Tag Archives: fiscal responsibility

Keep Squeezing the Budget!

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Monday’s Wall Street Journal has an Op Ed column by Stephen Moore, “The Budget Sequester Is a Success”, which points out that federal spending has actually shrunk from a high of $3.598 trillion in 2011 to $3.537 trillion in 2012 to a projected $3.45 trillion for 2013.  These spending declines are due to the Budget Control Act of 2011 which accompanied the 2011 increase in the debt limit.  The $100 billion per year budget sequester is a part of that agreement.  The current budget standoff between the Senate and the House is simply an attempt by the Democratic majority in the Senate to renegotiate the spending limits agreed to in 2011.
The sequester will continue to constrain discretionary spending but the two thirds of the federal budget devoted to entitlements is growing at a much faster rate than the overall growth of the economy.  The way out of this dilemma should be obvious to any rational, impartial observer.  We need to slow down the growth of entitlements and speed up the growth of the economy.  But this is much easier said than done!
Democrats will apparently not agree to do either of these two things.  Reining in entitlements takes political courage and the Democrats would rather be able to accuse Republicans of cruelty to the poor and the elderly than to actually address this problem in a serious manner.  Growing the economy faster will require appealing to investors and risk takers, with lower tax rates, for example, as well as loosening anti-business regulations.  Measures like these go against liberal ideology.
While we’re waiting for common sense to prevail in Washington, what more can be done to shrink still very large deficit spending?  There are all sorts of wasteful, duplicative and ineffective federal programs out there.  Fiscal conservatives should just keep going after them, one-by-one, and whittling them down.  Millions of voters and taxpayers will be thankful for this.

One Way to Solve the National Debt Problem

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In today’s New York Times, the economists Glenn Hubbard and Tim Kane write that “Republicans and Democrats Both Miscalculated”.  They say that “when the Congressional Budget Office recently lowered its forecast of future deficits, many voices on the left claimed that the problem had been overblown by ‘austerity scaremongers’” and that “some voices on the right have renewed calls to ‘starve the beast’ now that deficits are under control.”  But they point out that just because the deficit is likely to shrink for the next couple of years, CBO also projects that it will soon be back up to a trillion dollars per year indefinitely into the future.  And this is all optimistically assuming full employment, robust growth and moderate interest rates.
The Hubbard/Kane solution is to amend the Constitution with a flexible Balanced Budget Amendment.  Its features would include: 1) a provision that spending in a given year would not exceed income averaged over the previous seven years, 2) no restriction on tax rates which would have to be hashed out by Congress and 3) an exception to spending restraint for national emergencies.
There are, of course, valid objections to a Balanced Budget Amendment to the Constitution.  It reduces the flexibility of Congress and the President to act as needed.  It would be much better for Congress to act in a fiscally responsible manner on its own initiative.  But we all know that this doesn’t happen.  The pressure is always to adopt new spending programs and never to cut existing programs, no matter how ineffective they are.
Debt is the “single biggest threat to our national security” declared Admiral Mike Mullen, the former Chairman of the Joint Chiefs of Staff.  Many other prominent citizens express similar thoughts on a regular basis.  It is really just basic common sense that no governmental unit can flagrantly ignore this fundamental economic principle year after year without very serious repercussions.  It is (well past) time to force our national leaders to bite the bullet and do what almost every sane person knows what must be done.

Is a ‘Do Nothing’ Congress Really a Serious Problem?

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Today’s Omaha World Herald reprints the article “Get-nothing-done Congress is disrespectful to democracy” by the Baltimore Sun writer, Andrew Yarrow.  Mr. Yarrow says that “the 112th Congress, which ended in 2012, passed fewer bills than any Congress in recent memory, and the current 113th Congress is on track to do just as badly.  …  What Congress does do often seems patently ridiculous.  …  We need to … ramp up public pressure to get something done, rather than just fight.”
But is the problem just to do something, anything, or is it rather to do something worthwhile?  And what if there is a fundamental disagreement, as there is today, about what is worthwhile?  One party thinks that the way to boost the economy and speed up the recovery is to increase artificial stimulus (government spending) and to pay for it by raising taxes on the rich.  The other party is appalled by the $6 trillion in deficit spending racked up so far by the current administration and wants to slam on the brakes.  Each side is working as hard as it can to prevail, especially by discrediting and embarrassing the other side.  How do you resolve a dispute like this?
There is really only one person who has the clout and visibility to get this done and that is the President.  But when the President is the divider-in-chief, spending much of his time and effort proposing unsound economic and fiscal policies, intended primarily for short term political gain, what is the other party supposed to do?  Acquiesce by passing new laws that will just make things worse?  Or by standing firm on principle and hoping that the general public will be able to understand and appreciate its opposition to bad policies?
This is the situation which we are currently in.  It makes for a difficult and unpleasant time.  The economy is slowly recovering from the Great Recession on its own.  Let’s hope that this trend continues and that we can muddle through our present political predicament.

The National Significance of the Municipal Pension Crisis

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The New York Times reported yesterday that “Chicago Sees Pension Crisis Drawing Near”.  “A crushing problem lurks behind the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. … The pension fund for retired Chicago teachers stands at risk of collapse.”
William Daley, former chief of staff for President Obama and now a Democratic candidate for governor of Illinois says that “Anyone who thinks that this is just a problem on paper, those are the same people who looked at Detroit 20 years ago and said, ‘Don’t worry about it, we can handle it.’”  Chicago Mayor, Rahm Emanuel, another former chief of staff for President Obama, says that “What the system needs is a hard, cold, dose of honesty.  I understand the anger.  I totally respect it.  You have every right to be angry because there were contracts voted on.  People agreed to something.  But things get updated all the time.”
Just as Chicago and Illinois need a cold dose of honesty about the public pension crisis in that city and state, so does our entire country need a cold dose of honesty about our national fiscal crisis.  Shall we wait 20 years or until this problem explodes in our faces (or our children’s faces), or shall we start to deal with it now, while we can still proceed in a rational manner?
Our current public debt (on which we pay interest) is now $12 trillion.  With artificially low interest rates, we are paying “only” $250 billion annually in interest on this debt. When interest rates resume their historical average of 5%, our annual interest rate will jump to $600 billion.  Where will we find an additional $350 billion per year for interest payments alone?  Will we take it from entitlements, from social services for the poor, from our defense budget?  Or will we just increase our deficit even more to pay for it?  It will have to come from somewhere!
Wake up, America!  Learn from the municipal pension crisis.  Now is the time to get things straightened out.  Further procrastination will have dire consequences.

The New York Times is in Denial

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An editorial in yesterday’s New York Times, “Republican No-Shows in the Budget Wars”, ridicules House Republican leadership for having the temerity to propose $4 billion in cuts from this year’s budgets for transportation and housing, and expecting Republican representatives to support such “draconian” cuts.  “But the House’s skittishness at the decidedly unpopular costs of some of the party’s budget strictures presented a revealing tableau of both hypocrisy and weakness: Republicans could not pass their own cramped vision of the future.”
The underlying problem is that the House Budget for discretionary spending for 2014, at $967 billion, is almost $100 billion less than the Senate’s $1058 billion budget.  The House insists on continuing the sequester cuts for the full ten years agreed upon when the sequester mechanism was set up two years ago.  The Senate is ignoring the sequester agreement because it wants to replace it by a combination of milder cuts and tax increases.  The Republicans would prefer to replace the across-the-board sequester cuts by a more rational budget cutting plan but the Democrats are unwilling to negotiate such a plan.
The Democratic Party, and its media supporters such as the New York Times, simply refuses to acknowledge that the United States has a fiscal problem.  $6 trillion in deficit spending in the last five years apparently does not make a serious impression.  The mantra is that we’ll worry about our enormous deficits, and exploding national debt, later, after the economy more fully recovers from the Great Recession.  But after four years of recovery such an argument makes no sense.  There are lots of effective ways to boost the economy but continued artificial stimulus (deficit spending) is not one of them.
Wake up, Keynesians!  We need to turn things around and the sooner the better.  Stop ridiculing the mostly Republican fiscal conservatives who are valiantly striving to accomplish this herculean task under the most trying circumstances.

The Four Fiscal Fantasies

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Jon Cowan and Jim Kessler from the Third Way think tank have just written a new article, “The Four Fiscal Fantasies”, in which they address our country’s current fiscal situation from a point of view which is sympathetic to, but critical of, the left.

  • Fantasy #1:  Taxing the rich solves our problems.
  • Fantasy #2:  We can have it all.
  • Fantasy #3:  Waiting is benign.
  • Fantasy #4:  The politics get better.

These four fantasies are fairly self-explanatory.  The solution they propose for the long term insolvency of Social Security is an at least partial lifting of the FICA cap as well as chain-weighting of the CPI.  These are both good ideas.
Their solution to looming Medicare insolvency is to trim costs in the current program with, for example: bundled payments, medical homes for end-of-life, a permanent fix for the Sustainable Growth Rate (doc fix), reducing duplicative care, increasing provider coordination, etc.  This however is a band aid approach to getting Medicare costs under control.  We need far greater and more fundamental changes in our entire healthcare system, public and private.  Douglas Holtz-Eakin and Avik Roy have a plan to do this which I have discussed in my June 5, 2013 blog post, “Free Market Healthcare in America”.
With respect to discretionary spending in the federal budget, Mr. Cowan and Mr. Kessler propose several specific budget cuts in order to boost spending for other programs for kids, science, research, curing disease, infrastructure, etc.  Savings in one area would be spent on investments in other areas rather than being used for reducing the deficit.
To me this whole program represents a step in the right direction even though it does not come close to all of the changes that will be needed to shrink the deficit down to zero.  If national Democratic leaders would propose this sort of a program, it would force Republican leaders to take it seriously and would therefore break the current logjam in Congress.

Who is Responsible for the Sour Economy?

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In yesterday’s New York Times the columnist Ross Douthat with “The Great Disconnect” makes a good case that the Washington to Boston corridor, i.e. the national elite, is disconnected from America’s most pressing problems.  Instead of concerning themselves with jobs and the economy, healthcare costs and entitlement reform, fighting poverty and reforming the tax code, which are the real priorities of the American people, the issues getting the most attention by our national leaders are rather gun control, immigration reform and climate change mitigation which represent much lower public priorities.
Of course there is a political logjam between the two parties.  The Republicans want to use free market incentives to improve the economy such as tax reform and the elimination of onerous regulations.  The Democrats want more government stimulus which is controversial because it will increase the deficit.  As far as Mr. Douthat is concerned both parties are pretty much equally to blame for the stalemate because of their unwillingness to compromise in order to make progress on our biggest problems.
In a situation like this there is really only one person who has the clout to make a difference.  It is the President.  Presumably he is motivated to improve the economy more quickly because lack of progress will be a blot on his record and a drag on the chances of his party in the next presidential election.
The problem is that his liberal ideology, which got him elected and then re-elected, is at odds with the one single measure which would most improve the economy.  I am referring to pro-growth, broad-based tax reform where rate reduction and simplification would be offset revenue-wise by eliminating deductions and closing loopholes.  If such tax reform includes the elimination of the tax deduction for employer provided health insurance (again, offset with lower tax rates!), the cost of healthcare would drop dramatically as consumers started paying attention to their own costs.  Then Medicare and Medicaid could be brought into the same framework and presto, we have entitlement reform as well.
Republicans are strong advocates of tax reform.  It’s too bad that Democratic leaders can’t see how everyone, including themselves, would benefit from doing this!

Is America in Decline?

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A new book by the two economists Glenn Hubbard and Tim Kane “Balance: The Economics of Great Powers from Ancient Rome to Modern America” analyzes the decline of many of the great empires and civilizations in human history.  According to the authors, they all declined (or are now declining!) primarily for internal economic reasons rather than from external military threat.  The authors conclude that America’s own existential threat is fiscal.  Our lowest debt level in recent years was 23.9% of GDP in 1974 ($344 billion) which has climbed to 75% of GDP today ($12 trillion) and is predicted to keep growing worse in the years to come.
Our political system is too polarized to solve our huge debt problem.  Republicans want lower taxes; Democrats want higher spending.  If Republicans succeed in cutting spending, it upsets the voters and gives the Democrats an advantage.  If Democrats succeed in raising taxes, it upsets the voters and gives the Republicans an advantage.  So we end up with low taxes, high spending, fiscal imbalance and political stalemate.  This is the dilemma we are in.
But the authors propose a solution: a flexible balanced budget constitutional amendment where total outlays for a year do not exceed the median annual revenue collected in the seven prior years.  A three-fifths supermajority of each house of Congress can declare a one-year emergency exemption.  Additional one-year exemptions may be approved only by escalating votes in each house of Congress.  The amendment would take effect in the seventh year following ratification by the states.  During the seven year transition period the deficit would be reduced gradually each year until it reached zero.
Messrs Hubbard and Kane provide an excellent, nonpartisan analysis of the deep predicament in which our country now finds itself as well as an attractive means of extricating ourselves from this precarious situation.

Will Higher Inflation Help the Economy?

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The New York Times’ Eduardo Porter has a column in yesterday’s paper “Making the Case for a Rise in Inflation”, arguing that a 4% inflation rate, for example, would be a better target rate for the Federal Reserve than its present 2% target rate.   The idea is that higher inflation would lessen the value of a dollar, thereby eating away at our $12 trillion in public debt (on which we pay interest).  A lower value of the dollar would also boost the economy by making exports less expensive.  Higher inflation would likewise encourage consumers to spend more because the value of the dollar is decreasing more rapidly.
Mr. Porter does point out that there would be opposition to any policy of purposely letting inflation go up.  The best known Fed Chair in recent years, Paul Volcker, says that “All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse”.
The biggest problem, though, is the risky procedure of trying to boost the economy with monetary policy (quantitative easing, QE1, QE2 and QE3) rather than using fiscal policy (tax reform and deregulation).  The creation of an enormous amount of new money in a slow recovery creates huge upward pressure on inflation.  The economy is slowly improving on its own accord.  Very soon (in the next few years) the Fed will have to perform the difficult function of withdrawing money from the system fast enough to avoid inflation and, at the same time, slow enough, to keep interest rates from skyrocketing.  So the question is, will the Fed be able to simultaneously keep both inflation and interest rates under some kind of control?
For sure we don’t want to make its job more difficult by pushing inflation any higher than necessary at the present time!

The Folly of Paul Krugman

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In yesterday’s New York Times Paul Krugman has a column “Fight the Future” in which he says that “fiscal contraction” is “undermining what might otherwise have been a fairly vigorous recovery” and that  focusing on long run fiscal sustainability “isn’t a way of being responsible”.  He compares our fiscal problems with global warming and says that the “uncertainty about the impact of greenhouse gases on global temperatures actually strengthens the case for action, to head off the risk of catastrophe”.  But “delaying action on entitlement reform has no comparable cost”.  He even says that seeking a “grand bargain” that links reduced austerity now to longer-run fiscal changes is harmful because it would involve negotiating with untrustworthy Republicans!
First of all, there has been no real fiscal austerity in the past five years.  Federal expenditures took a huge jump from 2008 to 2009 and have increased each year since, in spite of huge deficits.  The sequester will not cut spending in 2013 compared with 2012 but only slow down the rate of increase.  There is little, if any, uncertainty about how fast the costs of healthcare in general, and Medicare in particular, will increase in the years ahead.  The current slowdown in healthcare costs in the last few years still leaves it growing at twice the rate of increase of GDP.  Demographics alone clearly show that the cost of Medicare will start increasing even more rapidly in just a few years from now.
Mr. Krugman concludes by saying that “influential people should stop using the future as an excuse for inaction.  The clear and present danger is mass unemployment, and we should deal with it, now.”  I basically agree with him!  The question is how!  Should we deal with it by artificial stimulation (bigger deficits and more debt) or rather by boosting the private sector with tax reform and strategic deregulation?  It takes two to tango and Mr. Krugman doesn’t help by constantly ridiculing the Republicans!