Tag Archives: fiscal responsibility

Nebraska Senator Deb Fischer Is a Big Spender

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Senator Fischer is up for re-election in 2018 and she starts out a recent fund raising letter (see below) as follows: “My goals are clear: stronger national defense, safer roads and bridges, healthcare that is accessible and affordable, protection of our fundamental liberties, less government, and a fairer, simpler tax code.” Here’s the breakdown:

  • First, and most important: national security.
  • Second, our roads and bridges must be repaired and rebuilt.
  • Third, Obamacare must be repealed and replaced.
  • Fourth, our fundamental liberties must be protected.
  • Fifth, government must shrink and the tax code must be simpler and fairer.

I don’t disagree with the specifics of any of these five goals but rather where the emphasis is placed. Her first two goals are to greatly increase spending for both the military and for infrastructure projects.  Her last goal is to shrink the federal government which is a good idea but very hard to accomplish in practice.

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Here is the basic problem our national debt (the public part on which we pay interest) is now at 77% of GDP, the highest it has been since right after WWII, and steadily getting worse.  Right now this approximately $14 trillion debt is essentially “free” money because interest rates are so low.  But when interest rates inevitably rise to more normal levels, interest payments on the debt will soar by hundreds of billions of dollars per year and eat much more deeply into tax revenue.
It should be a very high priority for Congress to establish a plan to bring government spending more closely in line with tax revenue.  I have previously described how this could be accomplished over a ten year period without cutting hardly anything but simply using restraint for spending increases.

Conclusion. If Senator Fisher feels that it is necessary to make big spending increases in areas such as national defense and infrastructure repair, then she should be equally adamant about the need to hold down the growth of government spending overall.

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Why I Am Optimistic about President Trump

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I voted for Hillary Clinton last November. Not because I liked her program.  I was voting against Donald Trump.  He is crude, sleazy and a terrible narcissist.  I preferred John Kasich, Governor of Ohio, in the Republican Primary.  But he didn’t make it.  I voted for Mitt Romney in 2012 but he didn’t make it either.
The question now is whether or not the Trump Administration will effectively address our country’s two biggest problems, both of which are very serious and need urgent attention:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth means a tighter labor market which in turn means more workers and higher wages. This in turn means less inequality. Furthermore, it is the United States’ dominant economic strength which assures world peace and stability. The Chinese economy, now half the size of ours, will catch us eventually. But stronger U.S. growth will delay this and enable us to cope with it better when it happens.
  • Massive Debt. The public debt of $14 trillion (on which we pay interest) is now 77% of GDP, (https://itdoesnotaddup.com/2017/01/31/trump-needs-a-wall-of-fiscal-discipline/) the highest since the end of WWII and steadily getting worse. With current low interest rates the debt is now essentially “free” money. But what will happen when interest rates return to normal historical levels? At this point interest payments on the debt will rise precipitously and become a huge drain on the budget. We can’t prevent this from happening but we can lessen the impact by acting now.

Will the Trump Administration take these two problems seriously?

  • For sure on economic growth. His re-election chances in four years depend largely on the fortunes of his base of blue-collar workers. His appointments at Treasury (Mnuchin), HHS (Price), and EPA (Pruitt) all support the tax reform and deregulation needed to get this done. I am confident that Trump will avoid a disastrous trade war.capture99
  • The debt. This is trickier because Trump has said he won’t touch Social Security or Medicare. My optimism is based on the fact that the Debt Ceiling will be re-imposed on March 16 at its level on that date. This will give Congress just a few months to raise the ceiling to a higher level. It is likely that the many fiscal conservatives in the House will insist, in return, for some sort of spending restraint such as a ten-year plan to balance the budget.

Conclusion. We’re not out of the woods yet. But there is a clear path showing the way forward.

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What, if Anything, Will Restrain Donald Trump?

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The Atlantic magazine has just released a remarkable essay written by the political commentator, David Frum, entitled, “How to Build an Autocracy.”  Says Mr. Frum, “Donald Trump will not set out to build an authoritarian state.  His immediate priority seems likely to be to use the presidency to enrich himself.  But as he does so, he will need to protect himself from legal risk.  Being Trump, he will also inevitably wish to inflict payback on his critics.  Construction of an apparatus of impunity and revenge will begin haphazardly and opportunistically.  But it will accelerate.  It will have to.”

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Let’s assume that Mr. Frum is correct that Trump’s top priority is to enrich himself.  What will stop him from doing this?  A recent column in the New York Times points out that:

  •  54% of registered voters in congressional districts represented by Republicans view Mr. Trump favorably compared with only 42% who view him unfavorably.
    In these same districts, 87% of registered Republicans view Mr. Trump favorably.
  • In other words, the Republican dominated Congress is unlikely to strongly oppose his sleazy and self-enriching behavior.

But there are other constraints on what he does in office:

  • As I said in a recent post in order for Mr. Trump to be reelected in 2020, he will need to substantially speed up economic growth in order to increase the wages of his key blue-collar supporters. He clearly wants to accomplish this.
  • On the other hand, the conservative Republican base, including its representatives in the House such as the Freedom Caucus, will simply not support huge increases in deficit spending for anything (except an emergency) including infrastructure, the military or unfunded tax cuts.
  • In fact, Rep Mick Mulvaney (R, SC), a deficit hawk, has been nominated to become the Trump Administration’s Budget Director. In March the debt ceiling will have to be raised. I expect the many fiscal conservatives in Congress to insist on significant fiscal restraint (e.g. a ten year plan to balance the budget) as a tradeoff for raising the debt ceiling.

Conclusion. Just because Republicans are tolerant of Mr. Trump’s personal behavior does not mean he can successfully ignore the strong Republican desire for fiscal restraint.

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Trump Needs a Wall of Fiscal Discipline

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So says the Concord Coalition’s Robert Bixby. President Trump said in a recent interview on Fox News that he would like to have a balanced budget “eventually,” but not at the expense of higher spending for the military. The problem is, as Mr. Bixby points out, if we delay fiscal discipline in order to increase military spending, what else will we delay it for?  Will we delay it for infrastructure spending or border security or tax cuts?  Will we delay it to protect Social Security and Medicare?

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The Congressional Budget Office predicts (see chart) that, under current law, the public debt (on which we pay interest) will grow from 77% of GDP in 2017 to 89% of GDP in 2027.  Furthermore, mandatory programs (Social Security, Medicare and Medicaid) will grow from 13% of GDP this year to 15.4% in 2027 while discretionary programs (everything else except interest payments) will fall from 6.3% of GDP today to 5.3% of GDP in 2027.  Interest payments on the debt will grow from 1.4% of GDP ($270 billion) today to 2.7% of GDP ($768 billion) in 2027.

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It turns out that it is possible to avoid this calamitous scenario in the following fiscally responsible way (see the attached table):

  • Note that spending (outlays) is projected to increase from $3963 billion in 2017 to $6548 in 2027, which represents a 5% annual increase in spending every year.
  • But also revenues (tax income) are projected to increase from $3404 billion in 2017 to $5140 billion in 2027.
  • If spending growth could slow down from $3963 billion in 2017 to $5140 billion in 2027 (the projected amount of revenue in that year), the budget would then be balanced in 2027!
  • It turns out that no budget cuts are required to accomplish this. In fact a calculation shows that simply limiting spending increases to 2.6% per year (rather than CBO’s projected increases of 5% per year) is sufficient to achieve this goal.

Conclusion. Above is outlined a plan to balance the budget over a ten year period without making any spending cuts! All that is needed is a modest amount of spending restraint!

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What Will Trump Do?

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I did not vote for Donald Trump because of his often crude remarks and sleazy behavior. But I am now cautiously optimistic about the prospects for his presidency based on the quality of his nominees for important government posts.  Like many of his voters, I “take him seriously but not literally.”

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Here is what I think he will do:

  • Economic Policy. He will try to speed up economic growth, well above the average 2.1% annual GDP growth of the past 7½ years. This can be accomplished with tax reform (lowering tax rates paid for by shrinking deductions), regulatory reform (including paring back Dodd-Frank and the ACA), immigration reform and tougher trade policies. Faster growth benefits the whole country and especially the blue-collar workers who voted for him.
  • Improving life in the inner cities. K-12 education is a disaster in many inner cities and Betsy DeVos will be a reformer in the Education Department. Ben Carson grew up in public housing and is an excellent choice for HUD.
  • Foreign Policy. Mr. Trump wants changes from China on currency and trade practices. He also wants more cooperation from Russia in fighting terrorism. He wants our NATO partners to bear a bigger share of their own defense. His Secretary of State designee, Rex Tillerson, supports arming Ukraine against Russia and also supports the TPP trade agreement with Asia. This all sounds good to me.
  • Fiscal Policy. My biggest concern at this point is our national debt, now 76% of GDP (for the public part on which we pay interest) which is historically high and steadily getting worse. The House Republicans are serious about shrinking deficit spending and hopefully Mr. Trump will support their efforts.

Conclusion. Donald Trump has a highly unconventional (but very effective) style of communication. If it leads to progress in addressing our biggest problems as above, then he’ll have a very successful presidency.

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What to look for in President Trump’s First Budget

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As a new administration prepares to take office in January, one of the key indicators of President Trump’s approach to government will be his first budget. This is especially true since the Republican controlled Congress is likely to take a Republican President’s budget seriously.

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One of our nation’s chief fiscal watchdogs, the Concord Coalition, has summarized the most important things to look for:

  • What is the overall fiscal target? President Obama’s recent budgets have aimed at stabilizing the debt as a share of the economy. House Republicans have aimed for a more ambitious goal of balancing the budget within ten years, gradually reducing the debt as a share of the economy. What path will Mr. Trump recommend?
  • What specific tax cuts will be proposed and what are the likely revenue effects? During the campaign Mr. Trump proposed tax cuts amounting to $5.9 trillion in revenue loss over ten years. Even with dynamic scoring, taking the stimulatory effects of his tax cuts into effect, the revenue loss is still $3.9 trillion over ten years. Such huge revenue losses will make our debt much worse than it is already and won’t be approved by Congress.
  • What will the budget recommend for the federal debt limit? Currently the debt limit is suspended until March 16, 2017 when it will return at whatever level it is on that date. Congress will then have several months to reset it. Whatever the President recommends will send a strong signal, positive or negative, to the financial markets.
  • What economic growth rates will the budget assume?   GDP growth has averaged 2.6% for the past 30 years. Any predicted long term growth rate higher than this will lack credibility without strong justification.

Conclusion. Mr. Trump has the opportunity to institute the change in course which so many Americans would like to see. His first budget will set the tone and provide an important clue as to whether or not he is serious about doing this.

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The Importance of Shrinking Our Debt and How to Do It

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President-elect Donald Trump is on record as favoring tax and regulatory reform in order to speed up economic growth and I have made it clear that this can be accomplished without increasing our debt.
But what is really needed is to grow our economy faster and actually shrink our debt at the same time.  It will be very difficult, essentially impossible, to accomplish this with growth alone or even by raising taxes because the magnitude of our debt, 76% of GDP and rising, is so great.

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There is really only one way to begin to shrink the debt and this is to get entitlement spending under control.  The above chart shows that, without major changes, by 2032 all tax revenue will go towards healthcare, Social Security and net interest. Here is what needs to be done:

  • Social Security is already paying out $100 billion per year more than it collects in payroll taxes. Its Trust Fund will run dry in 15 years unless major changes are made and all benefits will drop by about 25% when this happens. We need to either increase the eligibility age for full benefits and/or raise the income cap on payroll taxes. These changes can be phased in but the sooner we get started the less painful it will be.
  • Medicare is an even bigger problem than Social Security. Either we have government rationing, i.e. “death panels,” or else rationing by price meaning some form of premium support. This simply means that we will all have more “skin in the game,” in the sense that we will all have a financial incentive to minimize our own healthcare expenses.
  • Medicaid should be block granted to the states so that the federal government is not obligated to a fixed match for all state Medicaid expenses. Again, cost control is the object of such a change.

Conclusion. It needs to be emphasized as strongly as possible that the reason for stringent cost control of entitlement programs is to preserve them for posterity, not destroy them.  Our prosperous way of life is severely threatened by our unwillingness to recognize this problem.

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Trumponomics II. Debt

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As I discussed in my last post, Donald Trump’s primary mandate from the presidential election is to get the economy growing faster in order to help out his base of blue-collar workers who have suffered wage stagnation for many years and especially since the end of the Great Recession in June 2009.  The tax and regulatory reform needed to accomplish this urgent task will undoubtedly turn out to be the first plank of Trumponomics.

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But there is another equally urgent task which must not be overlooked by the incoming Trump Administration.  Our national debt, the public part on which we pay interest, is now 75% of GDP, the highest level since the end of WWII, and projected by the nonpartisan Congressional Budget Office to keep growing rapidly in the years just ahead (see chart above).
As Barron’s has pointed out, “Saving America, Part 1”, in its current issue:

  • Today’s public debt of $14 trillion will grow to $45 trillion in just 20 years’ time on the basis of current entitlement programs like Medicare and Medicaid, without any new spending programs or tax cuts.
  • The annual interest on a $45 trillion debt load would be about $750 billion at today’s super low interest rates. If interest rates rise to more typical levels, the interest payment on this level of debt would be about $1.5 trillion a year. This represents almost half of all federal spending during the current 2016-2017 budget year.

Conclusion. Such a high level of interest payment on our debt is unthinkable. This means that either we make fundamental reforms in government entitlement programs in the next few years or else we will have a severe fiscal crisis on our hands in less than twenty years’ time. We have some stark choices to make and hopefully the incoming Trump Administration will not shy away from what needs to be done.

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Donald Trump Needs a More Positive Message

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As regular readers of my blog posts know, I am not enthusiastic about either of our two main presidential candidates because neither of them has a good grasp of our two biggest economic problems which are:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth would solve or alleviate many other problems, especially by creating more new jobs as well as delivering faster wage growth for all middle- and lower-income workers.
  • Massive debt now at 75% of GDP, the highest it has been since right after WWII, and projected by the Congressional Budget Office to get steadily worse unless big changes are made in spending and tax policies. Such major changes are difficult to make without presidential leadership.

Hillary Clinton promises “equitable” growth but her policy proposals will lead to a big increase in spending (bad idea) on projects of dubious value in speeding up economic growth. Donald Trump would hurt the economy with immigration controls and trade restrictions.  His proposal for lower tax rates (good idea) needs much improvement to avoid increasing annual deficits.
capture40Mr. Trump’s biggest problem, however, is his negative message about life in America today. Yes, we need stronger border security but we don’t need a Fortress America.  As the American Enterprise Institute has just reported, worker satisfaction is greatly improved since 2009 and workers are now much less anxious about job security than just a few years ago.
There is a really good way for Mr. Trump to sound a more positive note.  He could very easily take up the major themes of the Republican House Plan, “A Better Way” for solving America’s major economic problems.
Conclusion. There is an overwhelming desire for change in America, for new leadership which breaks out of the corruption, cronyism and elitism so rampant in Washington DC today.  But Americans are natural optimists and want a leader who can look forward to a bright future for our country.

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The Inherent Instability of Obamacare

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The recent announcement by Aetna Insurance Company that it will exit the health insurance market in most of the states where it now operates raises a fundamental question about the stability of the Affordable Care Act. As shown by the following map  from yesterday’s New York Times, it appears that at least five states with 17% of the American population will have only one health insurer to choose from next year.
Capture33As the Wall Street Journal’s Greg Ip points out in a recent article, “the problem isn’t technical or temporary, it is intrinsic to how the law was written”  Specifically:

  • Insurance is supposed to price risk but the ACA changed this. Insurers can no longer charge or exclude coverage for pre-existing conditions, charge men and women different rates, or charge older customers more than three times as much as the young.
  • For example, a 64-year-old consumes six times as much health care as the average 21-year-old. Adhering to the 3-to-1 maximum ratio, the insurer would have to greatly overcharge the 21-year-old than his actual cost and/or greatly undercharge the 64-year-old.
  • The rational response for unsound pricing is for young and healthy customers to stay away and sick, older customers to flock to the exchanges. ACA mechanisms to prevent this type of behavior aren’t working very well.Capture32
  • One example of this is that the ACA exchanges, which provide income-based subsidies for those without employer provided health insurance, are mainly attracting those people just slightly above the poverty line who get the biggest subsidies (see chart).

I have pointed out many times that the cost of health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental driver of our exploding national debt and therefore must be curtailed.  But now, in addition to the cost problem, we are discovering that the ACA also has a fundamental access problem as well. Big changes are clearly needed in the ACA.  More details later!

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