Tag Archives: jack heidel

Paul Krugman: “Debt Is Good”

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Every Monday and Friday morning when I pick up the New York Times, I immediately turn to the OP-ED page to see what liberal icon Paul Krugman is saying. In his most recent column, “Debt Is Good,” he says that “what ails the world economy right now is that governments aren’t deep enough in debt.”
CaptureHere is my response to his argument:

  • “The federal government can (now) borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future.” Our public debt (on which we pay interest) is now $13 trillion or 74% of GDP, the highest since the end of WWII, as shown in the above chart from the Congressional Budget Office. It is likely that interest rates will soon begin to go up. Every 1% rise will increase interest payments on our already existing debt by $130 billion per year. Where are the hundreds of billions of new dollars for debt service going to come from in an already tight budget? The more we add to the debt, the worse this problem will become.
  • “Having at least some government debt helps the economy function better.” I agree! But $13 trillion is way beyond what is needed for this. It is outrageously excessive!
  • “What we need are policies that would permit higher (interest) rates in good times without causing a slump. And one such policy would be targeting a higher level of debt.” The problem here is the conceit of Keynesians, like Mr. Krugman, that monetary policy alone can restore us to economic and fiscal health. Rather than accepting that the economy has entered a “new normal” with a permanently slow growth rate of about 2% (as has been the case since the end of the Great Recession in June 2009), we need policy changes such as individual and corporate tax reform (revenue neutral to be sure) and changes in the Affordable Care Act and Dodd-Frank Act to remove their job killing features.

 

Anybody with an ounce of common sense knows that excessive borrowing will eventually lead to disaster. Mr. Krugman seems to think that by constantly ridiculing his opponents, he can get away with denying this simple truth.

Debunking Several Social Security Myths

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The Committee for a Responsible Federal Budget has just published a new report, “Debunking 8 Social Security Myths on Its 80th Birthday.” Here are several of the “myths” they report on:

  • Myth: Social Security does not face a large funding shortfall. Fact: Social Security’s trust funds are projected to run out of reserves within 20 years. Although the Social Security Trust Fund currently contains $2 trillion, it is being depleted at a rate of close to $100 billion per year. The looming insolvency is a result of the growing costs associated with an aging population.
  • Myth: Today’s workers will not receive Social Security benefits. Fact: Even if policy makers do nothing, the program will still pay about three-quarters of scheduled benefits. Once the trust fund is depleted, benefits would be paid only from incoming payroll tax revenue.

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  • Myth: We don’t need to worry about Social Security for 20 years. Fact: there is a very high cost involved in waiting to reform Social Security. Substantial changes are needed to avoid the benefit cuts referred to above. The sooner we make these changes the less onerous they will be for both recipients and payroll tax payers (see above chart).Capture1
  • Myth: Social Security reform is code for slashing benefits, especially for the poor. Fact: under most reform plans, benefits would continue to grow faster than inflation. Most reform plans do not cut benefits from their current levels but rather slow the growth of benefits to reduce some of the pressure that wage-growth and rising life-expectancy place on the program. Under the Simpson-Bowles Plan, for example, benefits for low-wage earners will grow much faster, proportionally, than for higher-wage earners (see above chart).

Conclusion: It should be clear from the above discussion that Social Security can be fixed so as to continue to provide retirement benefits indefinitely into the future. It should also be clear that the sooner the needed reforms are implemented the less painful they will be for all concerned. We should tell our Congressional representatives that we want them to act now!

Minorities and Higher Education: a Severe Dilemma

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In two recent posts, here and here, I have established that:

  • Rapid increases in federal student aid in recent years have led to tuition increases at both public and private educational institutions and for both undergraduate and graduate students.
  • American higher education is increasing the divide between the haves and the have-nots in the sense that college degree attainment is increasing much faster for those students from higher income families.
  • Furthermore, students at private, nonprofit (most prestigious) institutions have higher graduation rates and lower debt levels compared to students from public institutions who, in turn, have both higher graduation rates and lower debt levels than students at for-profit colleges (least prestigious).Capture

As if this isn’t bad enough, it gets even worse! The Federal Reserve Bank of St. Louis has just reported, “Why Didn’t Higher Education Protect Hispanic and Black Wealth?” that “White and Asian college grads do much better than their counterparts without college, while college-grad Hispanics and blacks do much worse proportionately.” (see above chart).
In short, the federal government is spending more and more money on higher education, which, in turn, is making colleges and universities more and more expensive. Whites and Asians from higher-income families are graduating in much higher numbers and with minimal debt, while college-grad blacks and Hispanics are mired in huge levels of debt.
How should society address this severe inequality in higher education?

  • Federal student loans should be limited to $30,000 for undergraduates and $60,000 for graduate students, the average amounts borrowed today for each category of student. Beyond these limits, students could still borrow from the private market, but with no subsidies or loan guarantees provided by the government. This single action alone will help to hold down college costs.
  • All students, and especially those from low-income families, should be encouraged to avoid excessive college debt. There are many high quality, low-cost educational institutions all around the country (e.g. UNOmaha where I teach) to meet their needs. It should be strongly emphasized that an expensive, prestigious institution is not needed to obtain a good education.

A Vivid Example of Fiscal Irresponsibility at the Federal Level

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An article in the Friday, August 14 edition of the Omaha World Herald, “Why are the BRT stations so expensive? Officials explain the $260,000 price tag,“ describes a new $30 million bus rapid transit plan for Dodge Street with 27 individual sleek, modern bus stop shelters along the route at a cost of $260,000 each.  Half of the new $30 million plan will be paid for by the city of Omaha and half by the Federal Transit Authority which has an annual budget of $8.6 billion.
Capture1 The issue is not whether Omaha should spend $15 million in local funds to achieve a $30 million bus system upgrade. We can expect city officials to make a responsible decision on this matter. The real issue is why the FTA should have annual budget of $8.6 billion to begin with when it is paying for, and therefore encouraging, extravagantly designed bus transit systems all over the country.
CaptureThe U.S. deficit for the 2015-2016 budget year, ending on September 30, is predicted to be about $450 billion dollars. This adds to the approximately $13 trillion public debt (on which we pay interest) which, at 74% of GDP, is the highest it has been since the end of WWII (see the above chart from the Congressional Budget Office).
It is the responsibility of Congress and the President to figure out how to get the budget under better control. All aspects of federal spending can and should be tightened up, including entitlements (Social Security, Medicare and Medicaid) and discretionary spending (everything else).
The Federal Transit Administration is wasting money on unnecessarily extravagant bus transit systems. Such fiscal irresponsibility means that its budget should be cut significantly. Many other similar examples exist in the federal government. We need people in Congress who can identify these fiscal boondoggles and effectively agitate for needed cutbacks.

How to Avoid a New, and Much Worse, Financial Crisis

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Is it possible for the U.S. to effectively address its enormous debt problem in today’s contentious political environment? Two weeks ago I discussed in “America’s Fourth Revolution” why the political scientist James Piereson thinks this is impossible. He is very persuasive but I think he is too pessimistic.
CaptureSince then I have discussed several different things we should do to turn around this perilous situation:

  • If spending for just Medicare and Medicaid (two very expensive entitlement programs) alone fell by 25% over ten years, as a percentage of GDP, and then stayed in line with GDP after that, the U.S. would actually have a budget surplus in 2040.
  • Just recognizing the magnitude of our debt problem would do wonders in public awareness.
  • If the Tea Party were able to grow beyond a protest movement and unite the country behind a majoritarian agenda of work, mobility and opportunity, it would be much more effective in achieving its fiscally conservative goals.
  • Another significant way to save money, and get better results at the same time, is to turn over more and more programs to the states. A good way to do this is with block grants to the states for federal programs in such areas as welfare, education and Medicaid. This would give the states more flexibility to get the job done in an efficient and cost saving manner.

What we need to do to turn our debt situation around is to greatly shrink our annual deficits below their current level of about $450 billion per year. If the debt is growing slower than the economy, then it will shrink as a proportion of the economy. This is what happened after WWII (see above chart) and it needs to happen again now!

Perfecting Our Union: Ending the War Against the States

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“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”                                                 The Tenth Amendment to the U.S. Constitution

As the readers of this blog know, I am very concerned about our massive (public) debt, now at 74% of GDP, the highest since the end of WWII. One way to get federal spending under better control is to give more power back to the states (which are required to balance their budgets), as described by Adam Freedman in his new book “A Less Perfect Union: the Case for States Rights.”
CaptureHere are some of the many advantages of doing this, according to Mr. Freedman:

  • Better schools, roads and infrastructure, as states are freed from wasteful federal mandates. The Common Core, for example, should be considered as federal guidelines and not as an attempt to require a specific curriculum.
  • Lower taxes, as states engage in a virtuous competition for citizens and businesses.
  • Improved stewardship of natural resources, as decisions reflect local priorities on land use.
  • Less crowded prisons, by returning criminal jurisdiction to the states, where penal reform is light-years ahead of Washington.
  • An end to national gridlock, as the most divisive social issues devolve to state and local decision-makers. A good example here is the current interest by states and localities to enact their own minimum wage laws. This is far superior to raising the national minimum wage law in a one-size-fits-all manner.

 

The way to implement a program of giving responsibility back to the states is with block grants. A plan to do this for social welfare programs was formulated by the House Budget Committee just one year ago. It is often suggested to do something similar with federal education programs and with Medicaid as well.
Moving programs back to the states will improve their quality and help get costs under much better control. It makes much sense to move in this direction!

The Future of the Tea Party

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As I constantly remind the readers of this blog, America has huge fiscal and economic problems which need to be addressed right away. In a recent post, “America’s Fourth Revolution,” I described the pessimistic view of the political scientist, James Piereson, that our polarized and dysfunctional political system will not be able to successfully confront our stagnant economy and massive debt and establish a pathway to recovery.
CaptureThe president of the American Enterprise Institute, Arthur Brooks, does see a way for this to happen as explained in his new book, “The Conservative Heart: how to build a fairer, happier and more prosperous America.” It is the Tea Party which could do this! Its “future relevance depends on whether it can shift from being a protest movement to becoming a social movement.”
According to Mr. Brooks there are four steps to making the transition from minority to majority and turning a protest movement into a broad-based social movement. They are:

  • Launch a rebellion
  • Declare majoritarian values
  • Claim the moral high ground
  • Unite the country behind an agenda

These were the steps taken by our own founding fathers over two hundred years ago and by the civil rights movement some fifty years ago. The Tea Party has already launched a rebellion against big government, taxes, spending, etc. Now it needs to take the second step of declaring its support for the majoritarian values of work, mobility and opportunity. The third step is to seize the moral high ground:

  • Too many Americans have been marginalized and left behind in recent years.
  • It is neither fair nor compassionate to content ourselves with an economic recovery that only accrues to top earners.
  • Obamacare is hurting too many people by forcing them out of full-time work and into part-time work.
  • Huge debt may require spending cuts that fall the hardest on the poor.
  • We need education reform, especially in big cities, because the welfare of poor kids is more important than job security for poor teachers.

The Tea Party should spend less time protesting big government and more time showing how conservative principles help the most vulnerable members of society!

Prominent Myths about Our National Debt

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As the 2016 presidential election contest begins to heat up, the Committee for a Responsible Federal Budget and its outreach arm, Fix the Debt, have issued a new “Fiscal FactChecker: 16 Budget Myths to Watch Out For in the 2016 Campaign.”  Here are four of the major myths:

  • We Can Continue Borrowing Without Consequences. “Low interest rates are a temporary consequence of the struggling global economy and near term Federal Reserve actions – not a permanent fixture.”

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  • There is No Harm in Waiting to Solve Our Debt Problems. “The longer policy makers wait to control debt, the more difficult it will become. For example, reducing debt to around the historical average of about 40% of GDP by 2040 would require tax increases or spending cuts of about 2.6% of GDP per year, if enacted today, or starting at $1,450 per person per year. Waiting a decade to begin would require adjustments of over 4% of GDP.”
  • Deficit Reduction is Code for Austerity, Which Will Harm the Economy. “Most advocates of fiscal responsibility in the U.S. have called for gradual reductions in long-term deficits so that the debt grows slower than the economy. These changes tend to have minimal near-term effects as well as the potential to significantly grow the size of the economy over the long term.”
  • We Can Fix the Debt Solely by Taxing the Top 1%. “The top 1% of earners, households that make at least $450,000 annually, earn a substantial share of national income, about 13% on an after tax basis, and further tax increases on this group could help. But these increases would need to be combined with reductions in spending growth and/or broader tax increases to fully address the nation’s fiscal challenges.”

Just a few days ago, I described a persuasive argument, “America’s Fourth Revolution,” that our hyper-partisan and dysfunctional political system will be unable to rectify our debt problem until we have another and much more severe financial crisis. The above discussion of budget myths from CRFB actually suggests a way forward to solve our debt problem.
We have a choice. Which path will we take?

Higher Ed: Higher Costs, More Inequality. What to do?

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Several months ago I discussed “How the American Education System Contributes to Inequality.” It so happens that students from high-income families graduate from college in much greater numbers and also with much less debt, compared with students from low-income families.
CaptureA new study from the New York Federal Reserve has found a connection between a rapid increase in student aid in recent years and the rapid increase in college costs. In particular:

  • A $1 increase in the subsidized loan cap leads to a tuition increase of 65 cents, and
  • A $1 increase in the Pell Grant limit leads to a tuition increase of 55 cents.
  • Furthermore, private schools, both nonprofit and for-profit, are bigger offenders than public schools, even though declining state subsidies for higher education primarily affect public universities.
  • At the present time undergraduates can borrow a maximum of $57,500 from the federal government.
  • Under the decade-old Grad Plus program, graduate students can borrow any amount their school charges. In the seven years before Grad Plus, undergraduate tuition was rising faster than grad school costs. In the seven years after, the reverse occurred.
    Capture1Clearly this is an untenable situation. The solution, in my opinion, is to strictly limit the total amount of federal loans for both undergraduate and graduate students and force schools to compete on price. For example:
  • Limit the total amount borrowable by an undergraduate, from the federal government, to $30,000, the average amount borrowed today, and then let it adjust it each year for inflation.
  • Limit the total amount borrowable by a graduate student to $60,000, the average amount borrowed today, adjustable each year by inflation.
  • Students who want to borrow additional funds may do so on the private market, with no subsidies or guarantees provided by the federal government.

Such a program would provide much needed financial discipline to colleges and universities and reduce and stabilize ballooning student loan costs for the federal government.

Can America’s “Fourth Revolution” Be Avoided?

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My last post, “America’s Fourth Revolution,” presented a persuasive argument by the political scientist, James Piereson, that our currently dysfunctional political system will be unable to solve our most fundamental problems of massive debt, accompanied by a rapidly aging population and slowing economic growth. This will result, according to Mr. Piereson, in a severe crisis leading to a fourth revolution, overthrowing the New Deal liberal consensus which has prevailed since 1932.
It is commonly understood that entitlement spending: Social Security, Medicare and Medicaid, is the main driver of our rapidly growing national debt. A recent report from the Centers for Medicare and Medicaid Services, summarized in the Wall Street Journal, shows that U.S. healthcare spending is likely to rise from just under 18% today to 19.6% of GDP in 2024.
Capture2Barron’s editor, Thomas Donlan, has just reported that the Director of the Congressional Budget Office, Keith Hall, stated in a recent hearing of the Senate Budget Committee that if spending for Medicare and Medicaid, as a percentage of GDP, fell by 25% over ten years, and then stayed in line with GDP after that, the U.S. would have a budget surplus of 2% of GDP in 2040 instead of the otherwise projected deficit of 6.6% of GDP. Furthermore debt held by the public would fall to 24% of GDP, a remarkable achievement.
This is significant because one country, The Netherlands, spends 12% of GDP on healthcare, and every other country in the world (except for the U.S.) spends less than 12%.
Conclusion: all the U.S. needs to do, so to speak, is to bring healthcare costs in line with the rest of the world and our entire deficit spending problem would be solved! Nobody is claiming that this will be easy but it certainly is within the realm of possibility. It is also far superior than waiting to act until we have another fiscal crisis and thus risking a huge change, a revolution, in our way of life.