Tag Archives: jack heidel

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

Why $16 Trillion Only Hints at the True U.S. Debt

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In an Op Ed article last fall in the Wall Street Journal two former Congressmen, Chris Cox and Bill Archer, point out that the total US government debt, now over $16 trillion, is only a fraction of the total unfunded liabilities of the government, which now exceed $87 trillion.  The unfunded liabilities represent future expected payments for Social Security, Medicare benefits for currently employed workers as well as current retirees and also the future retirement benefits of current federal employees and retirees.

If this enormous sum of already obligated future payouts is not bad enough, even scarier is the rate of growth of these unfunded liabilities.  In calendar year 2011, the accrued expense was $7 trillion, double the entire current revenue of the federal government of about $3.5 trillion.  In other words this awful problem is getting much worse every year.

The House Republican majority is trying to address our almost incomprehensibly bad debt problem.  Will they be able to generate enough public support to force the Senate and the President to take the problem seriously?  Right now the odds do not look very good for effective action to be taken.  An enormous crisis is almost on our doorsteps.  How bad will it have to get before public opinion demands action?  It is very hard to remain optimistic about the future of our country when we appear to lack the collective will to take the action which is so obviously needed

The Great Reset

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The Great Recession ended almost four years ago, in June 2009, and growth in the US economy has been an anemic 2% annually since then.  The unemployment rate, now 7.8% is dropping only very slowly and millions of workers are still unemployed or underemployed.  If this isn’t bad enough already, knowledgeable experts are now predicting (see the Friday January 25 Omaha World Herald)  that many mid-skill, mid-pay jobs will never return largely because of the rapidly accelerating use of technology in all aspects of our lives.
Faster economic growth would not only provide more jobs but would also increase tax revenue and therefore shrink the deficit.  If such traditional measures as lower tax rates, deregulation and aggressively promoting foreign trade won’t fly politically which, of course, is very disappointing, then we need to consider other measures which could gain political support.  A good place to start is to enact The Startup Act of 2011 proposed by the Kauffman Foundation.
The Startup Act proposes: 1) more visas for entrepreneurs and Green cards given out with STEM degrees, 2) tax incentives for startup investments, 3) speeding up the patent process for entrepreneurs and 4) relaxing the regulatory burden on startup businesses.  Such measures as these need not be expensive to undertake and could give our economy a big boost.
Our leadership role in world affairs depends on our economic, military and cultural dominance.  First and foremost is our economic strength.  It is vital to speed up the growth of our economy.  Any and all means to accomplish this should be considered.  The status quo is not acceptable!

Is inequality Holding Back the Recovery?

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The Nobel prize-winning Keynesian economist, Joseph Stiglitz, claims in the January 20, 2013 New York Times, that “Inequality is holding back the recovery”.  He says that the most important reason is because the middle class is too weak to support the consumer spending we need.  And that the weakness of the middle class is holding back tax receipts.  And that we are squandering our young who are increasingly unable to get an education without borrowing huge sums of money.

Many liberals deplore the slow rate of economic growth since the recession ended in June 2009 and all of the problems it creates and exacerbates such as high unemployment and lower tax revenue to support public services.  What these liberals amazingly fail to understand is that there are tried and true methods to promote economic growth.  What we need to do is to lower tax rates (offset by eliminating tax deductions and loopholes), remove or diminish the enormous new regulatory burdens which have recently been placed on the economy, boost domestic energy production and aggressively, rather than halfheartedly, pursue new trade agreements to lower the barriers to free trade.

Powerful trends such as globalization and computer technology are driving economic progress and causing the inequality which Stiglitz and many others deplore.  We need to embrace these trends and use them to our advantage.  The way to boost the middle class is to boost our stagnant economy in the tried and true ways which have worked in the past.  The way to boost postsecondary education is to recognize that there are many high quality and low cost schools all over the country.  And that it is not necessary to borrow lots of money to get a good education. 

In short, the solution to the urgent and critical economic and fiscal problems we are now facing lies entirely under our control.  All we need are national leaders who have the vision, capability and fortitude to lead the way.

The Myth of Government Default

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The moment of truth is rapidly approaching and House Republicans need to crank up their resolve to force a real long term solution to the debt crisis of our federal government.  As David Rivkin and Lee Casey describe in the January 11, 2013 issue of the Wall Street Journal, the threat of government default is greatly exaggerated.  $200 billion in tax revenue is coming into the federal government every month, more than enough to keep making interest payments on the national debt as well as paying many other bills.

Far too many national leaders are in a state of denial about the seriousness of our fiscal problems.  House Speaker John Boehner says that “The American people do not support raising the debt ceiling without reducing government spending at the same time.”  The “Boehner Rule” stipulates that an increase in the debt limit must be paired with spending cuts of equal size over a ten year period.  This is an excellent framework for kicking off a national discussion to persuade the American people to support cutting back spending on entitlements and social programs as well as defense spending.

Every economic unit whether it be an individual, a family, a business, a community or a larger political subdivision, has to learn to live within its means.  This elementary rule of common sense applies to our whole country just as much as to any other social group.  Republicans have the clearest grasp of this basic truth at the present time and now need to exhibit the courage of their political convictions.  The future of our country depends on it!

The Magnitude of the Mess We’re In

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In an opinion piece last fall in the Wall Street Journal, George Schultz, and several colleagues from Stanford University’s Hoover Institution, very cogently describe the horrendous economic and fiscal mess in which the United States is now embedded.  Trillion dollar deficits for four years in a row, now going on five, a persistently weak recovery from the great recession of 2008, several rounds of quantitative easing by the Federal Reserve now totaling over three trillion dollars, and worst of all, a complete lack of consensus by political leaders on how to respond to this dangerous situation.

The President and the Democratic majority in the Senate, flush with victory after the November 2012 elections, believe that they have a mandate to continue their present expansionist policies.  The Republican majority in the House of Representatives, only slightly diminished by the 2012 elections, feels equally strongly that it has a mandate to continue applying the brakes.  As a fiscal conservative I agree with the Republicans that we must return to the sound fiscal and monetary policies advocated so eloquently in the above WSJ article.

What strategy can the House Republican’s follow to move federal policy in this direction?  House Speaker John Boehner has suggested that any increase in the debt limit be matched dollar for dollar by cuts in federal spending over a ten year period.  For example, the “Boehner Rule” would require that an increase in the debt limit of $1 trillion, enough to last about one year, would be offset by spending cuts of $100 billion a year for 10 years.  If such a regimen were then repeated a year from now, another $100 billion in spending cuts per year would be needed as well, and so on.

Taking into account the baseline budgeting process in Congress, whereby budgets are automatically increased from one year to the next by the anticipated rate of inflation, and also the occasional need for emergency appropriations to cover natural disasters and other dire events, the Boehner Rule would have the likely effect of holding spending approximately constant from one year to the next in absolute terms.  While this is not the same as what most people would understand by actual spending cuts, nevertheless it does represent significant restraint in federal spending, compared to recent patterns.

As the economy continues on its current growth trajectory of about 2% per year, this would mean that new tax revenues would eventually catch up with relatively flat spending levels and eventually lead to a balanced budget.

It sounds good but does he mean it?

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In today’s Omaha World Herald, Representative Lee Terry explains why he voted against the fiscal cliff deal just approved by Congress a few days ago.  It is because “raising taxes with little to no spending cuts does not make for a balanced agreement.”

Of course he is entirely correct in this assessment.  But will he stand firm in the next two months as a new deal is negotiated to either implement or replace sequestration which makes across the board spending cuts?  Will he stand firm when conservatives complain about cutting defense and liberals complain about cutting social programs?  Will be stand firm when the AARP complains about cutting entitlements?  We need to do all of these things and more!

House Speaker John Boehner has said that Republicans will be “singularly focused on the deficit and the debt” in the next two months.  But the President has said that he will not “play games” with raising our nation’s debt limit.  Will Mr. Boehner, Mr. Terry and the Republican majority in the House be prepared to withstand withering criticism from the mainstream press if the default deadline grows close without agreement for significant spending cuts?

We are rapidly approaching the moment of truth.  The future of our country depends on the fiscal responsibility of our national leaders.  Let’s hope that enough of them are made of the right stuff!

One Cheer for Lee Terry

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Congress has averted the immediate Fiscal Cliff but no significant action was taken to address our long term fiscal problems.  According to the Wall Street Journal, the deficit will shrink slightly below $1 trillion for a few years and then continue its inexorable rise. The can was kicked down the road for two months by delaying sequestration until March 1.  In other words this was a bad deal and Republicans in the House of Representatives should have voted it down and held out for a much better deal.

At least, Nebraska’s 2nd District Congressman, Lee Terry, voted against it.  Speaker John Boehner declared that the new 113th Congress would make the federal debt and deficit its singular focus.  Let’s hope that Mr. Boehner means what he says and that Mr. Terry supports him when the chips are down.

One year ago Mr. Terry voted to extend the payroll tax holiday for two months (annual cost $110 billion) and then voted against a full year extension two months later, after the die was cast.  Shenanigan’s like this are unacceptable and should be interpreted as complacency and deviousness about addressing serious problems.

House Republicans are in an incredibly difficult position.  We’ve just re-elected a President whose basic economic policy is more artificial stimulus (government spending), which just makes the deficit and debt that much worse.  The Republican House is now the sole bastion of common sense economic and fiscal policy.  We have to hold their feet to the fire.  Our survival as a strong nation depends on it.

Is Growth Over?

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                                             Is Growth Over?

In a recent New York Times op-ed column, Is Growth Over?, the Keynesian economist Paul Krugman argues that our current information technology revolution may not be potent enough to increase our economic growth rate beyond the American historical average of about 2%.

As much as we hope for a faster rate of growth, let’s assume that he is correct.  In fact our average rate of growth for 2010 – 2012 (since the recession ended in June 2009) is 2.1%.  What are the economic implications of 2% growth indefinitely into the future?  They are slower job growth, higher unemployment and therefore lower tax revenue.

High unemployment is bad enough for the millions of unemployed and underemployed.  But the fiscal implications are much worse because they affect the entire country.  We’ve already had four years in a row of trillion dollar deficits and the 2013 budget projections don’t look any better.  So continuing our present course presents a grim outlook, to say the least.

What are the alternatives?  We have two choices.  One is to boost the private sector with measures like pro-growth tax reform, relaxing onerous regulations, boosting domestic energy production and promoting international trade.  If such pro-growth policies are not politically doable, then the alternative is massive tax increases and spending cuts.

Our first priority must be to rapidly shrink the federal deficit down to zero.  Otherwise we are inviting fiscal calamity which can hit at any time without warning.  Fiscal conservatives should always remain focused on this #1 problem.  If no agreement can be reached for a rational plan to significantly reduce the deficit, then get the job done anyway that is possible.

We have got to wake up the American people to our urgent fiscal condition.  If going over the cliff is what it takes, then so be it!

What do we need to do to avoid the fiscal cliff?

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Although Republicans need to be prepared to jump off the cliff, at the same time they also need to make every reasonable effort to avoid taking this drastic action.  Mr. David Walker, the CEO of Comeback America and former Comptroller General of the United States, has described very clearly, on the Politico website, what kind of deal the Republican House of Representatives should be looking for.

In return for raising taxes on the wealthy, the House should insist on two concessions from the President and the Senate.  First of all, there must be an immediate and significant down payment on the spending cuts required by the sequester.  Comprehensive tax and social insurance reforms, a so-called Grand Bargain, would be deferred until a set date in 2013, to give the new Congress time for careful deliberation.  The debt ceiling limit would be raised just enough to get by until the new deadline next year.   A fail-safe hammer would be put in place to kick in if the deadline is not met.

Mr. Walker suggests that the long term goal, say by 2024, should be to reduce debt to 60% of the economy.  This will require an approximately $4 trillion combination of revenue increases and spending cuts over the next ten years.  There would be appropriate interim milestones set up to be met along the way.  My personal preference is to hold out for a balanced budget by a date certain but the main thing is to negotiate an ironclad agreement to put our fiscal policy on a sustainable path.  Anything less will lead to a dangerous fiscal crisis in the very near future, far worse than the present danger of going off the cliff.