Beltway insiders are praising the just announced budget deal between the Democrats and the Republicans. For example, a news analysis in today’s Wall Street Journal, “Accord Is Departure for Capitol”, suggests that budget politics may be changing, getting any deal is very hard, that perhaps bipartisanship isn’t dead in Washington but that there is still unfinished business. This is a purely euphemistic assessment. All this deal really does is to let the big spenders off the hook.
What it does is to relax the sequester by $63 billion for the next two years for very little in return. The $84 billion in new fees over ten years “officially” reduces the deficit by $21 billion but two year’s worth of new fees is just $16.8 billion. This means that the deficit will actually increase by $46 billion over the next two years.
But the real problem is that the leverage represented by the sequester is being thrown away for the next two years and this sets a bad precedent for the future. For example, we can now assume that the debt limit will also be raised for two more years in February 2014 because there will no longer be any leverage for bargaining for any other changes.
This in turn means that entitlement reform is for all practical purposes dead for the next two years. This is the really hard problem to solve. Big spenders will do anything to avoid dealing with it. Responsible fiscal conservatives know it must be addressed and need all the help they can muster to get something done.
What happens if the budget deal is not passed by Congress? It simply means that the sequester remains in effect and that discretionary spending will be $43 billion lower this current budget year than otherwise. The value of the sequester is to force action on the really thorny issue of reducing entitlement spending. Let’s preserve it for this purpose and not throw it away for nothing significant in return.
Leaders are supposed to address issues, not walk away from them!
My previous post, two days ago, introduced a new book by two economists, John Dearie and Courtney Geduldig, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. They make a very strong case that net job creation comes primarily from businesses less than one year old, true “start-ups”. But, unfortunately, there has been a huge drop off in the number of new businesses created each year since 2007 and, furthermore, the historical average of seven new jobs created by a firm in its first year has now fallen to less than five.
How do we reverse this alarming trend? Here is what the authors have learned from the many entrepreneurs they have talked to:
“Not enough people with the skills we need”
“Our immigration policies are insane”
“Regulations are killing us”
“Tax payments can be the difference between survival and failure”
“There’s too much uncertainty and it’s Washington’s fault”
Although there are 24 million Americans either unemployed or underemployed, there are also 3 million advertised high skill job openings going begging and many more potential jobs available for qualified individuals. A greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education in the U.S. would help. But also immigration reform is urgently needed. The Senate has passed legislation to raise the annual cap on H1-B visas (for high skilled workers) from 65,000 currently to 110,000. Hopefully the House will concur.
A Preferential Regulatory Framework for New Businesses could be devised to help fragile new businesses in their first five years. A Regulatory Improvement Commission could be created to streamline the entire federal regulatory process. Likewise a Preferential Tax Framework for New Business should be created and could, for example, recommend taxing income for the first five years at a much lower rate than normal.
Regarding policy uncertainty the authors refer to the U.S. Economic Policy Uncertainty Index which is at a very high level since the Great Recession. Economic uncertainty obviously discourages business growth.
Conclusion: A very good way to boost the economy and create more new jobs is to put greater emphasis on supporting entrepreneurs who are trying to start new businesses. There are a number of concrete actions that the federal government can take to do this and doing so should be a very high priority for our national leaders.
Yesterday’s weekend interview in the Wall Street Journal with money manager Stanley Druckenmiller, “How Washington Really Redistributes Income”, vividly illustrates how disastrous Obama economic policy has been for the young people who form the core of his coalition. “High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.”
“I thought that tying Obama Care to the debt ceiling was nutty”, says Mr. Druckenmiller. “I did not think it would be nutty to tie entitlements to the debt ceiling because there’s a massive long term problem. And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith.”
How about the “rat through the python” theory which holds that the fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable. Unfortunately for taxpayers, “the debt accumulates while the rat’s going through the python,” so that by the 2030’s the debt and its enormous interest payments become bigger problems than entitlements. “That’s where Greece was when it hit the skids”, he says.
What is Mr. Druckenmiller’s solution? Raise taxes on dividends and capital gains up to ordinary income rates and eliminate corporate taxes all together. This is justified because it ends double taxation of corporate profits. But, in addition, the people who run the corporations would be more incentivized to invest the profits in growth and expansion. Ending corporate taxation also ends crony capitalism and corporate welfare. All of this would be “very, very good for growth which is a good part of the solution to the debt problem long-term. You can’t do it without growth.”
Bottom line: we urgently need to rein in entitlement spending but we also need smarter policies to grow the economy faster. Young people ought to be totally on board with all of this. When will they wake up and see the light?
The CATO Institute has just released a new study “The Work Versus Welfare Trade-Off: 2013”, which analyzes the total level of welfare benefits on a state by state basis. The authors, Michael Tanner and Charles Hughes, show that welfare pays more than a minimum-wage job in 35 states and, moreover, in 13 states, it pays more than $15 per hour. The authors recommend that Congress and state legislatures strengthen welfare work requirements, remove exemptions from working and narrow the definition of work. Also many states should consider shrinking the large gap between the value of welfare and work by reducing current benefit levels and tightening eligibility requirements.
Clearly welfare benefits as well as disability payments, through the Supplemental Security Income (SSI) program of Social Security, have grown too large and have become a disincentive for many people to find a job. Getting something for nothing is a moral hazard which induces an attitude of entitlement and helplessness. It also causes the labor force participation rate to shrink and therefore hurts the economy.
Tightening up welfare payments and disability income are among the many actions
which Congress could take to speed up economic growth and lower government
spending. We need more representatives in Washington who understand that change is needed and who can advocate effectively for policies which will get this done!
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.