Deal
In a rare moment of bipartisanship, Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA) this past week reached a budget compromise that is actually quite moderate in nature.
Conservatives got the two things that were most critical to them - no tax increases (although there were some fee increases, which I feel are defacto tax increases - more on that later) and restoration of some of the sequester budget cuts.
Liberals got two more years without entitlement cuts as the agreement leaves Social Security, Medicare and Medicaid untouched. They also got higher overall spending caps (by $63 billion) over the next two years than the sequester allowed, although part of that increase will go to defense.
In theory, the package is deficit reducing, but probably not in reality. The package allowed $63 billion in additional spending over the next two years, offset by $85 billion in cuts (primarily from federal workers and military pension contribution changes) and fee increases (most notably an increase in the fee on airline tickets) over the next 10 years. So if the world stays utterly static over the next ten years, the deficit will go down, but the reality is that the package increases the deficit by $45 billion over the next two years versus the sequester agreement and it is a near 100% certainty that budgeting over the following 8 years will change.
This is a small-ball bargain that largely preserves the status quo. It does not touch in any meaningful way the three biggest drivers of the deficit, which are entitlement spending, defense spending and revenues. But that might actually be okay - the federal budget last year was $680 billion, way down from the recession heights of $1.4 trillion+ and clocks in at only 4.0% of GDP, close to a reasonable level. In order to keep the debt to GDP ratio constant, the deficit can be as high as the inflation rate plus the rate of economic growth. If one assumes modest 2% inflation and 2% GDP growth, then a 4% deficit will essentially keep debt flat in real terms.
Unfortunately, the math above only works if you never have a recession. Recessions cause huge spikes in spending and decreases in revenues that shock the system. In order to pay for these approximately once per decade shocks, in the good years, governments need to be running deficits of a lot less than 4%, ideally budgets would be balanced or even slightly in surplus.
The brief modern history here is that the US exited World War 2 with major debt from war obligations, with debt to GDP running as high as 120%. We steadily "paid down" this debt, no so much through absolute reduction but though inflation and economic growth and by the end of the Carter administration, debt had fallen to 35% of GDP. The next 12 years of Reagan and Bush (although H.W. did eventually agree to tax increases) saw major increases in defense spending, no cuts to social spending and large tax decreases, all of which, combined with the 90-91 recession, spiked debt to almost 70% of GDP. The Clinton administration saw tax increases (his idea) and large cuts in defense (his idea) and social spending (Newt Gingrich's idea) which combined for budget surpluses and took debt down to 55% of GDP.
Then W. Bush took over as President and immediately slashed taxes, instituted prescription drug benefits for Medicare and ramped up defense spending in the build-up to wars in Afgahnistan and Iraq. Debt was already up to over 70% of GDP before the recession hit and spiked to over 80% of GDP by the time Bush left office as massive outlays for bank bailouts and social benefits hit the federal coffers as the recession hit.
The first year of the Obama administration saw continued large outlays for the bailouts coupled with a large stimulus bill that spiked the debt by almost 10% in a single year. Now the debt has stabilized right around 100% of GDP.
We really need to get back to about 50% of GDP to be able to absorb comfortably the next recession, since debt levels over 100% of GDP are reaching towards the saturation point where credit downgrades and loss of investor interest cause a spike in interest rates. And a 1% interest rate increase on a 100% of GDP debt increases the deficit by 1% of GDP, meaning that we are very susceptible to interest rate risk if rates rise off of their current historic lows.
This deal won't accomplish any of that - it doesn't deal with tax reform, entitlement reform or defense spending reform. But it does give the markets certainty, prevents another government shutdown in the near term and at least maintains debts and deficit at a stable level.
It is also significant in that conservatives agreed to new sources of revenue. An increase in the airline ticketing fee is effectively a tax, since it is a direct charge to you as a consumer when you purchase an airline ticket. Calling it a fee and not a tax is politically expedient, but the effect is the same - airline consumers pay more to the government.
The deal passed overwhelmingly in the conservative-dominated House, by a roll call vote of 332-94 with 73% of Republicans and 84% of Democrats backing passage. It seems likely to pass the Senate, although, oddly, Republican opposition in the Senate seems a lot stronger than in the House and the vote next week may be much closer than the House vote.
For Republicans, this deal provides political cover to focus the debate on Obamacare, where they perceive themselves to have a big advantage given the struggles with the website and anger over policy cancellations. For Democrats, they get a higher spending level and clear the legislative agenda to discuss other items that are non-budgetary, such as immigration reform, where they perceive they have a public opinion advantage.
This deal was expedient bipartisanship, but welcome bipartisanship nonetheless.
Obamacare Enrollment Improves Some
Obamacare enrollment increased dramatically in November, with the total now enrolled nationally reaching 365,000 by the end of the month, up from under 30,000 in October.
The basic benchmark of success is 7 million enrollments by the time open enrollment ends on April 1st. Clearly, enrollment will not happen evenly across the months and will ramp up as the deadline gets closer. Even so, October was clearly a dramatic failure. The November numbers are less clear. On a straightline basis, if every other month (December, January, February, March) only saw the same level of enrollment as November, enrollment would reach less than 2 million. But, as I said, that is not the likely scenario. It is still TBD to me if the administration comes close to its goal.
An additional 803,000 people have qualified for expansions in Medicaid and SCHIP, another key element of the law's expanded access.
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Showing posts with label federal debt. Show all posts
Showing posts with label federal debt. Show all posts
Saturday, December 14, 2013
Sunday, July 3, 2011
Time to Gerrymander, The Path to Success on the Debt Ceiling, Looking at the Party Factions, Reasons to Celebrate American Independence
43 States Full of Gerrymandering
In the early 1800s, Democratic-Republican Governor of Massachusetts Elbridge Gerry, working with allies in the state legislature, crafted a map of State Senate districts that was designed to thwart the Federalists by building as many majority Democratic-Republican districts as possible. The 12th District, designed in the Boston area, closely resembled a salamander. Hence, the terry Gerrymander was born as a symbol of designing districts not on the basis of any rational grouping of towns and neighborhoods, but with the specific intent of benefit the party in power.
And it has been thus for the past two centuries. It is a time-honored tradition, used by both Democrats and Republicans alike, to shape Congressional districts to benefit ones own party.
The 2012 Congressional elections will be the first with newly drawn districts based on the 2010 Census. All 50 states will have to redraw, including not only the ones that are gaining or losing seats, but also the ones where the seats are staying the same, as population shifts have still made current districts uneven.
Seven states have laws on the books to protect against Gerrymandering. These states use a bi-partisan commission to draw districts in logical ways to avoid this effect. Arizona, Hawaii, Idaho, New Jersey, California, Minnesota and Washington all fall into this category. For a 7 other states, Gerrymandering is irrelevant as they hold a single at-large seat. Delaware, Vermont, North Dakota, South Dakota, Montana, Wyoming and Alaska fall into this category.
In the remaining 36 states, however, it is open season. Of the largest of these redistricting prizes: Texas, New York, Florida, Pennsylvania, Ohio, Illinois, Michigan, Georgia, North Carolina and Virginia, only 1 (Illinois) is a Democratically-controlled legislature and only 2 others (New York and Virginia) have divided legislatures; 7 of these 10 states are firmly controlled by Republicans.
Whatever your personal views on Gerrymandering (I support the bi-partisan commissions, most partisans seem to favor those when they are out of power and oppose them when they are in power), the dynamics of this year show the huge intrinsic advantage that Republicans have in the House in the 2012 elections. Not only are Republican states by and large picking up seats: Democratic-leaning states are losing 7 seats, GOP-leaning states are gaining 6 (Nevada, a swing state, is gaining the 7th seat), but they will largely control the redistricting process, which could swing as many as a dozen seats to the advantage of the GOP.
So, any hope the Democrats had that higher turnout in 2012 will help them overcome 2010 GOP gains has to be blunted by a intrinsic GOP advantage of almost 20 seats going in.
How About This Compromise?
The impasse on raising the debt ceiling and the associated deficit reduction package that the Congressional GOP have demanded has come down to one basic issue: taxes.
At issue: Democrats want tax changes to be part of the deficit reduction package, namely the elimination or reduction of tax credits and exemptions for rich corporations and individuals. Republicans with a few exceptions (Sen. Tom Coburn (R-OK) and Sen. Lindsey Graham (R-SC) being the most notable) have stated opposition to any proposal that increases total tax revenues, even if they do not increase marginal rates. Democrats are loathe to support massive spending cuts without something on the tax side.
In the spirit of Grover Norquist (who I detest, but that's another discussion), how about this compromise? Put through the spending cuts (on discretionary spending, nothing significant is going to happen with entitlements, unfortunately), incorporate reductions of tax loopholes for the wealthy and corporations, but offset those with reductions to taxes for middle-income Americans. This holds to the GOP pledge of not increasing net taxes, but throws the Democrats a bone on income equality.
What do you say, Eric Cantor and Harry Reid?
Who Unites the Factions Best?
Ronald Reagan famously swept into office over incumbent Jimmy Carter by winning over moderates who came to be known as "Reagan Democrats". In every election, there is a core of support for each party which is complemented by how well the unite the factions that can go either way. In recent years, it seems party loyalties have become even more complex, so I thought it might make sense to take stock of the membership factions of each party to understand how each party might to try to build a winning coalition next November. I'll also assess the risk of each group dumping their home party in a given election.
1. The Democrats
Democrats rely on a number of different factions:
a. Social Justice Liberals
This group includes those whose primary issues are civil rights-related, including gay rights. This group has been around since at least the 60s and tend to be passionate voters with a strong moral bent to their voting.
Risk Level: Low
b. Socialists
Those seeking economic justice, they tend to have core issues such as universal health care, social assistance, education spending and income equality. These are not all full-blown socialists, but are generally people that admire the social safety net of large European countries.
Risk Level: Low
c. Feminists
This group tends to overlap heavily with the Social Justice Liberals, but they tend to have a single voting issue that overrides everything else: abortion-rights.
Risk Level: Low
d. Doves
This group is the anti-war gang. They strongly opposed Iraq and now want out quickly of Afghanistan and oppose involvement in the conflict in Libya. They turned out big for Obama in 2008
Risk Level: Medium (but only because the GOP isn't likely to run as the party of peace against President Obama)
e. Populist Hispanics
Hispanics in general, and Mexican-Americans specifically favored the Democrats heavily in the past on the basis of their economically liberal views and support for immigration reform. But Democrats part ways with this heavily Catholic group on social issues such as abortion and gay rights.
Risk Level: Medium (the economy hasn't improved and the President has largely ignored this Hispanic base, although he did nominate Sonia Sotomayor to the Supreme Court)
f. Social Libertarians
Those that favor not only abortion-rights but hate the Patriot Act, Gitmo, want to legalize Marijuana and prostitution and generally want the government completely out of social issues.
Risk Level: High (the President hasn't closed Gitmo, has extended the Patriot Act and the Tea Party seems to have co-opted the social libertarian message)
Republicans
a. The Corporatists
The Goldman-Sachs, Exxon-Mobil wing of the GOP isn't as concerned with true free markets as they are with making the government business-friendly. They favor tax breaks and subsidies and limited government regulation.
Risk: Low (this group hates the President)
b. Christian Conservatives
The social-issue focused group opposes gay marriage, abortion rights and affirmative action and is far more interested in traditional values than economics.
Risk: Low
c. The Tea Party / Economic Libertarians
This group generally opposes government involvement in the economy and favors far lower government spending, lower taxes and less regulation.
Risk: Low-to-Medium (they won't support Obama, but they could stay home if a more Corporatist Republican takes office)
d. The Neo-Cons
Remember when the Neo-Cons were the big new thing? The first Republicans in ages to support such concepts of nation-building, this new way of Republican thinkers was prominent during the Bush Administration. They are a lot quieter these days after a decade of war, but they are still around.
Risk: Low
e. Northeastern Republicans
This socially liberal but economically conservative bunch, wants less government but things the Tea Party and the Christian Conservatives are a little out there. There are a lot less of these pragmatists than the used to be, but they are still around.
Risk: Medium-to-High
f. Establishment Republicans
This group likes Medicare, Medicaid and Social Security but opposes Universal Healthcare. A nuanced, but large group, they are resistant to change in general, they are the classic Reagan Democrats. They want our existing social programs maintained, but don't want new ones, and sure don't want their taxes going up.
Risk: Medium
There are many other groups (true Libertarians and all shades of moderates) out there, but each party is going to have to shore up a complex base to win.
Why America is Great
As we celebrate 235 years of the Untied States of America on July 4th, here are a few of the reasons why America is great:
1. The Best Capital Markets
Why are the most innovative companies in the world based in the US? Our innovative spirit, to be sure. But also, we have the best capital markets in the world. Venture Capital, Angel Investing and strong property rights all make the US one the best place in history to turn an idea into a business.
2. The Most Diverse, Integrated Population Ever
We are a truly diverse nation. Black, White, Hispanic, Asian, Native American, protestant, Catholic, Jewish, Muslim, gay, straight, bisexual, and on and on. Sure, other countries have elements of diversity -- there is a sizable Muslim population in France and lots of people from Fiji in Australia. But can you name anywhere else that has existed in history where the population is so well economically and socially integrated? Sure, we still have our problems, but can you imagine the election of a guy like Barack Obama in Europe?
3. The Bill of Rights
Nothing before or since anywhere in the world has established the rights of the citizenry so uniquely. Free speech? Good luck with that in Germany. Bearing arms? Have fun in Great Britain. We have the strongest spirit of individual rights of anywhere in the world and it leads to the most open dialogue about social and political issues of anywhere on Earth.
4. The University System
Sure, it's too expensive. Sure, the tenure system is broken. And yes, the funding system is unfair to middle-class savers. But there is a reason that people from all over the world come to our colleges and universities. Because they are the best.
5. Class Mobility
Maybe its less than it was for some a generation ago, but it isn't gone. But take a look at the stories of Chris Gardner (the subject of the book and film "The Pursuit of Happyness" who went from homeless to running an investment management group), Oprah Winfrey (who grew up poor in Chicago to build a media empire), Bill Clinton (born poor to a single-mother in rural Arkansas to become President of the United States) and David Geffen (who grew up in poverty in Brooklyn and rose to be the biggest name in the music business), rags-to-riches stories simply don't happen with the prevalence that they do in the United States anywhere else.
Happy Independence Day, everyone. I hope you get a long weekend.
In the early 1800s, Democratic-Republican Governor of Massachusetts Elbridge Gerry, working with allies in the state legislature, crafted a map of State Senate districts that was designed to thwart the Federalists by building as many majority Democratic-Republican districts as possible. The 12th District, designed in the Boston area, closely resembled a salamander. Hence, the terry Gerrymander was born as a symbol of designing districts not on the basis of any rational grouping of towns and neighborhoods, but with the specific intent of benefit the party in power.
And it has been thus for the past two centuries. It is a time-honored tradition, used by both Democrats and Republicans alike, to shape Congressional districts to benefit ones own party.
The 2012 Congressional elections will be the first with newly drawn districts based on the 2010 Census. All 50 states will have to redraw, including not only the ones that are gaining or losing seats, but also the ones where the seats are staying the same, as population shifts have still made current districts uneven.
Seven states have laws on the books to protect against Gerrymandering. These states use a bi-partisan commission to draw districts in logical ways to avoid this effect. Arizona, Hawaii, Idaho, New Jersey, California, Minnesota and Washington all fall into this category. For a 7 other states, Gerrymandering is irrelevant as they hold a single at-large seat. Delaware, Vermont, North Dakota, South Dakota, Montana, Wyoming and Alaska fall into this category.
In the remaining 36 states, however, it is open season. Of the largest of these redistricting prizes: Texas, New York, Florida, Pennsylvania, Ohio, Illinois, Michigan, Georgia, North Carolina and Virginia, only 1 (Illinois) is a Democratically-controlled legislature and only 2 others (New York and Virginia) have divided legislatures; 7 of these 10 states are firmly controlled by Republicans.
Whatever your personal views on Gerrymandering (I support the bi-partisan commissions, most partisans seem to favor those when they are out of power and oppose them when they are in power), the dynamics of this year show the huge intrinsic advantage that Republicans have in the House in the 2012 elections. Not only are Republican states by and large picking up seats: Democratic-leaning states are losing 7 seats, GOP-leaning states are gaining 6 (Nevada, a swing state, is gaining the 7th seat), but they will largely control the redistricting process, which could swing as many as a dozen seats to the advantage of the GOP.
So, any hope the Democrats had that higher turnout in 2012 will help them overcome 2010 GOP gains has to be blunted by a intrinsic GOP advantage of almost 20 seats going in.
How About This Compromise?
The impasse on raising the debt ceiling and the associated deficit reduction package that the Congressional GOP have demanded has come down to one basic issue: taxes.
At issue: Democrats want tax changes to be part of the deficit reduction package, namely the elimination or reduction of tax credits and exemptions for rich corporations and individuals. Republicans with a few exceptions (Sen. Tom Coburn (R-OK) and Sen. Lindsey Graham (R-SC) being the most notable) have stated opposition to any proposal that increases total tax revenues, even if they do not increase marginal rates. Democrats are loathe to support massive spending cuts without something on the tax side.
In the spirit of Grover Norquist (who I detest, but that's another discussion), how about this compromise? Put through the spending cuts (on discretionary spending, nothing significant is going to happen with entitlements, unfortunately), incorporate reductions of tax loopholes for the wealthy and corporations, but offset those with reductions to taxes for middle-income Americans. This holds to the GOP pledge of not increasing net taxes, but throws the Democrats a bone on income equality.
What do you say, Eric Cantor and Harry Reid?
Who Unites the Factions Best?
Ronald Reagan famously swept into office over incumbent Jimmy Carter by winning over moderates who came to be known as "Reagan Democrats". In every election, there is a core of support for each party which is complemented by how well the unite the factions that can go either way. In recent years, it seems party loyalties have become even more complex, so I thought it might make sense to take stock of the membership factions of each party to understand how each party might to try to build a winning coalition next November. I'll also assess the risk of each group dumping their home party in a given election.
1. The Democrats
Democrats rely on a number of different factions:
a. Social Justice Liberals
This group includes those whose primary issues are civil rights-related, including gay rights. This group has been around since at least the 60s and tend to be passionate voters with a strong moral bent to their voting.
Risk Level: Low
b. Socialists
Those seeking economic justice, they tend to have core issues such as universal health care, social assistance, education spending and income equality. These are not all full-blown socialists, but are generally people that admire the social safety net of large European countries.
Risk Level: Low
c. Feminists
This group tends to overlap heavily with the Social Justice Liberals, but they tend to have a single voting issue that overrides everything else: abortion-rights.
Risk Level: Low
d. Doves
This group is the anti-war gang. They strongly opposed Iraq and now want out quickly of Afghanistan and oppose involvement in the conflict in Libya. They turned out big for Obama in 2008
Risk Level: Medium (but only because the GOP isn't likely to run as the party of peace against President Obama)
e. Populist Hispanics
Hispanics in general, and Mexican-Americans specifically favored the Democrats heavily in the past on the basis of their economically liberal views and support for immigration reform. But Democrats part ways with this heavily Catholic group on social issues such as abortion and gay rights.
Risk Level: Medium (the economy hasn't improved and the President has largely ignored this Hispanic base, although he did nominate Sonia Sotomayor to the Supreme Court)
f. Social Libertarians
Those that favor not only abortion-rights but hate the Patriot Act, Gitmo, want to legalize Marijuana and prostitution and generally want the government completely out of social issues.
Risk Level: High (the President hasn't closed Gitmo, has extended the Patriot Act and the Tea Party seems to have co-opted the social libertarian message)
Republicans
a. The Corporatists
The Goldman-Sachs, Exxon-Mobil wing of the GOP isn't as concerned with true free markets as they are with making the government business-friendly. They favor tax breaks and subsidies and limited government regulation.
Risk: Low (this group hates the President)
b. Christian Conservatives
The social-issue focused group opposes gay marriage, abortion rights and affirmative action and is far more interested in traditional values than economics.
Risk: Low
c. The Tea Party / Economic Libertarians
This group generally opposes government involvement in the economy and favors far lower government spending, lower taxes and less regulation.
Risk: Low-to-Medium (they won't support Obama, but they could stay home if a more Corporatist Republican takes office)
d. The Neo-Cons
Remember when the Neo-Cons were the big new thing? The first Republicans in ages to support such concepts of nation-building, this new way of Republican thinkers was prominent during the Bush Administration. They are a lot quieter these days after a decade of war, but they are still around.
Risk: Low
e. Northeastern Republicans
This socially liberal but economically conservative bunch, wants less government but things the Tea Party and the Christian Conservatives are a little out there. There are a lot less of these pragmatists than the used to be, but they are still around.
Risk: Medium-to-High
f. Establishment Republicans
This group likes Medicare, Medicaid and Social Security but opposes Universal Healthcare. A nuanced, but large group, they are resistant to change in general, they are the classic Reagan Democrats. They want our existing social programs maintained, but don't want new ones, and sure don't want their taxes going up.
Risk: Medium
There are many other groups (true Libertarians and all shades of moderates) out there, but each party is going to have to shore up a complex base to win.
Why America is Great
As we celebrate 235 years of the Untied States of America on July 4th, here are a few of the reasons why America is great:
1. The Best Capital Markets
Why are the most innovative companies in the world based in the US? Our innovative spirit, to be sure. But also, we have the best capital markets in the world. Venture Capital, Angel Investing and strong property rights all make the US one the best place in history to turn an idea into a business.
2. The Most Diverse, Integrated Population Ever
We are a truly diverse nation. Black, White, Hispanic, Asian, Native American, protestant, Catholic, Jewish, Muslim, gay, straight, bisexual, and on and on. Sure, other countries have elements of diversity -- there is a sizable Muslim population in France and lots of people from Fiji in Australia. But can you name anywhere else that has existed in history where the population is so well economically and socially integrated? Sure, we still have our problems, but can you imagine the election of a guy like Barack Obama in Europe?
3. The Bill of Rights
Nothing before or since anywhere in the world has established the rights of the citizenry so uniquely. Free speech? Good luck with that in Germany. Bearing arms? Have fun in Great Britain. We have the strongest spirit of individual rights of anywhere in the world and it leads to the most open dialogue about social and political issues of anywhere on Earth.
4. The University System
Sure, it's too expensive. Sure, the tenure system is broken. And yes, the funding system is unfair to middle-class savers. But there is a reason that people from all over the world come to our colleges and universities. Because they are the best.
5. Class Mobility
Maybe its less than it was for some a generation ago, but it isn't gone. But take a look at the stories of Chris Gardner (the subject of the book and film "The Pursuit of Happyness" who went from homeless to running an investment management group), Oprah Winfrey (who grew up poor in Chicago to build a media empire), Bill Clinton (born poor to a single-mother in rural Arkansas to become President of the United States) and David Geffen (who grew up in poverty in Brooklyn and rose to be the biggest name in the music business), rags-to-riches stories simply don't happen with the prevalence that they do in the United States anywhere else.
Happy Independence Day, everyone. I hope you get a long weekend.
Sunday, September 20, 2009
Is the Stimulus Still Necessary?, Sloppiness on Capital Hill, Addressing Access but Not Cost
As we approach the end of the government's fiscal year (which runs from October 1st to September 30th), it seemed like an appropriate time to review fiscal priorities and policies.
If the Economy is Growing Again, Do We Still Need the Stimulus?
As I'd been predicting for some time and the consensus of the political and economic world has now confirmed, the economy appears to have resumed a modest level of growth in the third quarter of this year (the quarter than began July.) Consumer spending and industrial production are up. Capital investment is back. The stock market has rebounded. And new unemployment claims are falling.
So, do we still need a stimulus?
First, let's review where we are.
As of the latest report from the government, here is where the provisions of the stimulus bill stand:
(1) Appropriations -- $499 billion total allocated
Authorized: $237.7 billion (47.6%)
Spent: $98.0 billion (19.6%)
(2) Tax Cuts -- $288 billion total allocated
Tax Relief Provided -- $62.5 billion (21.75)
In total, between the tax cuts and the outlays, $160.5 billion of the stimulus funds have been paid out, representing 20.4% of the amount authorized in the bill.
So, if the economy is recovering, do we really need to spend the other $626.5 billion? Would the money be better unspent to attempt to reduce the deficit.
Unequivocally, I believe that we must continue down the current path, for several reasons.
(1) Government Commitments
Projects which have been authorized but not spent would have a chilling impact if canceled. Private contractors have made hiring and investment decisions on the basis of these decisions and the government is obliged to honor them.
Similarly with the tax cuts, people have made decisions to buy homes, upgrade the energy efficiency of their homes, purchase automobiles and made financial decisions on the basis of the tax cuts in 2009 and 2010. Repealing them now would be operating in bad faith.
(2) Not Yet V-Shaped
Yes, growth has returned. But it is tenuous growth. The economy is clearly not booming and is in fragile shape. Pulling spending out of the stimulus is not the way to ensure that the economy finds firm footing.
(3) We Need to Do a Lot of This Anyway
The "emergency" provisions of the stimulus such as direct payments to states to cover shortfalls are already spent. Most of what is left is infrastructure spending including upgrading roads and bridges, green investment in government building and schools, computerizing government record-keeping systems and other investments, which, on balance are extremely good and needed things to do. Part of the complexity of the stimulus is that it wasn't just a direct infusion into the economy, it was kind of a roadmap for how we would upgrade productivity over the next decade. Not a bad thing to keep doing.
(4) It's Unemployment, Stupid
Unemployment still languishes at 9.7%, it's highest level since 1982. On of the major charges behind the stimulus bill was to contain unemployment. Sustained high unemployment damages consumer spending and confidence, and perhaps, just as importantly, is a major political problem for Democrats.
The American Recovery and Reinvestment Act was a massive expenditure at a time when the deficit was already projected to be at unsustainable levels. But it was a necessary short-term choice. In the near-term, the federal debt is not a big concern, Treasury Yields (the rate of interest the government has to pay to borrow) are at historical lows, meaning there is still plenty of liquidity to fund government operations.
We desperately need to get the deficit under control during President Obama's first term. But let's finish fixing the economy first -- ultimately economic growth leads to tax receipts, so if we don't fix the economy, nothing that we will do to fix the deficit will work.
Why Can't Congress Meet a Deadline?
In a continuation of a horrible legislative practice, it appears that we will likely see none of the major appropriations bills hit the President's desk by the time the new government fiscal year starts on October 1st. The cumbersome legislative process involved in annual appropriations involves both houses of congress passing a version of each appropriations bill, then a conference committee of Representatives and Senators compromising on the differences in the bills, a "conference report" that contains these agreements then being passed by both houses and the final appropriations bill signed by the President.
Over the past couple decades, the habit has been to pass budgets later and later in the fiscal year, using "continuing resolutions", partial funding for the functions of government for a short period of time, to bridge the gap.
This is understandable when power in Washington is split and Republicans and Democrats have to have tough negotiations to agree to spending priorities. In fact, for the fiscal year we are finishing, President Bush never signed budget bills -- this was left to the messy omnibus bill that President Obama signed that was widely criticized for being laden with pork.
There is no excuse with one party in control. It is simply dereliction of duty not to get budgeting done on time. Use of continuing resolutions is a poor practice because it leaves government agencies without spending priorities or an understanding of what programs will have continuing funding throughout the year. Below is the status of the bills. The Senate is really just getting into the debate, with the Transportation bill next on the docket. Looks like we will miss all the deadlines again.
Improved Access? Maybe. Improved Cost? Not So Much.
The very compromised Baucus Health Care Bill, which still appears to have zero GOP support, despite giving in on what looks to me like every major point (public option -- gone, protections against illegal immigrants -- in, spending -- reduced), will likely still help improve access to health care for Americans most at risk.
Eliminating exclusions for pre-existing conditions, prohibiting dropping insured people who are current on their premiums simply because they become sick and providing subsidies for those not poor enough for Medicaid but not rich enough to buy insurance on their own are all good things that will help improve access to our system.
But there is really very little in this bill that addresses the most dangerous part of health care in this country, it's very high and rising cost. There are many contributing factors to this, but here are what I consider to be the key ones:
(1) Perscription Drug Costs
No allowance to import drugs from Canada. No "most favored nation" clause, as I have suggested, for drug pricing. This looks like a giveaway to big Pharma -- more insured patients but no controls on what they can charge, even if it is many multiples of what they charge other industrialized nations that have government-run health insurance.
(2) Insurance Company Overhead and Profit
One in three healthcare dollars pays for insurance company overhead and profit. This spending adds zero value to the health care system. Medicare and Medicaid has less than a third of that overhead, as do nationalized healthcare systems. Without some provision to control the amount of money sucked out by insurance companies, we will continue to suffer from higher costs for care. Co-operatives may help some, but I doubt they are the full solution.
(3) Defensive Medicine
The GOP has this one right -- we need tort reform not just to reduce the cost of tort, but to reduce the prevalence of "defensive medicine" -- procedures that are likely unnecssary that are performed just to prevent a future law suit. Baucus is silent on this.
We may make a step forward on access, but I fear we are not going to make much progress on cost with this bill. Without reforms to cost, Medicare and Medicaid spending will cripple the government over the next 20 years. We will have to take it up eventually, but it looks increasingly unlikely that it will happen this year.
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If the Economy is Growing Again, Do We Still Need the Stimulus?
As I'd been predicting for some time and the consensus of the political and economic world has now confirmed, the economy appears to have resumed a modest level of growth in the third quarter of this year (the quarter than began July.) Consumer spending and industrial production are up. Capital investment is back. The stock market has rebounded. And new unemployment claims are falling.
So, do we still need a stimulus?
First, let's review where we are.
As of the latest report from the government, here is where the provisions of the stimulus bill stand:
(1) Appropriations -- $499 billion total allocated
Authorized: $237.7 billion (47.6%)
Spent: $98.0 billion (19.6%)
(2) Tax Cuts -- $288 billion total allocated
Tax Relief Provided -- $62.5 billion (21.75)
In total, between the tax cuts and the outlays, $160.5 billion of the stimulus funds have been paid out, representing 20.4% of the amount authorized in the bill.
So, if the economy is recovering, do we really need to spend the other $626.5 billion? Would the money be better unspent to attempt to reduce the deficit.
Unequivocally, I believe that we must continue down the current path, for several reasons.
(1) Government Commitments
Projects which have been authorized but not spent would have a chilling impact if canceled. Private contractors have made hiring and investment decisions on the basis of these decisions and the government is obliged to honor them.
Similarly with the tax cuts, people have made decisions to buy homes, upgrade the energy efficiency of their homes, purchase automobiles and made financial decisions on the basis of the tax cuts in 2009 and 2010. Repealing them now would be operating in bad faith.
(2) Not Yet V-Shaped
Yes, growth has returned. But it is tenuous growth. The economy is clearly not booming and is in fragile shape. Pulling spending out of the stimulus is not the way to ensure that the economy finds firm footing.
(3) We Need to Do a Lot of This Anyway
The "emergency" provisions of the stimulus such as direct payments to states to cover shortfalls are already spent. Most of what is left is infrastructure spending including upgrading roads and bridges, green investment in government building and schools, computerizing government record-keeping systems and other investments, which, on balance are extremely good and needed things to do. Part of the complexity of the stimulus is that it wasn't just a direct infusion into the economy, it was kind of a roadmap for how we would upgrade productivity over the next decade. Not a bad thing to keep doing.
(4) It's Unemployment, Stupid
Unemployment still languishes at 9.7%, it's highest level since 1982. On of the major charges behind the stimulus bill was to contain unemployment. Sustained high unemployment damages consumer spending and confidence, and perhaps, just as importantly, is a major political problem for Democrats.
The American Recovery and Reinvestment Act was a massive expenditure at a time when the deficit was already projected to be at unsustainable levels. But it was a necessary short-term choice. In the near-term, the federal debt is not a big concern, Treasury Yields (the rate of interest the government has to pay to borrow) are at historical lows, meaning there is still plenty of liquidity to fund government operations.
We desperately need to get the deficit under control during President Obama's first term. But let's finish fixing the economy first -- ultimately economic growth leads to tax receipts, so if we don't fix the economy, nothing that we will do to fix the deficit will work.
Why Can't Congress Meet a Deadline?
In a continuation of a horrible legislative practice, it appears that we will likely see none of the major appropriations bills hit the President's desk by the time the new government fiscal year starts on October 1st. The cumbersome legislative process involved in annual appropriations involves both houses of congress passing a version of each appropriations bill, then a conference committee of Representatives and Senators compromising on the differences in the bills, a "conference report" that contains these agreements then being passed by both houses and the final appropriations bill signed by the President.
Over the past couple decades, the habit has been to pass budgets later and later in the fiscal year, using "continuing resolutions", partial funding for the functions of government for a short period of time, to bridge the gap.
This is understandable when power in Washington is split and Republicans and Democrats have to have tough negotiations to agree to spending priorities. In fact, for the fiscal year we are finishing, President Bush never signed budget bills -- this was left to the messy omnibus bill that President Obama signed that was widely criticized for being laden with pork.
There is no excuse with one party in control. It is simply dereliction of duty not to get budgeting done on time. Use of continuing resolutions is a poor practice because it leaves government agencies without spending priorities or an understanding of what programs will have continuing funding throughout the year. Below is the status of the bills. The Senate is really just getting into the debate, with the Transportation bill next on the docket. Looks like we will miss all the deadlines again.
Improved Access? Maybe. Improved Cost? Not So Much.
The very compromised Baucus Health Care Bill, which still appears to have zero GOP support, despite giving in on what looks to me like every major point (public option -- gone, protections against illegal immigrants -- in, spending -- reduced), will likely still help improve access to health care for Americans most at risk.
Eliminating exclusions for pre-existing conditions, prohibiting dropping insured people who are current on their premiums simply because they become sick and providing subsidies for those not poor enough for Medicaid but not rich enough to buy insurance on their own are all good things that will help improve access to our system.
But there is really very little in this bill that addresses the most dangerous part of health care in this country, it's very high and rising cost. There are many contributing factors to this, but here are what I consider to be the key ones:
(1) Perscription Drug Costs
No allowance to import drugs from Canada. No "most favored nation" clause, as I have suggested, for drug pricing. This looks like a giveaway to big Pharma -- more insured patients but no controls on what they can charge, even if it is many multiples of what they charge other industrialized nations that have government-run health insurance.
(2) Insurance Company Overhead and Profit
One in three healthcare dollars pays for insurance company overhead and profit. This spending adds zero value to the health care system. Medicare and Medicaid has less than a third of that overhead, as do nationalized healthcare systems. Without some provision to control the amount of money sucked out by insurance companies, we will continue to suffer from higher costs for care. Co-operatives may help some, but I doubt they are the full solution.
(3) Defensive Medicine
The GOP has this one right -- we need tort reform not just to reduce the cost of tort, but to reduce the prevalence of "defensive medicine" -- procedures that are likely unnecssary that are performed just to prevent a future law suit. Baucus is silent on this.
We may make a step forward on access, but I fear we are not going to make much progress on cost with this bill. Without reforms to cost, Medicare and Medicaid spending will cripple the government over the next 20 years. We will have to take it up eventually, but it looks increasingly unlikely that it will happen this year.
If you like this site, tell your friends. Our site counter still isn't working, but we've had 99 visitors so far in the month of September, for thos of you following it.
Tuesday, August 25, 2009
9,000,000,000,000
A Friggin' Huge Number
Nine trillion dollars. That's how much the government will spend that it doesn't have over the next ten years. $30,000 for every man, woman and child in the United States. This, which we had all suspected but was confirmed by the White House Office of Management and Budget today. I couldn't have fathomed in the heady days of the late 1990s when we were running surpluses and talking about having the federal debt paid off by about now, but here we are. It is sobering and very concerning. Debt levels this high suck financial capital out of our economy and create a very real risk of rising inflation and ballooning interest rates as we print money to continue to service our debt. A financial collapse could loom if our creditors in China and Saudi Arabia decide to stop gobbling up our debt. It is an untenable, unsustainable situation. Our debt, already 70% of our GDP, could balloon to over 100% of our GDP.
How Did We Get Here?
How did this incredible crash from better than balanced budgets to eye-popping deficits happen? There were several contributing factors....
(1) The Bush Tax Cuts
Quote me Laffer curves all you want. Laffer may have been right that beyond a point, tax increases no longer increase government revenues -- surely if a government is taxing 90% of income and it hikes it to 100%, it won't see an increase -- but we were not at that point. The proof is in the revenue explosion that occurred in the 1990s after the Clinton tax hikes that led to a balanced budget. The Bush tax cuts cost us $150 billion per year.
(2) The Iraq and Afghanistan Wars
The wars have been phenomenally expensive as we have had the costs not only of deployed troops but of hundred of thousands of private contractors from Blackwater, Halliburton and others. Annual cost: close to $200 billion
(3) Medicare Perscription Drugs
An amazingly quiet bill in retrospect, President George W. Bush signed into law early in his Presidency a perscription drug benefit as part of Medicare. Liberals panned it as a give-away to big pharma. Conservatives shunned it as an exploding entitlement. Yet the broad bi-partisan middle passed it. Whoever was right it costs about $150 billion / year.
(4) Entitlement Explosion
Health care spending is rising at double the rate of inflation....and the number of people on the Medicare roles is rising even more rapidly as the retirement-age population grows and life expectancy extends.
Social Security is rising in cost too, due to life expectancy and population demographics but at a less alarming rate.
So where are we?
Today 2019
Entitlements 2.0 trillion 3.0 trillion
Defense 0.7 trillion 0.9 trillion
Interest 0.3 trillion 0.8 trillion
TARP* 0.3 trillion none
Domestic Discretionary 0.6 trillion 0.7 trillion
Total Spending 3.8 trillion 5.4 trillion
Revenues 2.2 trillion 4.3 trillion
Deficit 1.6 trillion 1.1 trillion
* TARP expenditures were close to $0.7 trillion but are estimated at $0.3 trillion because the government received tangible assets in return for the money -- losses under the program are estimated at $0.3 trillion
What Do We Do?
As you can see from the spending above, any discussion of domestic discretionary spending is largely irrelevant. Yes, there is waste in earmarks, as Sen. John McCain (R-AZ) and others have often pointed out. But the spending, in total budget terms is a pittance at 16% of the current budget and 13% of the 2019 budget. We can get more efficient, but we aren't going to wholesale eliminate government departments...at least not yet.
Interest is an output...an output of our debt level and current interest rates. The only way to control it is to reduce other spending and thereby reduce debt.
This leaves us with the three whoppers: taxes, entitlements and defense spending. Taxes will HAVE ot go up. Entitlements will HAVE to be reformed -- higher retirement ages, lower benefits, etc. Defense will have to be reduced.
So what to do specifically?
(1) Defense
* Find a way out of Iraq (yes, we still have lots of troops there) and Afghanistan
* Cancel all the Military-Industrial giveways like next-generation fighter plans and nuclear subs
* Increase the number of reservists and decrease the number of active-duty troops
No other country on earth spends on defense like we do. Can we really afford to keep being the global police force?
(2) Taxes
* Let the Bush tax cuts expire...all of them
* Enact real cap and trade where ALL carbon is auctioned and there are no give-aways to big coal
* Hike gas taxes by $1/gallon
* Raise capital gains tax to coincide with income taxes
* Phase-out 401K deductibility for high-income individuals
(3) Entitlements
* Move to a cash-balance program for Social Security that automatically adjusts as life-expectancy changes or move the retirement age to 70 and index to life expectancy
* Require Canada-equivalen tpricing for Medicare perscription drug benefits, ban pharma ads while we are at it
* Move Medicare eligibility to 70
* Comprehensively fix health care inflation and confront rationing questions head on
None of these are pleasant solutions and many are probably politically infeasible today. There are many other good ideas that could be used as substitutes. But the notion that we can fix this without making tough and painful choices is just wrong. The longer we wait to act, the worse it will get. And if we pass the brink and T-bill rates spike and we are forced to print money to service the debt, the recession of 2008/2009 will seem like the good old days.
Mr. President, I know Health Care Reform is a part of the solution, but let's be honest, you haven't provided us with a real, candid assessment of what you intend to do about the deficit. Ignoring it won't make it go away. And it will mar your presidency if you don't take it head on.
If you like this site, tell your friends.
Nine trillion dollars. That's how much the government will spend that it doesn't have over the next ten years. $30,000 for every man, woman and child in the United States. This, which we had all suspected but was confirmed by the White House Office of Management and Budget today. I couldn't have fathomed in the heady days of the late 1990s when we were running surpluses and talking about having the federal debt paid off by about now, but here we are. It is sobering and very concerning. Debt levels this high suck financial capital out of our economy and create a very real risk of rising inflation and ballooning interest rates as we print money to continue to service our debt. A financial collapse could loom if our creditors in China and Saudi Arabia decide to stop gobbling up our debt. It is an untenable, unsustainable situation. Our debt, already 70% of our GDP, could balloon to over 100% of our GDP.
How Did We Get Here?
How did this incredible crash from better than balanced budgets to eye-popping deficits happen? There were several contributing factors....
(1) The Bush Tax Cuts
Quote me Laffer curves all you want. Laffer may have been right that beyond a point, tax increases no longer increase government revenues -- surely if a government is taxing 90% of income and it hikes it to 100%, it won't see an increase -- but we were not at that point. The proof is in the revenue explosion that occurred in the 1990s after the Clinton tax hikes that led to a balanced budget. The Bush tax cuts cost us $150 billion per year.
(2) The Iraq and Afghanistan Wars
The wars have been phenomenally expensive as we have had the costs not only of deployed troops but of hundred of thousands of private contractors from Blackwater, Halliburton and others. Annual cost: close to $200 billion
(3) Medicare Perscription Drugs
An amazingly quiet bill in retrospect, President George W. Bush signed into law early in his Presidency a perscription drug benefit as part of Medicare. Liberals panned it as a give-away to big pharma. Conservatives shunned it as an exploding entitlement. Yet the broad bi-partisan middle passed it. Whoever was right it costs about $150 billion / year.
(4) Entitlement Explosion
Health care spending is rising at double the rate of inflation....and the number of people on the Medicare roles is rising even more rapidly as the retirement-age population grows and life expectancy extends.
Social Security is rising in cost too, due to life expectancy and population demographics but at a less alarming rate.
So where are we?
Today 2019
Entitlements 2.0 trillion 3.0 trillion
Defense 0.7 trillion 0.9 trillion
Interest 0.3 trillion 0.8 trillion
TARP* 0.3 trillion none
Domestic Discretionary 0.6 trillion 0.7 trillion
Total Spending 3.8 trillion 5.4 trillion
Revenues 2.2 trillion 4.3 trillion
Deficit 1.6 trillion 1.1 trillion
* TARP expenditures were close to $0.7 trillion but are estimated at $0.3 trillion because the government received tangible assets in return for the money -- losses under the program are estimated at $0.3 trillion
What Do We Do?
As you can see from the spending above, any discussion of domestic discretionary spending is largely irrelevant. Yes, there is waste in earmarks, as Sen. John McCain (R-AZ) and others have often pointed out. But the spending, in total budget terms is a pittance at 16% of the current budget and 13% of the 2019 budget. We can get more efficient, but we aren't going to wholesale eliminate government departments...at least not yet.
Interest is an output...an output of our debt level and current interest rates. The only way to control it is to reduce other spending and thereby reduce debt.
This leaves us with the three whoppers: taxes, entitlements and defense spending. Taxes will HAVE ot go up. Entitlements will HAVE to be reformed -- higher retirement ages, lower benefits, etc. Defense will have to be reduced.
So what to do specifically?
(1) Defense
* Find a way out of Iraq (yes, we still have lots of troops there) and Afghanistan
* Cancel all the Military-Industrial giveways like next-generation fighter plans and nuclear subs
* Increase the number of reservists and decrease the number of active-duty troops
No other country on earth spends on defense like we do. Can we really afford to keep being the global police force?
(2) Taxes
* Let the Bush tax cuts expire...all of them
* Enact real cap and trade where ALL carbon is auctioned and there are no give-aways to big coal
* Hike gas taxes by $1/gallon
* Raise capital gains tax to coincide with income taxes
* Phase-out 401K deductibility for high-income individuals
(3) Entitlements
* Move to a cash-balance program for Social Security that automatically adjusts as life-expectancy changes or move the retirement age to 70 and index to life expectancy
* Require Canada-equivalen tpricing for Medicare perscription drug benefits, ban pharma ads while we are at it
* Move Medicare eligibility to 70
* Comprehensively fix health care inflation and confront rationing questions head on
None of these are pleasant solutions and many are probably politically infeasible today. There are many other good ideas that could be used as substitutes. But the notion that we can fix this without making tough and painful choices is just wrong. The longer we wait to act, the worse it will get. And if we pass the brink and T-bill rates spike and we are forced to print money to service the debt, the recession of 2008/2009 will seem like the good old days.
Mr. President, I know Health Care Reform is a part of the solution, but let's be honest, you haven't provided us with a real, candid assessment of what you intend to do about the deficit. Ignoring it won't make it go away. And it will mar your presidency if you don't take it head on.
If you like this site, tell your friends.
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