It's time to balance the budget
02/25/19 Filed in: Spending | Taxes | Budget
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A recent Congressional Budget Office projection showed federal debt held by the public growing substantially faster than the US economy over the next 30 years and hitting a percentage of Gross Domestic Product well in excess of the historic record.
The administration has taken a more sanguine view, contending that regulatory easing plus the 2018 tax cuts will boost economic growth and result in shrinking deficits longer term without austerity measures. Trump says the US will grow its way out of the $22 trillion debt, Colin Wilhelm, Washington Examiner, 2/15/19.
“It’s all about growth,” said Trump at a Rose Garden announcement of his national emergency declaration in an attempt to build a border wall with Mexico. “Growth will straighten it out.”
Democrats have been dinging Republicans for rising deficits, which complements their charge that GOP tax cuts are fueling rising economic inequality. This may be a short-sighted strategy, however, as there is no way Democrats want to be committed to deficit reduction goals. Deficits don’t matter, so why are Democrats complaining about them? Bill Schcr, politico.com, 2/7/18.
Once Democrats regain power, they won’t want to be placed in fiscal restraints. They will want the latitude to pursue infrastructure investment, expanded preschool, college affordability, drug abuse treatment and anti-poverty measures. The Sanders wing wants to go even farther, with plans for single-payer health care and free college tuition. Signaling to voters that the deficit is their own primary concern only sets Democrats up for failure.
Whatever our political leaders say, many financial experts believe deficits and debt are a serious problem for this country and the global economy as well. Consider, for example, “The real national emergency isn’t at the border. It’s the national debt!” Peter Schiff, podcast (55 minutes), 2/22/19. Mr. Schiff’s talk covers a lot of topics, but his relevant observations are at the beginning.
The US is headed for a financial train wreck. The $22 trillion debt is bad enough, but it’s just the tip of the iceberg given all the unfunded future commitments and contingent liabilities. The fact that this country hasn’t had a fiscal meltdown yet doesn’t mean it’s not going to happen; indeed, the roof is bound to cave in. No one knows when, but in Schiff’s view the meltdown will happen a lot sooner than people think. As for the current US economic outlook, it's cooling and the Federal Reserve will have no choice but to provide more monetary stimulus.
Sounds about right! Barring decisive changes in current policies, we feel confident that exceedingly painful adjustments will become unavoidable long before 2049 (the end of the CBO projection period). These might include major tax increases (for everyone, not just “the rich”), hollowing out of the US military and other traditional government functions, and slashed entitlement benefits.
Chronic budget deficits have been spawned by bipartisan irresponsibility, but no one seems to be claiming ownership – let alone offering credible solutions. Indeed, the current focus isn’t reducing deficits at all, it is figuring out how to avoid $126 billion in Obama-era budget caps that are set to kick in this October (for fiscal year 2020). Congress shrugs off $22 trillion national debt, David Sherfinski, Washington Examiner, 2/20/19.
Here’s Rep. John Yarmuth (D-MA), chairman of the House Budget Committee, making the case for once again waiving the budget caps. Opening statement, 2/7/19, video (4:59).
A problem that has been festering for the last two decades can’t be solved in the current session of Congress, but it’s time to get to work. To this end, SAFE would like to propose a two-point approach.
A. Short-term – Not only are the members of Congress not pursuing deficit reduction, but numerous ideas are being proposed that could compound the already existing problems. To avoid such an outcome, it’s time to start operating in damage control mode.
#TAXES - Tax increases of some kind may need to be part of the ultimate solution to the fiscal problem, but Congress should be in no rush to impose them.
First, new taxes or increased tax rates could undo the pro-growth effects of the Tax Cuts and Jobs Act of 2017, which contributed to a 3% economic growth rate for 2018 that will hopefully continue or accelerate. As an exception to the foregoing, we would gladly support elimination of the scores of special business tax breaks that were stealthily resurrected in the Budget Reconciliation Act of 2018.
If and when it becomes clear that taxes must be increased, moreover, the burden should be widely shared (ensuring that all Americans will have an incentive to support economical government) instead of loaded primarily on corporations and upper income taxpayers who already pay a disproportionate share of total government outlays.
Second, it’s noteworthy that the case being made for tax increases is that the proceeds would “pay for” new government spending, not that they would be used to reduce deficits. This strategy was used in selling GovCare back in 2010, and it’s also evident in several current proposals including a proposal to combat global warming by imposing a carbon tax on the use of fossil fuels.
Despite suggestions that the proceeds of the carbon tax could be paid out as “dividends” to all Americans – a revenue neutral arrangement, although energy prices would still be increased – that’s not how things would work in practice. A “revenue neutral” carbon tax is a costly myth, James Taylor, townhall.com, 1/20/19.
Democrats, environmental activist groups, and the political Left have made it clear that they will not support or accept a ‘revenue neutral’ carbon dioxide tax. They proved this point in the state of Washington in 2016 when a ‘revenue neutral’ carbon dioxide tax was put on the ballot with support from many establishment Republicans. Democrats, environmental activist groups, and the political Left opposed the ballot initiative, stating they would only support a carbon dioxide tax that authorized government to keep the tax revenues and direct the revenue to causes supported by the environmental Left.
#GOVERNMENT OUTLAYS – It’s more enjoyable for the members of Congress to approve funding for new or expanded programs than to eliminate funding for wasteful government programs or activities. Thus, as President Reagan once wryly noted, “a government bureau is the nearest thing to eternal life that we’ll ever see on this earth.”
When spending levels are under pressure, the tendency is to impose across-the-board limits (e.g., the Obama-era spending caps that Congress is currently planning to wriggle out of.) Such restrictions never work well or last long, however, because they are based on the obviously fallacious premise that all government expenditures are of equal merit.
Comfortable or not, targeted spending cuts make far more sense, i.e., budgeters should identify programs or activities that aren’t worth the cost and eliminate them while ensuring that solid programs are adequately funded. And to its credit, the Trump administration has suggested numerous spending cuts over the past two years – conveniently documented in the “Major Savings and Reforms” volumes of its budget proposals.
This effort will hopefully be continued in the president’s budget for fiscal year 2020 (which is currently being prepared for submission in mid-March). We would urge the members of Congress to give the MSR proposals serious consideration rather than dismissing them as “dead on arrival.”
#BENEFIT PROGRAMS – A large and growing portion of the budget is accounted for by the distribution of retirement, healthcare, and welfare benefits – often described as “entitlements.” Payments in this category are generally classified as “mandatory” expenditures; as such they are not regularly reviewed as part of the budget process.
Pruning entitlements represents the biggest opportunity to eliminate deficits, i.e., balance the budget, but it would take time to systematically review the options – hopefully get some bipartisan agreement as to what is going to be done – and transition to the revised ground rules. Our political leaders shouldn’t expect to see results for several years, and they shouldn’t allow the “we can’t get the job done without fixing entitlements” mantra to delay targeted spending cuts in discretionary government programs.
While the groundwork for entitlement program reviews (most likely by independent commissions) is being considered, Congress should refrain from expanding existing entitlement programs (e.g., by enacting the Social Security 2100 Act) or creating new ones (such as a paid family leave program).
B. Presidential leadership – There are 535 members of Congress representing different geographic areas of the country, serving in two different legislative chambers, and having no common master. Although the “power of the purse” is vested in Congress by the Constitution and usefully serves to limit presidential power, that doesn’t mean the members of Congress (effectively 535 “chief executive officers”) are well suited to run the budget system.
Although congressional support is certainly needed, it seems doubtful that the budget system will ever work effectively without strong presidential leadership. Note that the budget was last balanced during the second term of President Bill Clinton – and deficits and debt increases have since returned with a vengeance.
Given his penchant for challenging conventional patterns, it has occurred to us that the president might be willing to take on the challenge of fixing the fiscal problem in his second term (assuming he wins reelection in 2020).
President Trump’s 10/12/18 letter to SAFE expressed appreciation for various aspects of the fiscal problem: “hard choices . . . stop wasteful spending . . . lower the national debt . . . focus the federal government on what matters most.” He also expressed support for a strong military, honoring Social Security and Medicare commitments to American workers, and plans to help working families find a path toward a better future, however, and made no quantitative commitments. Letter re fiscal problem (President Trump), 2/26/18, scroll down for response.
Also, the president said nothing about government deficits or debt in his recent SOTU address. Trump ignores biggest threat, Philip Klein, Washington Examiner, 2/5/19.
Trump's vision for America won't be possible if the current policy continues on autopilot. Instead, the rising national debt will threaten military spending, lead to crushing tax rates, and force sudden, severe cuts to government spending to stave off a financial collapse.
Suppose the president and all of his opponents in the 2020 presidential race were urged to (1) commit to balancing the federal budget by 2025, and (2) explain specifically how they would propose to go about it. And to reinforce this thrust, one of the three presidential debates was reserved for discussion of the fiscal problem.
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SAFE has sent two letters summarizing the foregoing proposals, one to the president and a second to selected members of Congress including a number of declared presidential candidates for 2020.
See also: Prospects for action on the fiscal problem, 2/18/19.
Reader feedback and support would be greatly appreciated.
# Many financial experts acknowledge that the Federal Reserve is drawing its last breath. The petrodollar monetary system is dying. Gold will bring down the Fed. In other words, a new Bretton Woods agreement among the major powers of the world is necessary. Trust in Trump. A major audit and restructuring of the Fed to unleash the productive power of the United States is on the horizon. A new monetary system backed by gold and other physical items of value is in the future. – SAFE member (DE)
The Federal Reserve is rethinking its tightening of monetary policy, but Fed Chair Lewis Powell has made clear that he stands with those who believe that “deficits matter,” and his argument makes sense. Fed’s Powell says “no rush” to hike rates in “solid” but slowing economy, Howard Schneider & Jason Lange (Reuters), yahoo.com, 2/26/19.
"The idea that deficits don't matter for countries that can borrow in their own currency I think is just wrong. I think that U.S. debt is fairly high as a level of (gross domestic product) and, much more importantly than that, it's growing faster than GDP," Powell said. "To the extent that people are talking about the Fed - our role is not to provide support for particular policies" on environmental, social or other related issues.
Indeed, asked about the upcoming need to boost the U.S. debt ceiling, he said he considered the prospect of a U.S. government default on its obligations "a bright line, and I hope we never do pass it."
# Very well written. I also like your suggestion at the end (encouraging presidential candidates to commit to balancing the budget and explain how they would go about it). Will certainly be interesting to see what happens. – Retired finance manager