I hate to sound like a deficit hawk, but…

I’d like to elaborate on this post more soon with more detail (and fun graphs), but the topic of fiscal policy and continuing federal budget deficits has been on my mind lately. My thoughts are:

  1. The economy is operating close enough to full potential that any Keynesian deficit-financed stimulus would potentially be counterproductive at this point. Similarly, continued annual deficits increasingly run the risk of crowding out private sector spending as resources are used to fuller capacity. If crowding out were to occur, interest rates would almost certainly rise, hurting growth. Though economic slack does remain, we should be increasingly cautious about running large-ish deficits in the coming years.
  2. Our long-term debt sustainability issues (which are our actual problems) certainly are not helped by short-term debt accumulation. Though acceptable in times of economic downturn and during recovery, short-term debt accumulation is less acceptable when an economy is both growing and has almost returned to near full operating capacity. If we continue to run structural (e.g. cyclical = 0) deficits, as we have for the past four decades, even in good times, our capacity to deal with the coming surge of entitlement spending will be greatly diminished. In many ways, though, we’re already too late on this regard.
  3. It might even be optimal to try to run a balanced or even more than balanced (e.g. surplus) budget for a few years. Normally, the rule-of-thumb is that, in the long run, annual debt growth (which roughly equal annual deficits) must be equal to or less than annual economic growth in the long-run (indicating that even balanced budgets are technically required for sustainability). Though this is now the case at the moment, our current deficit of around 3% of GDP is only small enough to about stabilize our debt/GDP ratio of around 75%, not reduce it. And arguably, reductions in debt/GDP would be preferable soon to give us more room for the coming entitlement spending and any future recessions we might encounter (and also to reduce the risk of a debt crisis).
  4. At the very least, we should continue to try to reduce our structural budget deficits while promoting long-term government investments (for example, in infrastructure, R&D, etc.). At the present time, further fiscal stimulus would seem inappropriate; the window for action has passed.
  5. Reduction of budget deficits is not only about timing, but rates of change (which is where the calculus comes in). Any plan must not just offer targets and amounts, but how quickly those targets and amounts are to be achieved and any feedback loops that might ensue
  6. None of the presidential candidates offers a viable long-term deficit reduction/debt stabilization plan, which is appalling. Indeed, many (especially Trump and Sanders) would dramatically increase our rate of debt accumulation in a very unsustainable way. Though many candidates offer proposals for productive spending, both that spending and, more crucially, the coming increase in mandatory program spending should be at least partially paid for, via tax increases or spending cuts. None elaborate on such a plan.

In my world, the government would:

  1. Enact reforms to mandatory programs (e.g. Social Security, Medicare, Medicaid) that progressively reduced benefit growth and raised more dedicated revenue (for example, by increasing the payroll taxes’ income cap)
  2. Reduce wasteful spending in the form of corporate subsidies (e.g. agricultural, fossil fuel), DOD procurement waste, redundant programs (for example, many overlapping government assistance programs)
  3. Raise general revenue (via reductions in excludability of health insurance from taxation, gradual phase-out of mortgage interest deduction, caps on deductions/deductability of some items, etc.)
  4. Modestly raise spending on direct R&D and R&D tax credit, transportation (highway) funding, job training programs

A more detailed discussion of the fiscal situation and solutions I would endorse will follow soon. But I thought it would be good to write down my general thoughts on the matter.

Advertisements

American Freedom: it’s time to put a ring on it

Well, this is it. Any day now (possibly within just hours of this posting), the Supreme Court will finally determine the constitutional status of gay marriage nationwide; and in the process, will likely end up overturning the few remaining barriers to a new era of positive freedom for the United States. Though being deliberated on by just nine elderly justices, I’m confident their determination will reflect both the overwhelming tide of public opinion and the true meaning of liberty as intended by the Constitution. It is something that is inevitable; it is something that is unprecedented; and simultaneously, at the same time, it is something that is long, long overdue.

To many, this will be a bitter pill to swallow (surprise!) . I know, because at one point, that would’ve been my situation. Social conservatism is a very powerful force in this country. That’s not at all inherently a bad thing (I’d argue much of that sentiment is actually a force for much good), and many well-meaning, good people, people whom I love very much, hold very traditional, socially conservative values.  And they have a right to do so.  But the ideology and core beliefs that they espouse has a tendency (sometimes, but not always) to overrule independent thinking, or the ability to think of different possibilities and to adapt accordingly (although to be fair, that’s generally true for all ideologies).  The value system that structures “traditionalists'” world, in reaction to a non-traditional concept, tells them no, or that it’s wrong, and that no other reality can or ever should exist.  Whether it be for moral or religious or status quo reasons, preservation of “tradition” (as constructed) is key.  Anything else is a threat, and is labeled as wrong and undesirable accordingly.

I deeply understand all of this; again, like I said, I was at that point once.  But I strongly challenge all those who still hold “traditional” views to seriously rethink their positions; if not on every social issue (which is understandable), then at the very least on this issue of gay marriage.  Because the arguments for gay marriage are simply overwhelming on all angles – from a societal, economic, and moral standpoint.  Now, it should go without saying I won’t be able to address anywhere near the full amount of arguments both sides pose (nor do I really want to), and I’m certainly not an expert on anything.  But here are a few brief things that I think people who oppose gay marriage should consider (and yes, full disclosure, my opinion is injected into many of these arguments):

1)  First and foremost, having “unconventional” attractions is simply NOT a choice.  Too many people, too many studies, too many instances in the animal kingdom confirm this.  And I have no idea why someone would EVER choose (given rampant societal discrimination) to have “unconventional” attractions.  It’s a perfectly natural thing that just is.  If this cannot be swallowed, spend some time on it (especially if you want to even begin considering gay marriage pros/cons).  If second-hand sources don’t suit you, then please, go out and meet people who have these “unconventional” attractions (there are many such people – more than you’d think – and whether they identify as LGBTQ or not).  Your perspective will be transformed; perhaps not instantly, but inevitably, it will be.

2) America is (quite simply) built for freedom (including religious) and the pursuit of happiness.  If you object to gay marriage, you can freely say so, refuse to endorse it, say you think it is wrong, etc.  Those are all legitimate beliefs you are entitled to personally have.  But America’s promise is to allow all people to live their lives as they see fit to pursue happiness (as long as they are not harming anyone else).  If you object on religious grounds, that’s fine; but America is not about forcing people (via the government, of all institutions) to be confined to your beliefs, or for you to be forced to follow theirs.  Let’s not deny any group of people their right to pursue happiness; especially those who are not harming others or infringing upon anyone else’s rights.

3) Gay marriage does NOT harm anything, including the institution of marriage.  Quite the contrary; it bestows countless benefits from almost every angle imaginable.  To put it in a rambling, incoherent sort of way: economically, expanded marriage rights increases people’s financial security, decreasing expenditures on social assistance programs. This reduces the budget deficit, resulting in lower-than-status-quo-trajectory debt levels.  Psychologically/economically, expanded marriage rights boosts happiness/self esteem, leading to higher productivity and more economic growth. This allows for more tax revenues/less social expenditures, again resulting in a lower budget deficit and lower-than-status-quo-trajectory debt levels.  Socially, expanded marriage rights helps to save (not destroy) the institution of marriage, which is already crumbling due to 50% + divorce rates among “traditional” marriages.  Socially again, expanded marriage rights helps to reinvigorate the nuclear family (again, crumbling largely due to high divorce rates).  Again from a social standpoint, marriage is not an unchanging institution (it has changed countless times over centuries and millenia).  Thus, the expansion of marriage rights does not constitute an attack on marriage.   Socially/morally, expanded marriage rights allows for continued/easier discussion on the inherent humanity and entitlement to equality of LGBTQ people, providing progress towards further acceptance and integration (among other economic, psychological, social benefits, etc.).  Morally, it also represents a basic expansion of positive freedoms (freedoms to do something, not from something), which, especially in this case , is a very good thing.    And the list can go on and on and on.

Nothing I’m writing here is in any way revolutionary, or is something that hasn’t been said before. Really, all I’m doing is simply adding my voice to the voices of millions of my (far more courageous) fellow millennials in calling for full marriage equality within the United States, and providing a short list of supporting rationales. But I felt like I should at least go on record expressing said support, mere hours/days before a ruling, even if it ultimately does nothing to change the minds of naysayers.  Because right now, fifteen years into the 21st century, it is time for American freedom to start reaching its fullest extent possible – and for us to finally do the right thing, and put a ring on it. Those who have been denied the right to marry whom they love, simply because of who they are, surely deserve nothing less than that.

1024px-HRC_marriage_equality_sign.svg

Building a New Era of Governance – Part 1

*Note: the views expressed in this posting are my own, and do not in any way represent the views of any other group or institution, public or private


Last Tuesday, November 4th, it is fair to say that the second Republican “wave” since 2010 swamped Congress and state governments across the nation. In Congress, the GOP managed to pick up at least 7 seats in the Senate (giving them a majority of 52, over the key threshold of 51), as well as at least 12 seats in the House (increasing their majority to at least 244). Gubernatorial elections also proved to be a route for the Democrats, as the Republicans snatched up another 3 governor-ships from the Democrats.

Despite these impressive gains, however, they will prove to be utterly meaningless unless Republicans in Congress can seize this opportunity to act in a bold, pragmatic, and bipartisan manner to go about conducting the nation’s business. More than anything, people are simply disgusted and fed up with what is shaping up to be (by many measures) one of the least productive governmental terms in American history (see chart).  While some may view inaction as a good thing (less activity means a smaller government = good, right?) I do not see this stagnation as benefiting anyone.  Even if few bills are passed, old ones already enacted are left to atrophy and will not be updated regularly to adapt to changing circumstances, creating new problems.  Additionally, it takes legislation to repeal legislation; inaction does not mean the government is in fact getting any smaller (and assuming a smaller government is even desirable in the first place).

Overall, as many pundits have noted, it is best to view the results of this election as an expression of disillusionment with a lack of leadership on either side of the aisle and a desperate plea for governance, as opposed to an endorsement of some ideological mandate. Especially when it comes to Congress, people are incredibly irritated that its members are well-paid, work part time (with much of their time spent campaigning), and yet very little of the country’s increasingly urgent problems are attended to. It is true, what many business-minded people would say: if the government were a private entity, they would’ve pushed out of the market a long, long time ago.

4.10.14.2

In terms of bills passed per legislative session, the 113th Congress is shaping up to be among the least productive in recent history

It is true that the outlook for an increase in Congressional productivity remains bleak, at least for the next two years. It’s a well-established pattern by now that American government doesn’t do too much unless a single political parties occupies both the Whitehouse and controls both chambers of Congress. However, this need not be an excuse for inaction; in fact, it cannot. The following is an agenda that I think Republicans can pursue that will not only help to solve the problems the public wants solved (and in a way that is congruent with the wishes of the electorate), but to help to build a new era of lasting American governance.

1) Lengthen the terms of the President, House, and Senate.  Of the many issues facing the country, this one (along with the next two agenda items) may seem like one of the least deserving of our attention.  However, relatively short Senate, Presidential, and (especially) House terms I believe has had a dramatic impact on the productivity of individual members.  Since elections come so frequently, many in the federal government must be in a near constant campaign mode that not only distracts them from legislative work but serves to polarize their “views”, making bipartisan consensus much more difficult.  At least attempting a Constitutional amendment, though quite unlikely to pass, could get the ball rolling on a future reform down the road.  Enactment of this reform, along with the following agenda item, could help to address the entrenched legislative paralysis.

2) Find a way to tie Congressional & Presidential pay to performance.  This one would be tough to implement (requiring another Constitutional amendment) and to find sufficient political support for, but I think it is an absolute must if we are to make meaningful legislative activity a core incentive for our politicians.  In my view, an independent committee (much like a state-level Civil Service Commission) would simply be given power to set Congressional & Presidential salaries and benefits upon a non-biased, impartial “performance review”.  This commission would be made up of individuals equally divided between the main political parties and would themselves be subject to background checks to ensure institutional independence

Many other potential reforms, such as a partial or complete scrapping of First-Past-The-Post (FPTP) representation in favor of more proportional representation and the outsourcing of congressional redistricting to independent commissions could help to both decrease the partisanship of the federal legislature and increase the “representative-ness” of individual members of Congress.  Ironically, the prospects of these reforms passing is weak at best; nonetheless, they would be crucial for the government to enact productive agendas in the future, and thus should be given priority in the agenda of the 114th Congress, even if chances of passage are slim.

As for other politically-feasible policy objectives that should be on the Congressional calendar:

3) Immigration reform.  No, seriously.  As discussed in more detail in my post “Why Republicans Should Embrace Comprehensive Immigration Reform”, the United States is in desperate need of both low and high-skilled labor, especially as the population ages in the coming decades.  Allowing in more immigrants (especially high-skilled) is not only politically reachable but is in line with a Republican emphasis on supply-side economic reforms.  Emphasis on increased border security (which is a prerequisite for any action for the party base, even if redundant and impractical) could be combined with reforms and/or increased funding to streamline the legal naturalization process.  At the very least, both Democrats and Republicans agree on the need for more high-skilled immigrants and an increase on the cap for H-1B work visas.  Increasing visa caps could help stem the tide of illegal immigrants (which Republicans are more concerned about anyway) via the substitution effect.  For best chances of passage, I would leave out measures that deal with illegal immigrants currently residing in the U.S. – a piecemeal, incremental approach would work best here.  Overall, immigration reform is an almost cost-free method to spur the economy in both the short and long-term, and considering how long it has been on the national agenda, it is incomprehensible that some sort of agreement cannot occur.

Due in part to an aging population, the U.S. Labor Force Participation Rate has reached levels not seen since 1978, increasing the need for new sources of labor

4) Corporate tax reform 

Again, opportunities for bipartisan agreement are rife here.  Everyone knows the corporate tax code is an unmitigated disaster, with high rates, too many loopholes, lost revenue, and distorted economic activity.  Make the system more territorial, modify depreciation schedules, scale down MNC deferral opportunities, eliminate tax expenditures, and reduce marginal rates.  Specific expenditures that are especially worthy of the chopping block are special preferences for oil & gas operations, insurance companies, corporate jets.  This operation need not be revenue-neutral, either; although this would technically constitute a tax “increase”, the removal of distortions and tax compliance hurdles will act as a counter-acting tax cut.  The government can gain revenue by increasing effective rates while simultaneously increasing growth and leaving businesses feeling better off than they do under the current tax regime.

5) Replace the sequester with targeted cuts & incremental, implement long-term reforms

The era of yawning short-term fiscal deficits is over – temporarily, at least.  Indeed, America has witnessed its fastest pace of fiscal consolidation since World War 2, with deficits as a percentage of GDP falling from 9.8% of GDP in FY 2009 to 2.8% of GDP in FY 2014 – a swing of 7% in just 6 fiscal years.  This has come about due to a variety of factors, including economic growth, slightly higher taxes and broad-based cuts to discretionary outlays.  It is this last option that is cause for concern, however, as the cuts initially enacted in the Budget Control Act of 2011 (the founding legislation of the so-called “sequester”) are quite blunt.  They also come at a time when discretionary spending is approaching record lows as a percentage of GDP, and arguably when increased federal spending on items such as infrastructure are desperately needed and interest rates remain at historic lows.  Additionally, they have subtracted from economic growth in the short-term, lengthening the time needed to close the output gap between real and potential GDP.  As has been projected for decades now, the biggest threat to American fiscal sustainability is the coming explosion in mandatory spending.  Therefore, the new GOP-led Congress must enact gradual but effective entitlement reform now – the longer it waits (as past Congresses have), the more abrupt the future adjustment.

Fiscal policy has not been this contractionary since the end of World War 2

Fiscal policy has not been this contractionary since the end of World War 2

Economic growth since 2009 has increased revenues and decreased "automatic stabilization" spending.  Meanwhile, higher taxes have also increased revenues, and new spending cuts have been enacted.

Economic growth since 2009 has increased revenues and decreased “automatic stabilization” spending. Meanwhile, higher taxes have also increased revenues, and new spending cuts have been enacted.

Non-defense discretionary spending has fallen to record lows as a percentage of the American economy

Non-defense discretionary spending has fallen to record lows as a percentage of the American economy…

...even as interest rates remain at record lows

…even as interest rates remain at record lows

Debt Held

The true threat to America’s finances comes from the coming explosion in mandatory “entitlement” spending. Congress much enact tough reforms now to stem this tide of red ink.

 

To be continued…

Why Republicans Should Embrace Comprehensive Immigration Reform

The escalating child migrant crisis has once again brought our ailing immigration system back into the mainstream spotlight.  As usual, both sides revert back to their usual arguments.  Republicans take the migrant crisis as being a result of loose borders and lax executive enforcement, and many call for more deportation of both the child migrants and all illegal aliens within the United States.  In contrast, Democrats generally argue for making it easier and faster to become a citizen and to implement gradual amnesty. Though both sides have legitimate concerns and arguments, I (surprisingly) mostly side with Democrats on this issue, and I strongly believe that Republicans should reconsider their stance on immigration reform.  Here’s why:

  1. We need more immigrants, legal or illegal, and badly.  Contrary to the beliefs of many, virtually all types of immigrants – legal or illegal, skilled or unskilled, etc. – benefit the country economically (though legal immigrants are, of course, preferable to illegal immigrants).  Skilled immigrants make up a large proportion of  innovative business start-ups, while low-skilled immigrants lower prices for consumers & employers and take jobs that natives are less inclined to perform.  All groups add to national GDP, and (unlike in many European countries), they usually contribute more to overall tax revenues than they consume via social programs, helping to balance budgets at the federal, state, and local levels.  As such, there is a strong economic argument to expanding legal immigration and making legal naturalization avenues more efficient.  Macro-economically, more legal immigrants could serve as both a short and long-term economic stimulant to the moribound US economy, adding to short and long-term supply and demand.  Due to the retirement of the baby boomers, the US labor force will continue to contract in the coming decades, producing labor shortages that an influx of immigrants could help fill (and freeing up natives to perform other jobs, thus boosting job creation).  Additionally (and largely due to the aforementioned retirement of the baby boomers), America faces long-run fiscal challenges that more legal immigrants (with their contribution to higher GDP and higher tax revenues) could help to alleviate.  Considering that Republicans are broadly regarded as the “party of business” and of fiscal conservatism, Republicans should thus be embracing legal immigration.  Instead, though they pay lip service to legal immigration, their laser-like focus on illegal immigration and accelerating enforcement measures overshadows their support for legal immigration.  Ironically, an increasing of legal immigration via immigration reform would help to solve illegal immigration and the presence of large numbers of undocumented workers.
  2. Continued deportation of unauthorized immigrants is impractical and costly.  Currently, there are over 11 million unauthorized immigrants residing within the United States.  Many Republicans argue that deportation should be ramped up to deal with them.  I disagree.  First of all, despite the perception among many, deportation rates have stabilized at relatively high levels in recent years – rates have not fallen off a cliff, so it’s not like this strategy isn’t being actively pursued.  Second, can you imagine trying to deport all 11 million + immigrants from the US?  Deportation already costs the government quite a bit, with the Department of Homeland Security reportedly requesting approximately $230 million in budgetary authority for the deportation of undocumented immigrants just in fiscal year 2015.  That is for the current rate of about 400,000 people a year, which is, of course, partially offset by continued inflows of unauthorized immigrants.  Logistically, deportations of a larger scale would undoubtedly create massive strains on the system.  Additionally, the removal of 11 million people would be hugely destructive economically – lowering productivity, raising prices, and disrupting both the creation and operation of businesses, at a time when the US has yet to fully recover from the 2007-2009 recession.  Of course, we also cannot forget the costs of splitting up families, which imposes deep scars the social fabric of the nation.  If anything, deportation should be scaled down.
  3. Resources devoted to immigration enforcement are at historical highs – and further enforcement measures, like building a wall, will not stop illegal immigration.  As partially mentioned above, immigration enforcement (such as deportations) is hardly on decline.  Indeed, according to The Economist, border enforcement costs about $20 billion a year, which is more than all other federal law enforcement agencies combined.  Yet, despite all these costs, we clearly still have enforcement problems, and until we reform the immigration system, we always will.  Why?  The reason is simple: the economic incentives for people to immigrate to the United States are overwhelming.  Even for low-skilled immigrants, pay is usually several times greater in the United States than it is in their country of origin.  No matter how much the federal government devotes to border enforcement and trying to prevent people from immigrating (legally or not), people will keep trying to come here – and many will find ways to succeed.  Since these forces will not be disappearing anytime soon, it would be better to work with the force, not against.
  4. Current immigration policy is tantamount to anti-trade protectionism – the antithesis of Republican ideology.  Republicans, in accordance with their belief in free markets, tend to be much more supportive of free trade than liberal Democrats.  However, the current legal immigration system is based largely on a series of quotas.  According to Vox.com, on the employment side a maximum of 65,000 H1B visas (for high-skilled workers) and 66,000 H2B visas (for low-skilled workers) are issued by the federal government annually.  Both of these quotas are usually hit pretty quickly, indicating that employer demand in the US is far outstripping supply.  These quotas are artificially restricting the supply of workers, raising employment costs and decreasing growth prospects.  Additionally, the number of “green cards” supplied tends to be less than demanded, especially for people without US-based relatives or prospective employers.  These restrictions do not let the market to operate efficiently, which goes against Republican notions of free market capitalism.  Not to mention, these quotas help to drive the illegal immigration that everybody is so furious about.
  5. Current immigration proposals do not grant unconditional amnesty – nor should they.  Last time I checked, the current mainstream immigration reform bills passed by House committees in the summer of 2013 allowed unauthorized residents to gain citizenship only after meeting several conditions, including paying several fines and going through vigorous checks.  Republicans are right to be weary of the granting of unconditional amnesty – unauthorized immigrants did, after all, technically break the law, and the rule of law must be upheld for the republic to function properly.  However, the current bills (and any bill that is likely to be passed) will not let unauthorized immigrants  off the hook.  Now, many Republicans say that any form of amnesty, conditional or not, is both unfair (as others still had to wait to become naturalized) and undermines the rule of law.  I think the fines help to partially offset this, punishing those who broke the law.  Though it (understandably) seems unfair that immigrants would be able to gain a “special” route to citizenship this way, such a route is, on net, still much more practical than sending those residing here illegally “to the back of the immigration line”.  Doing so would be too costly economically, difficult logistically, and would overwhelm the already strained legal immigration system.
  6. Republicans could use immigration reform to their political advantage.  Everyone knows that Hispanic voters tend to lean Democratic, and that this persuasion is becoming increasingly costly for Republicans electorally.  As the Hispanic population continues to grow in influence, the political parties increasingly need their support in order to win elections.  Right now, Republican opposition to immigration reform and a perceived anti-immigrant ideology is hurting the party.  Embrace immigration reform, and the Republicans could vastly improve their political fortunes.

Considering all of the outstanding issues on the federal policy radar, it is understandable that immigration reform might not top the policy agenda at the moment.  But until Washington is ready to devote its full attention to the issue, Republicans should seriously consider revising their views on the subject.  Too much is at stake for them not to do so.

The Murray-Ryan Budget Agreement: Part 2

I lied when I said “…more in the morning”.  It’s now around midnight the next day.

So, in the last post I was going over the reasons I was in favor of the Murray-Ryan budget agreement.  I left off on reason #3.  Let’s continue:

4. An easing of short-term austerity might not be a bad thing.  This may surprise many people, but America has just undergone its most rapid fiscal contraction since World War 2.  The budget deficit has fallen by a whopping $700 billion in the past 5 Fiscal Years, from $1.42 Trillion in FY 2009 to $680 billion in FY 2013.  This equates to a fiscal contraction of approximately 6% of GDP.  Thus, despite claims to the contrary, America’s annual fiscal situation is improving very quickly due to a combination of revenue increases (tax hikes + sluggish economic growth) and declining expenditures (spending cuts + cyclical declines in “automatic stabilization” spending).  Now, generally I disapprove of using government manipulation of fiscal policy to try and “pump-prime” the economy, and I think that fiscal responsibility does yield long-term benefits.  At the same time, however, the rapidity of the fiscal contraction that has been occurring over the past few years has almost certainly held back short-term economic growth (as higher taxes and lower spending bite into aggregate demand).  While I’m not against continued moderate austerity, I am against austerity that is too aggressive and rapid, as there comes a point when deficit reduction starts to be cancelled out as overly-rapid austerity bites into economic growth.  This is precisely what has happened in Greece, which (unlike America now) didn’t really have a choice as to whether to pursue austerity or not – I mean, it was literally being shut out of bond markets.  We do threaten to turn into Greece, however, if our pace of fiscal contraction becomes too rapid.  An easing of the pace of austerity that would come about upon enactment of the Murray-Ryan budget is thus potentially beneficial.

5. Immediate budget balance is not necessary for fiscal sustainability (even if eventual balance is desirable).  Many people are alarmed by the existence of any annual budget deficit; after all, every annual budget deficit adds to the debt by the amount of the deficit, and continual additions to the national debt are bad, right?  Actually, no.  What really matters is the size of our national debt as compared to the size of our national economy and the pace of annual debt growth (our budget deficit) as compared to the pace of annual economic growth.  Right now, when you look at our national debt of about $17.2 Trillion, it looks pretty scary.  But absolute numbers are not as important as relative numbers.  What matters is that $17 trillion as a ratio of the size of our economy, a figure that tells us how much of a relative burden that debt is and our national ability to service that debt.  Right now, with an economy of about $16 trillion, our debt/GDP ratio is about 107%.  Even this ratio is misleading, however.  That $17 trillion debt figure is our total gross national debt; more important is the debt held by the public, which is the total debt minus intergovernmental holdings of debt (I’ll get more into these distinctions in a later post – look here for good definitions & information though :D)  Using the debt held by the public figure, the debt/GDP ratio is lower at 73% – historically high, but not at crisis levels.  It is only when this figure approaches higher levels (say, 100% of GDP +) that a fiscal crisis (characterized by serious spikes in interest rates) is a real danger.  Due to continued economic expansion since June 2009 in combination with slower increases in debt (due to lower annual budget deficits), debt held by the public has stabilized as a percentage of GDP (around that 73% figure) – meaning our fiscal situation is as of now sustainable in the short run.  Indeed, as long as the following conditions are met, our debt is sustainable: annual increases in debt are lower than or equal to our GDP growth and the debt/GDP figure isn’t already high.  For now, this is the scenario we are in.  In the long-run, though, rising entitlement & healthcare spending will drive up budget deficits to the point where debt accumulation again outstrips GDP growth, implying a rising debt/GDP figure and an unsustainable long-term situation.  The Murray-Ryan budget deal, however, does not increase annual spending enough to have debt accumulation outstrip GDP growth in the short term, nor does it add to the long-term entitlement challenges I mentioned.  If adopted, we will remain fiscally sustainable in the short to medium-term, even if our long-term prospects are shaky.

I’ll try delving even further into these complex debt & deficits concepts in a later post. Right now, it’s time for bed.

Charts, courtesy of the Heritage Foundation:

CP-fed-spending-numbers-2013-page-4-chart-1 CP-fed-spending-numbers-2013-page-4-chart-2 CP-fed-spending-numbers-2013-page-5-chart-2

The Murray-Ryan Budget Agreement: An Acceptably Flawed Deal

Sorry for the delay in posts – busy couple of weeks.  So let’s look at what’s happened as of late:

Besides the ongoing ObamaCare fiasco, the latest political buzz is all about the recent budget deal for FY 2014  and FY 2015 produced by Representative Paul Ryan (R-WI) and Senator Patty Murray (D-WA).  The deal has promptly lead to loud opposition from conservative organizations and members of Congress, as it partially reverses the sequester by restoring approximately $63 billion in discretionary spending for FY 2014 and 2015 (even while calling for these spending increases to be offset by $85 billion in cuts over the next decade).  Marco Rubio (R – FL) says the budget “…fails to tackle our long-term fiscal challenges”, and many others are stating that it reverses “progress” made under the sequester.  Here are my thoughts:

  1. Tinkering with discretionary spending has almost no effect on our long-term fiscal challenges. We’ve all heard about how the entitlement programs (Medicare, Medicaid, Social Security, etc.) will bankrupt the country in the long-run as the baby boomers retire and (partially as a result) health care costs continue their upward march.  Indeed, this is true: as the Heritage Foundation has noted, mandatory spending is estimated to grow by about 79% over the next decade alone.  I find it puzzling, then, that almost all budget battles center around discretionary spending (domestic programs, like education & transportation, and security, like national defense).  Total discretionary spending is currently capped at around $967 billion/year, which is less than 1/3 of total spending of about $3.45 trillion.  This budget deal resets those levels to just over $1 trillion/year.  To put this in context, this amount is still 8% lower than FY 2010 discretionary authority, and discretionary spending is still projected to reach record lows as a % of GDP in the coming decade (even if the Murray-Ryan deal is implemented).  Meanwhile, mandatory spending is set to reach record highs as a percent of GDP.  The point?  While I’m all for budgetary efficiency, adjusting annual discretionary spending by less than $100 billion a year (and at levels well below previous records) as the budget deal does will neither exacerbate or alleviate our long-run fiscal problems.  Although important, it is truly not the fiscal elephant in the room.
  2. An imperfect budget deal with slightly higher spending is much better than a thriftier budget acquired via the threat of debt default and other forms of brinkmanship.  Since 2011, it has become a habit of Congress (especially the House of Representatives) to use America’s debt-ceiling and the threat of governmental shutdown as leverage for spending cuts.   Those leading the brinkmanship crusades (especially Tea Party Republicans) rationalize their behavior with the (not necessarily untrue) claim high deficits and debt cause significant business uncertainty, which they cite as the #1 inhibitor of economic growth.  Being the self-proclaimed defenders of business, they thus have repeatedly used the threat of debt default and government shutdowns to lock in spending cuts.  Ironically, however, these methods of governing have instead significantly increased policy uncertainty. In fact, fiscal policy uncertainty (including increased debt yields due to the repeated threat of default) is estimated by the Peter G. Peterson Institute to have reduced economic growth by approximately 12% since 2009.  As a result, it is quite possible that much of the deficit reduction acquired through actions that have increased policy uncertainty have actually been slightly or wholly cancelled out by the resultant slower economic growth (which would produce lower than expected revenues and higher than expected expenditures). As such, the Murray-Ryan budget deal, which lays out a tentative 2-year budget plan and would temporarily end budgetary impasses is a much better alternative for both the economy and deficit reduction.
  3. Quality is just as (if not more) important than quantity.   We constantly hear tons of different budget numbers being thrown around in debate ($967 billion in discretionary spending, $17 trillion debt, etc.) While these number are important, perhaps even more important is asking whether what is being funded is a) a legitimate government function b) gives us a positive rate of return c) is being funded at adequate levels for optimal performance.  In fact, before even beginning a discussion on FY 2014’s appropriations, Americans need to have a serious discussion about what they expect government to do, with the numbers to follow that conversation.  For example, America’s defense budget has absorbed big funding cuts over the past few year, with more pain to come.  However, what we expect the military to do (patrol the seas, r&d, stabilize other nations, etc.) has not been altered as significantly.  Such scenarios are becoming more common across the budget – busy programs with declining resources.  This then begs the question as to whether it is better to have a few well-funded, well functioning programs that we actually value or many under-funded, poorly functioning programs that are not valued.  Personally, I’d rather have the former scenario.

More to follow in the morning…