An updated view of the economy (part two)

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This is an update of our Survey of the US economy, August 2013 and 10-step plan to reboot the economy, 9/2/13. After covering three segments (economic growth, jobs and inflation) of the analysis, last week’s entry ended as follows:

Oops, we’re out of space and time for this economic survey update. Tune in next week for discussion of the funding of government services, taxes, and some overall conclusions on what the “next crisis” is likely to look like.

Now here’s the rest.

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SAFE is a big believer in fiscal discipline. We have urged repeatedly that the federal government balance the budget and keep it that way, while suggesting that raising taxes isn’t the way to do so. Tax increases slow economic growth, and they are often used as an excuse to expand spending programs or launch new ones instead of reducing the deficit. The best if not the only way to balance the budget is to rein in spending so the economy will grow faster than government outlays.

At the same time, government spending (federal, state and local) for certain purposes has often seemed inadequate. Examples noted in SAFE’s 2013 survey ranged from national defense to roads and bridges, parks, schools, and emergency services.

No substantial action has been taken on our suggestion to beef up defense funding, but the new administration has promised to have a go at it and seems to be making progress. More on that shortly.

The federal law re municipal bankruptcy hasn’t been amended to clarify the treatment of unfunded employee retirement benefits, but the courts may have addressed the point we had in mind. Stockton judge: Pension obligations are not impervious to impairment in Chapter 9 bankruptcy, what comes next? Ben Feder,,

And in other areas (our suggestions were far from exhaustive), the all too familiar pattern of shortchanging basic government functions has continued.

Is it inconsistent to call for enough spending cuts to wipe out a federal budget deficit of over $0.5 trillion per year while simultaneously acknowledging that more funding is needed in some areas? Not necessarily, because:

First, not all government spending is of equal value and many government programs exist that could be eliminated or sharply cut without great loss for taxpayers or the country. See, e.g., this inventory of spending cut opportunities identified by Citizens Against Government Waste. 2017 Prime Cuts (download PDF).

The 2017 version contains 607 recommendations that would save taxpayers $336.2 billion in the first year and $2.3 trillion over five years. If all the Prime Cuts recommendations were adopted, a balanced budget could be achieved within three years.

Second, some of the needed funding increases could be offset by slashing overhead within the applicable functional areas. For example, federal oversight over state school systems is expensive and has added little if any demonstrable value to educational outcomes. The bureaucracy to provide such oversight should therefore be slashed or eliminated. Similar opportunities exist within state school systems. See the Education page of this website.

Operating responsibility for schools is best vested in the administrators and teachers, who should then be held accountable for results. To the extent that school district and state level personnel have tried to micromanage the details, issuing rules and regulations to cover every situation, they should step back.

We see no need for another layer of monitoring at the federal level. If there is going to be a US Department of Education, we would suggest that it be charged with maintaining a data bank of best educational practices at the state and local level, sponsoring national and international educational contests, and the like.

Similarly, the Defense Department management structure has mushroomed over the years without enhancing military capabilities. Pentagon’s no. 2 needs to slash overhead, says Defense business board, Joe Gould,,

The current deputy defense secretary, Bob Work, has championed a vision for a Defense Department that is more technologically agile and globally engaged, and spearheaded its so-called "Third Offset Strategy." Work also has called for cost cutting, and, pointing to estimates that the department has 22 percent more in installations and real estate than it needs, urged lawmakers to consider a new round of the politically unpopular base-closure process.

As envisioned by the advisory [Defense Business Board], the deputy defense secretary would take bold action to tame the costs associated with overhead, personnel, benefits and unnecessary work, all of which [DBB Chair Michael] Bayer considers necessary for DoD to "swiftly and shrewdly adapt to maintain its superiority over determined adversaries."

Comments follow about the current situation in areas where basic government services that the public rightly values have been allowed to deteriorate.

FEDERAL PROGRAMS – The administration has served notice that it intends to support increased funding for various functions, notably national defense, border security and infrastructure (highways, bridges, airports, ports, etc.). There has been far less clarity, however, about how to do this without increasing the deficit.

Thus, a big increase in defense spending is contemplated for fiscal year 2018 – but the enabling legislation, which should have been enacted by the end of September, still hasn’t been put in place.

Both houses of Congress have passed the National Defense Authorization Act for fiscal year 2018. This bill provides for more defense funding than the president requested initially, and the Pentagon brass is itching to move ahead. Congress passes $700B defense bill, sends to Trump’s desk, Zachary Cohen,,

This year's bill authorizes a major hike in military spending and exceeds the $54 billion defense budget increase requested by President Donald Trump for 2018 that aimed for more aircraft and ships. It fully authorizes a pay increase for service members, increased missile defense, and adds additional ships and aircraft.

But wait, this is merely a “policy bill,” which neglects to lift the $85 billion lower spending cap that is currently in place. So don’t announce that raise or start ordering planes and ships just yet. Why the Pentagon’s not celebrating the passage of the defense policy bill, Jamie McIntyre & Travis Tritten, Washington Examiner,

Time is running out as the stopgap continuing resolution passed in September is set to expire Dec. 8 and there is no guarantee any final deal will fund all of the NDAA priorities. Without an appropriations measure that matches the authorization bill, the Pentagon can’t actually spend a penny of the new money.

This kind of budget shenanigans is demoralizing and counterproductive for a complex and vitally important organization like the Department of Defense, as has been pointed out to the members of Congress by Defense Secretary James Mattis and others. Given the supposedly bipartisan support for increased defense spending, what in the world is going on? Congress’ budgetary uncertainty is harming the troops, Carter Ham, Washington Examiner,

The ill effects of short-term, stop-gap measures like the continuing resolution have been well documented and clearly articulated to Congress by the Defense Department's most senior civilian and military leaders as well as by the defense industry community.

The sticking point is Democratic insistence that a defense spending increase should be matched by proportionate non-defense spending increases. And barring a decision by Senate Republicans to “go nuclear” and abolish the filibuster rule, which doesn’t seem to be in the cards right now, Senate Democrats will be able to block any appropriation bills that aren’t to their liking. So much for our notion that it’s time to start getting serious about cutting overall spending (even if more money is needed in some areas).

Then there was the promise of a $1 trillion program to upgrade US infrastructure (roads, bridges, ports, etc.), an area in which it might be possible for the parties to work on a bipartisan basis because politicians love to spend the taxpayers’ money when there is an arguable rationale for doing so. Senate takes lead on Trump’s infrastructure proposal, Melanie Zanona,,

•[Senator John] Barrasso, who also serves on the Republican leadership team, has held half a dozen infrastructure hearings since taking the helm of EPW [Environmental and Public Works Committee] this year. His panel has jurisdiction over a broad range of infrastructure issues, including waterways, ports, bridges, roads and other public works.

•“From day one, I started meeting with each member of the EPW committee. A lot of times on environmental issues, we fight like cats and dogs, but with infrastructure issues, we come together,” he said. “We’re going to get something out of the EPW committee that’s going to be bipartisan.”

The administration has yet to unveil an infrastructure plan, however, perhaps due to concerns about the deficit. Economic Adviser Gary Cohn recently indicated that such a plan may surface in early 2018, and that a tax increase may be proposed to help pay for it. White House eyes 7-cent gas tax hike for infrastructure plan, Melanie Zanona,,

The other side objects to a gas tax increase, heaven forbid that Congress should require Americans to pay for better roads and bridges instead of sweeping the cost under the carpet. [Senate Minority Leader] Chuck Schumer opposes gas tax hike, Diane Stancy Correll, Washington Examiner, 11/23/17.

The bottom line is that we don’t want to raise taxes on working people right now. As it stands now that is where we are at. Income distribution is so bad, I would rather pay for infrastructure by taking the money that comes from overseas [repatriation] and putting it into infrastructure.

Similarly, proposed hikes in admission fees for national parks (e.g., from $30 to $70 per vehicle for top tier parks) to pay for $12 billion in deferred maintenance and other infrastructure upgrades haven’t been well received. Attorney generals oppose Trump administration plan to raise additional park fees, Josh Siegel, Washington Examiner,

Democrats and national park groups have criticized the proposal, arguing Congress or the administration should pay for the maintenance at national parks, not visitors. A Senate appropriations bill for next year released Monday would increase the National Park Service budget to include funding for the construction backlog at national parks.

STATE/LOCAL PROGRAMS – The results of “robbing Peter to pay Paul” vary by jurisdiction, with some states and local governments capably managing their finances, the majority muddling along, and a fair number of fiscal disasters in the making.

California, Illinois and New Jersey have dire fiscal problems, for example, and as states they are not eligible for bankruptcy proceedings. Puerto Rico (which as a US possession could declare bankruptcy) is in even worse shape, and its problems were compounded by the recent hurricanes.

Detroit is the largest municipality that has been through a bankruptcy, but a number of big cities are experiencing fiscal problems and this record may be eclipsed in due course.

A common situation has been establishing generous retirement programs for government employees, failing to provide adequate funding, and concealing the growing shortfalls with unrealistic return assumptions and financial engineering. Frantic, states use “unconventional tools” to avoid pension collapse,,

New Jersey, for instance, experimented with alternative methods when Governor Chris Christie signed a law in July that pledged about $1 billion of the state’s lottery revenue to some of its public retirement systems, which have long been a drain on the Garden State’s finances. While Fitch said [this arrangement] improves the pension’s finances, it only raises the system’s funding ratio to 58.9 percent from 44.7 percent. [Also, there is no change in New Jersey’s overall financial situation as the pledged lottery revenue will no longer be available for other purposes.]

A better approach would be shifting younger workers from defined benefit plans to defined contribution plans (such as the 401-K plans now being used in lieu of pension plans by many private companies) and even negotiating pension benefit reductions with older workers and retirees if the situation requires. Another solution is to prune bureaucratic overhead, thereby reducing the number of workers with retirement benefits. Such adjustments are no fun, however, and politicians will go to considerable lengths to avoid them. Thus, it took years for a Delaware task force to be created to revisit the idea of consolidating 19 Delaware school districts into, say, four. The task force was given a limited amount of time and essentially no resources to study the matter, and a pretext will probably be found for once again dismissing the idea as impractical. Will school district consolidation task force make the grade, TCC of DE newsletter,

POLICY SUGGESTIONS – Efforts to provide lean-overhead, well-funded national defense should be pursued with urgency. This isn’t just “bean counting,” it could be a matter of national survival. If this country’s political leaders are justifiably concerned about the developing nuclear threat from North Korea, how much more should they be worried about the hypersonic missiles and other military capabilities of
China and Russia?

Federal infrastructure spending should support a relatively small number of facilities of a genuinely national nature as opposed to serving as a conduit for supplementary funding of state and local programs. National parks should be financed by user charges if possible so that the people who enjoy them will also pay for them.

The federal government can’t be expected to supervise state and local government budgets, so the primary federal strategy when mistakes are made should be to resist bailout demands from the jurisdictions concerned.

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No significant tax increases have occurred since 2013, and a tax cut bill is taking shape in Congress.

As for our suggestion to delay the rollout of GovCare (including embedded taxes) for one year, matters took a different course. A brief government shutdown was precipitated by a futile effort to stop GovCare, and a botched rollout followed due to sloppy work on the government website, etc. SAFE to both parties: listen to us next time!

While the specter of ever-rising taxes may have receded for now, it is far from vanquished.

First, the pending tax bill is basically about tax cuts versus reform – which considerably reduces the potential benefits. Cutting taxes is pointless without simplifying the [Internal Revenue] Code, Spencer Morrison,, 11/16/17.

•American people and businesses spend big bucks hiring accountants and lawyers to simply comply with the Tax Code. In fact, Americans spent an absurd $409 billion on tax compliance in 2016—a record high.

•Accountants and tax lawyers are very expensive, and so are the potential consequences for filing an incomplete or incorrect tax return. This puts many small businesses in a bind: either they shell out big money to tax specialists, or risk missing out on the plethora of obscure tax deductions

•Finally, complexity breeds corruption. The more complex the Tax Code, the more places there are to hide goodies for special interests and donors.

Second, it’s debatable whether the government can afford to cut taxes at a time when deficits are already at nosebleed levels and poised to rise. Even if the Republican tax plan is enacted into law, which remains to be seen, there will be relentless pressure to reverse the result by enacting future tax increases.

True, tax cuts should boost economic growth, thereby yielding future tax revenue growth. But this effect should be expected to reduce the revenue loss from tax cuts, not offset it entirely. Study: House tax bill would create 975,000 jobs, cut taxes by $2 trillion, Joseph Lawler, Washington Examiner,

•The [Tax Foundation] analysis also contains bad news for Republicans, though. It concluded that the bill would amount to a $989 billion reduction in tax revenue over 10 years even after taking into account that it would accelerate economic growth.

•Other outside analysts are unlikely to attribute as much economic growth to the Republican plan as the Tax Foundation did. Many tax modelers assume that tax cuts, if not offset by spending cuts, would slow private investment because the federal government would have to borrow to make up the difference, driving up interest rates and "crowding out" private-sector investment. The Tax Foundation assumes otherwise.

Does this mean the US is trapped in an economic/fiscal box, with no way to grow out of it? Not necessarily, if the economic stimulus from tax cuts is augmented by rolling back burdensome regulations (which has been taking place) and cutting spending. But tax cuts can’t do the job alone, and significant progress seems unlikely without some real spending discipline (which hasn’t been seen since the turn of the century).

Re spending discipline, just so much can be accomplished by cutting wasteful discretionary spending. It’s hard to imagine a long-term solution to the fiscal program without restructuring Social Security & the healthcare benefit programs; unfortunately, neither party seems disposed to grasp this nettle. How entitlement programs ruined our politics, Jerrod Laber, Washington Examiner,

Third, several sneaky tax increases are on the docket, notably previously deferred taxes that were embedded in the Affordable Care Act (GovCare). Stopping Obama’s time bomb: The first tax increase of the Trump era, Ken Blackwell,, 11/15/17.

Obamacare imposed hefty hidden new taxes on American-made medical devices and private-market health[care] insurance policies. These taxes were suspended for 2017 by Congress and the Obama administration because even Democrats saw that they were harming job creation and causing steep premium increases. But the suspensions expire at the end of the year. Unless Congress acts soon, these taxes go back into effect January 1, 2018—raising taxes by $15 billion next year alone and by hundreds of billions over the next decade. Yet most Republicans are doing nothing to stop it.

POLICY SUGGESTIONS – SAFE has been skeptical about the pending Tax Cuts and Jobs Act (one version has been passed by the House; a different version is being worked on in the Senate). It appears to be light on tax reform (many business and individual tax preferences would be retained; the Child Tax Credit would be expanded) and would add to the deficit. Its best feature seems to be a cut in business taxes, which should boost the economy, no need to be defensive about this. Efforts to sell the plan as a middle-class tax cut seem problematic as the typical tax cuts are relatively small and some workers who currently itemize deductions would wind up paying higher taxes. Assessing the Republican tax plan,

The current minority party doesn’t seem to be offering any worthy alternatives to the TCJA, which undermines complaints that Republicans aren’t working on tax reform in a bipartisan manner. GOP tax strategy on point, News Journal,

All things considered, SAFE is inclined to support passage of the TCJA. It sure beats raising taxes for new spending programs, which was the norm under the previous administration. Also, the previously deferred GovCare taxes should be repealed.

The TCJA that is passed will hopefully combine the best features of the House and Senate versions, eliminating as many tax preferences as is politically feasible.

Last but not least, we would urge Republicans to be upfront about the spending cuts that will be needed to balance the budget – and then push to get the cuts made.

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In 2013, there were conflicting evidence about what the next economic crisis would look like. Would it be a big crisis now, or an even bigger crisis later. Survey of the US economy, op. cit.

Was this country in for a big crisis now (economy starts to perk up - inflationary surge - Federal Reserve tightens monetary policies and interest rates soar, aborting the recovery), we wondered, or an even bigger crisis later (economic stagnation – unsustainable deficits – roof caves in when lenders lose faith in government’s ability to meet its financial obligations)?

Now the economy is sailing along with only one obvious threat – no one has done anything about the unsustainable deficits, and barring corrective action a fiscal meltdown seems like a near certainty.

Speaking in 2010 (video 1:12), Representative Paul Ryan (then ranking minority member of the House Budget Committee, now House Speaker) contrasted such an event with the 2008 financial crisis and called it “the most predictable economic crisis we’ve ever had.”

So why isn’t something being done about it?


#So you want to cut spending? Our government is too big, too crooked and too engrained in the fabric of our tax base. Kick them out. – SAFE director

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