By any objective measure, the government’s fiscal problem is worse now than in the last presidential election year when an incumbent wasn’t running for reelection. And yet there seems to be less buzz about the fiscal problem this year than there was in 2008.
Are fiscal visionaries headed for another disheartening setback, and if so is there any way to get back on track?
I. RED INK - Consider these illustrative data from the final budget proposals of the current president and his predecessor (plus actual results for FY 2009 & 2012): The deficits forecast for FY 2009 et seq. were substantially inflated by a financial crisis/recession, and this effect was compounded by a huge economic stimulus package (ESP) enacted in February 2009. Claiming a continuing need for economic stimulus, many political leaders have effectively abandoned the goal of balancing the budget.
The administration has often crowed about deficit reduction since FY 2009, as though the $1.4T deficit in that year was representative of previous results rather than being a statistical outlier. In our view, this claim is intellectually dishonest.
Another argument is that the ESP saved the US economy, and the government’s debt would be even higher but for its enactment. White House: Stimulus may have reduced the national debt, Pete Kasperowicz, Washington Examiner, 2/25/16.
We’ll leave that debate to economic historians, except to note that SAFE questioned the merits of the ESP at the time. Economic stimulus package: what’s the rush? 2/2/09.
It is not essential to act immediately – other ways to bolster the economy should be considered – this is a spending bill, not a stimulus bill. Who knows how things will come out, but the ESP is a bad idea and we are going to do whatever we can to slow it down.
Also, the ESP provided start-up funding for some supposedly attractive ventures, such as the Saft America lithium-ion battery plant in Jacksonville, Florida. Obama: Stimulus created green jobs that still exist today, Susan Crabtree, Washington Examiner, 2/26/16. "We turned recession into recovery faster" than other countries, [the president] said. "We took an empty swamp and turned it into an engine of innovation."
OK, but what about foregone jobs at other companies or the effect of government-supported “green energy” (aka clean energy) projects on electric power costs? The False Promise of Green Energy, Morriss et al., Cato Institute, 2011. There is no common definition of the green jobs that are promised, and forecasts are typically expressed on a gross basis (without subtracting jobs that would be eliminated, e.g., in the fossil fuel industries and in industrial operations that would leave the country as the result of higher US power costs.)
Aside from current red ink, eight more years have passed without structural adjustments to entitlement programs (Social Security Medicare, etc.), which will face major funding shortfalls as the retiree population soars. The longer that remedial action is postponed, the more wrenching the eventual adjustments will be. The 2015 long-term budget outlook, Congressional Budget Office, 6/16/15.
The unsustainable nature of the federal tax and spending policies specified in current law presents lawmakers and the public with difficult choices. Unless substantial changes were made to the major healthcare programs and Social Security, spending for those programs would equal a much larger percentage of GDP in the future than in the past. Federal spending as a whole would rise rapidly—even though, under current law, spending for all other federal benefits and services would make up a smaller percentage of GDP by 2025 than at any point in more than 70 years.
How big is the problem? According to economist Lawrence Kotlikoff, the present value of the government’s unfunded liabilities is some $210T, a liability that dwarfs the current debt and could obviously never be paid.
What’s the solution? The United States (and also other countries with similar problems) must choose between (a) cutting back the Social Security, etc. benefits that have been promised but are unaffordable, or (b) maintaining a course that at some undefined point will lead to a fiscal meltdown. The snowpack and the avalanche: how to understand federal liabilities, garynorth.com, 2/22/16.
It is easier to convey the inevitability of the avalanche than it is to convey the inevitability of the can finally rolling backward, crushing anybody who is in its path. But whichever metaphor you choose, you would be wise to accept the inevitability of the great reversal. The great reversal is going to be the great default. Either the checks will not be in the mail (default) or else the dollar will not buy anything (hyperinflation). This process of delay really is going to come to an end. Anyone who becomes dependent upon federal government programs of protection in a time of economic crisis will find that he is in the path of a crushing disaster. II. NICE TRY - Remember how David Walker et al. barnstormed the country in 2007-2008 seeking to build public awareness of the fiscal problem, and their efforts were capped by the release of a film just before the party conventions. Fiscal Wake-Up Tour message goes nationwide, 8/25/08.
•On August 21, I.O.U.S.A. premiered at 350+ theaters around the U.S. in conjunction with broadcasting of a live panel discussion in Omaha, Nebraska. Several SAFE members were present at the Regal Brandywine in Wilmington, Delaware. *** The total audience appeared to be about 200 people, which would suggest a nationwide audience (350 theaters x 200) of 70,000 – not bad, especially considering that the ticket price around the country was $10+.
• The film concluded to the refrain of “you’ve gotta be cruel to be kind,” there was a round of applause from the Omaha audience, and the panel discussion began.
•The five panelists were billionaire investor Warren Buffet; Peter Peterson and David Walker from the Peterson Foundation; William Niskanen, chairman of the Cato Institute; and William Novelli, CEO of the AARP.
• In our view, the nationwide premiere was a home run, and hopefully it will lead to many other people around the country seeing the film. But I.O.U.S.A. is at bottom a lecture, albeit a relatively painless one, and some folks may not be in the mood.
• Great article. By the way, on CNBC the next morning Warren, Pete, Bill Novelli (AARP) and I all agreed on two things. First, we must focus more on the future. Second, we need a capable, credible and bipartisan Fiscal Future Commission. - - David Walker
It seemed that the campaign for fiscal sanity might finally lead to action, but no such luck! Here are some notes from our archives on the subsequent course of events.
#The onset of a financial crisis eclipsed concerns about longer-term issues. October surprise: financial turmoil, 10/15/08.
While SAFE has been rattling on about smaller, better-focused, less costly government – and other advocates of fiscal responsibility in government have been pushing the idea of a bipartisan commission with government spending, taxes, and entitlements all on the table – events have been moving in a different direction. *** Who can blame the public for a short-term focus, when developments in the financial sphere are moving so erratically, at breathtaking speed, with no guarantee as to how the story will end?
#In the first presidential debate, the candidates seemed more anxious to discuss the tax cuts and spending programs they favored than the need for fiscal prudence. The debate moderators didn’t press them very hard about whether (and if so how) they would propose to balance the budget. Are we there yet: go to sleep, it’s another 500 miles, 9/29/08.
Both candidates are on record as favoring “tax cuts,” the main difference being who would benefit and how. Neither one acknowledged that overall taxes will have to increase (whether the $700 billion bailout takes place or not) unless spending is slashed dramatically.
#At one point in the second debate, Tom Brokaw asked a question about reforming entitlements – the candidates responded – and no one seemed to notice. Both candidates offer “pie in the sky” healthcare plans, 10/20/08.
Q. Would you give Congress a date certain to reform Social Security and Medicare within two years after you take office? Because in a bipartisan way, everyone agrees, that's a big ticking time bomb that will eat us up maybe even more than the mortgage crisis. Obama’s response was along the lines that the problem would resolve itself if “we understand the rest of our tax policies” and implement “a healthcare plan that actually works for you, reduces spending and costs over the long term, and Social Security that is stable and solvent for all Americans and not just some.” McCain envisioned fixing Social Security by adjusting taxes and benefits, much as Ronald Reagan and Tip O’Neill had done back in 1983. As for the more difficult problem *** “what we have to do with Medicare is have a commission, have the smartest people in America come together, come up with recommendations, and then, like the base-closing commission idea we had, then we should have Congress vote up or down.” Neither Brokaw nor either of the candidates said anything more about this subject, nor was McCain’s suggestion of a bipartisan commission given much (if any) play in the post-debate coverage. We are reminded of a well-known conundrum: If a tree falls in the woods and there is no one to hear it, does it make a sound?
#Bob Schieffer challenged the candidates to get specific about spending cuts in the third debate, but the responses were lackluster. Both candidates offer “pie in the sky” healthcare plans, 10/20/08.
Q. “We found out yesterday that this year's deficit will reach an astounding record high $455 billion. Some experts say it could go to $1 trillion next year. ***Aren't you both ignoring reality? Won't some of the programs you are proposing have to be trimmed, postponed, even eliminated? Give us some specifics on what you're going to cut back.”
Obama spoke about going through the federal budget line by line, page by page, and finding “a whole host of programs that don't work.” He offered few examples of such programs, however, seemingly preferring to talk about new programs – his healthcare plan, a serious energy policy, and the ability of our young people to go to college.
McCain suggested an across-the-board spending freeze, said he knew how to save billions of dollars in defense spending, and advocated eliminating subsidies for ethanol. He also committed to fight for a line-item veto and promised to veto “every earmark pork-barrel bill.”
Neither candidate mentioned the big problem: entitlements are growing faster than the other elements of the federal budget, and they are therefore progressively crowding out expenditures for national defense, homeland security, and other areas of “discretional” spending. #The president did establish a Fiscal Commission in early 2010, but it never seemed that he was serious about this effort. His directive to the FC made clear that its goal should be a supposedly sustainable deficit, not a balanced budget. And when the co-chairs (Erskine Bowles and Alan Simpson) floated a draft report with recommendations that purported to reflect the divergent views of the group (in our view, the recommendations did not go far enough), he provided no support for their efforts. Five of the six FC members from the House of Representatives plus two other members voted “no,” ensuring that the report wouldn’t be presented to Congress for consideration. Fiscal Commission sets stage for further discussion, 12/6/10.
III. State of play – There is no Fiscal Wake-Up Tour this year, and we’re not even aware of any recent books about averting (or preparing for) the coming fiscal meltdown. Still, there are lots of reminders about deficits and debts, from gloomy reports about budget woes to William Devane ads urging TV viewers to buy gold and silver because the government’s debt is over $19 trillion and there is a lot of “financial craziness” going on.
Many other problems are perceived, however, from national security threats (Russia, North Korea, ISIS, etc.) to global warming. So the question is, what issues are Americans most concerned about in this electoral cycle?
A recent poll indicates that the top issues (from a list of 15) are the economy (87) - employment & jobs (84) - terrorism (82) - healthcare (79) - education (79). Parenthetical numbers are the percentage of respondents who rated the issue as extremely or very important. Democrats, Republicans agree on four top issues for campaign, Frank Newport, gallup.com, 2/1/16.
Fewer respondents were concerned about fiscal issues on the list: federal budget deficit (71) - taxes (69) – size & efficiency of the federal government (61). Moreover, the level of concern about said issues was skewed along partisan lines, e.g., 83% of Republicans but only 62% of Democrats said the federal deficit was extremely or very important.
When asked to indicate the single issue they viewed as most important for the next president to address, respondents chose the economy (17), immigration (14), defense/homeland security (11), and healthcare (10). The 8th choice (out of 35 issues) was federal deficits (6).
Turning to the presidential candidates, it does not appear that any of them with the possible exceptions of Ohio Governor John Kasich and Senator Ted Cruz would be motivated and well equipped to address the fiscal problem. Herewith our assessments of all the surviving candidates based on prior analyses: Questions for presidential candidates: taxes, 12/7/15; Questions for presidential candidates: spending, 2/8/16.
•Hillary Clinton & Bernie Sanders have both proposed to hike taxes on well-to-do individuals and big business, but the proceeds would be earmarked for additional spending programs rather than being applied to reduce the deficit and there has been no apparent recognition of the drag effect on the economy. If either of them was elected president, we would expect the fiscal problem to continue getting worse.
•Donald Trump’s tax plan seems “unacceptable” given the Tax Foundation’s estimate that it would cut government revenue by about $1T per year. He proposes to rebuild the military, and his rhetoric about cutting spending in other areas is vague. All things considered, we doubt that the deficit would be reduced under his aegis.
•Marco Rubio has offered a tax plan with some good features, but we don’t approve of the expanded use of refundable tax credits to achieve social goals (back door welfare). The Tax Foundation estimates that his tax plan would cut government revenue by about $0.2T per year, and he hasn’t offered actionable specifics about spending cuts. Again, it’s unclear how the deficit would be reduced.
•Ted Cruz has offered a pretty solid tax plan, which among other things would eliminate the corporate income tax and payroll taxes and vastly simplify individual income taxes. The tradeoff would be a 15% gross receipts tax on businesses (essentially a VAT); on a net basis, the Tax Foundation estimates that government revenues would be cut by about $0.1T per year. Cruz’s ideas for cutting spending have the virtue of being specific, e.g., abolish three government departments plus the IRS. The big question mark is how effective he would be in persuading others to get on board.
•John Kasich has not offered either a tax plan or specifics about spending cuts, but he does have a solid track record in government budgeting (both as the House Budget Committee Chairman in the 1990s, when the federal budget was last balanced, and more recently as Ohio governor). He asserts that he is ready, willing and able to get the federal budget balanced again, and we are inclined to take him seriously. If Kasich doesn’t win the presidency, let’s hope that whoever does has the wit to appoint him as the secretary of Treasury.
•Ben Carson’s flat tax plan has received good reviews, although it is not considered to have much chance of passage. Ben Carson vs. IRS, Wall Street Journal, 1/8/16. The retired neurosurgeon has also offered some solid ideas for replacing GovCare with a more sensible system, which could reduce overall spending as well as better meeting the needs of patients. Whether or not Carson is suited for the presidency, we could certainly see him as the secretary of Health and Human Services.
Unfortunately, it has become increasingly clear that the Republican nominee may wind up being selected on the basis of political theater versus policy ideas and competence. Consider the 10th GOP candidates debate (CNN & Telemundo, Houston, Texas), which was generally seen as a riveting (appalling?) slugfest. Transcript, 2/25/16.
The discussion afterwards was all about how Marco Rubio & Ted Cruz had finally turned on Donald Trump, and how Trump had fired back. “Who won the debate” it was asked, not who offered the best ideas or made the most logical arguments.
Many pundits hastened to declare Rubio the winner, but the American public didn’t necessarily agree. According to an Independent Journal Review poll of likely Republican voters who watched the debate, the winner was Trump (43%). Trailing him were Rubio (30%), Cruz (12%), Kasich (10%), and Carson (5%). America has spoken, Justin Green, injo.com, 2/26/16.
Based on substance, the ranking might have been entirely different, e.g., with either Kasich or Cruz being declared the winner. Many of Trump’s comments in the debate were pure hokum, in our opinion, as illustrated by his response when Wolf Blitzer asked about the revenue loss ($10T over 10 years) from Trump’s tax plan. TRUMP: We’re going to make many cuts in business. We’re getting rid of — we’re going to get rid of so many different things. Department of Education — Common Core is out. *** Environmental protection — we waste all of this money. We’re going to bring that back to the states. *** We are going to cut many of the agencies, we will balance our budget, and we will be dynamic again.
BLITZER: Mr. Trump — Mr. Trump. If you eliminate completely the Department of Education, as you have proposed, that’s about $68 billion. If you eliminate the Environmental Protection Agency, that’s about $8 billion. That’s about $76 billion for those two agencies. The current deficit this year is $544 billion. Where are you going to come up with the money?
TRUMP: Waste, fraud and abuse all over the place. *** You look at what’s happening with Social Security, you look — look at what’s happening with every agency — waste, fraud and abuse. We will cut so much, your head will spin.
At this point, Blitzer asked Kasich whether “Mr. Trump’s plan could work.” Instead of seizing this opportunity to go negative, Kasich outlined his own approach: targeted tax cuts (such as lowering the capital gains rate), faster economic growth, and spending restraint (even if it meant taking on every special interest in Washington). The payoff would be more jobs and economic opportunity for Americans.
I’ve got a plan to take to Washington, and I will have it there in the first hundred days, and it will include shifting welfare, education, transportation, Medicaid and job training back to us, so we can begin, in the states, to be the laboratories of innovation. I’ve done it — I did it in Washington — four years of balanced budgets. No one could even believe it happened. I’ve done it in Ohio, we’re growing, the jobs are up and people are having opportunity. And I will go back to Washington and do it again for the American people. I promise you that.
Who made the more compelling argument in this segment? Kasich, obviously, and it wasn’t his only good moment of the evening. But his efforts were treated as inconsequential in the post-mortems (e.g., on “fair and balanced” Fox News), and there have been many calls for him to quit the race.
(Kasich has said he expects to win the March 15 primary in Ohio but will drop out if Trump prevails, an obvious slap at Rubio who according to polls is trailing Trump by double digits in Florida. Kasich: I’ll quit if I don’t win Ohio, Todd Beamon, Newsmax.com, 2/27/16.)
Will the presidential debates before the general election spark a meaningful conversation about the fiscal problem? Possibly, but fiscal visionaries shouldn’t count on this (especially considering what happened in the fall of 2008). Perhaps it’s time for a read on how the GOP budget plan in Congress is shaping up.