Kicking the fiscal can down the road

Reader feedback at end.

Neither Hillary Clinton nor Donald Trump has proposed meaningful solutions for chronic deficits and soaring debt. Dueling economic plans, 8/15/16.

Both of the candidates are aware of the fiscal problem, of course, so how do they propose to deal with it in their economic plans? Oops, looks like their main idea is to ignore this problem in hopes that it will go away – as most of the nation’s political leaders have been doing for years.

Perhaps this will change if enough Americans start demanding answers, but there seemed to be more public interest in the fiscal problem eight years ago (in the wake of the Fiscal Wakeup Tour) than we sense now. Campaign issues – deficits and debt,
2/29/16.

A September conversation about budgetary matters in DC will have a narrow focus. Individual appropriation bills aren’t expected to be completed and passed by September 30 (the deadline under the budget rules of Congress) so a continuing resolution (CR) will be required. The principal question: should the CR expire in December, setting the stage for a year-end budget deal, or later (as conservatives want) so the new Congress and president can make the necessary decisions. Assessing record of the 114th Congress,
8/26/16.

Democrats insist that the CR should expire in December. Reid: Dems will block long-term spending bill, Susan Ferrechio, Washington Examiner,
9/1/16. Political considerations aside, it’s hard to see any basis for their position. Senate braces for shutdown fight, Alexander Bolton, thehill.com, 9/2/16.

[Senate Minority Leader Harry Reid] and other Democrats expect Hillary Clinton will be president, and they don’t want to saddle her with a leftover spending fight during her first 100 days in office, when she would have maximum leverage for passing legislation.

Republicans aren’t about to risk being blamed for a government shutdown before the elections, and if there is going to be a meaningful budget battle it can take place in December. Meanwhile, here are some thoughts about how to attack the fiscal problem.

A. Combatting complacency - Current budget deficits and rising debt are not alarming according to an Office of Management and Budget statement that tracks previous statements by the president. OMB Mid-session review, 7/15/16.

Even as the Administration made critical investments to support economic growth, it also succeeded in putting the Nation on a sound fiscal path. Since 2009, Federal deficits have fallen by nearly three-quarters as a share of the economy—the most rapid sustained reduction since just after World War II.

This claim is misleading. First, the fiscal year 2009 deficit was sky-high (due to a major recession and the fiscal stimulus bill passed in February 2009) and doesn’t represent a logical starting point for assessing the administration’s fiscal track record. Second, the deficit is no longer declining; it will be about $600 billion for FY 2016 (10/1/15 to 9/30/16) vs. $438 billion for FY 2015. Third, the lower deficits projected for FY 2017 & 2018 are primarily a function of rising tax revenues that may not materialize if the economy remains anemic.

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Longer-term, the budget projection assumes that outlays for traditional functions of government (“discretionary” spending) will shrink as a percentage of both total budget outlays and Gross Domestic Product, while “mandatory” spending (primarily entitlement programs) and net interest will grow faster. Consider these data for the current fiscal year vs. projected data for FY 2026.

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Our political leaders have shown little inclination to cut discretionary spending (except that some of them would like to keep cutting the defense budget), so the projected pattern seems unrealistic. What to expect: mandatory spending will be pruned in some fashion, components of discretionary spending will be reclassified as mandatory, and/or a big new tax will be imposed to fund more discretionary spending.

Officials will concede that there is a fiscal problem if pressed, but they seem to lack a sense of urgency about addressing it. Obama administration says deficits are now next president’s problem, Dave Boyer, Washington Times,
8/24/16.

Asked about Congressional Budget Office projections that the federal deficit will spike 33 percent this year, White House press secretary Josh Earnest cited reasons including an aging population and Republican-sponsored tax cuts [extension of tax preferences by the bipartisan budget bill enacted in December 2015?]. Then he added, “There’s certainly a lot [of] money that can be saved, and this will be a challenge that the next president and the next Congress will have to do.”

B. Restoring discipline – Legislators have supported each other’s priorities since time immemorial, but such “log rolling” has unfortunate consequences. If all government programs are presumed worthy of support instead of being evaluated on their respective merits, the overall result will be to spend far more taxpayer money than is desirable.

Thus, some members of Congress have been working hard to delay passage of the defense appropriations bill. Their goal is not to hold down defense spending per se, apparently, so much as to use the defense budget as a bargaining chip to obtain higher spending in other areas. Third time’s the charm? Senate GOP will try again to move spending bill forward, Jacqueline Klimas, Washington Examiner,
9/1/16.

Two procedural votes to formally take up the spending bill on the floor previously failed: on a 50-44 vote July 7, and by a 55-42 vote July 14. Democrats have refused to move the bill forward because they want to ensure domestic spending gets an increase.

The results of such tactics are clear, and the only antidote is to review all spending requests with a healthy degree of skepticism. A list of targeted spending cuts,
8/22/11.

Across the board spending cuts treat all government programs as equally worthy, thereby undermining support for the limits imposed. It would be far more effective to eliminate or restructure ailing programs.

As for where to cut, the
Spending page of this website offers some ideas. Unnecessary programs such as agricultural subsidies and “corporate welfare” – duplicative programs of different agencies – federal grant programs (some $0.5B per year) – restructuring of entitlement programs.

See also the
Prime Cuts 2016 inventory of Citizens Against Government Waste; scores of recommendations are included that could save $644B (basically balancing the budget) in the first year.

For example, the report proposes eliminating the Market Access Program (MAP), which aims to help agricultural producers promote U.S. products overseas.  However, MAP is really a corporate welfare program that funnels millions of dollars to large, profitable corporations and trade associations that can well afford to pay for their own ads.  Eliminating MAP would save taxpayers $1 billion over five years. *** long-standing proposals to eliminate the sugar, dairy and peanut programs; reduce Medicare improper payments by 50 percent; replace the $1 bill with the $1 coin; and, increase the use of software asset management tools. *** numerous cuts could be made to the Department of Defense (DOD) without jeopardizing national security, including eliminating congressional add-ons for the M1 Abrams tank retrofit program.

While there is no way to eliminate log rolling, its effects could be minimized by establishing and observing a practice of balancing the overall budget. Across the board spending caps, hiring freezes, etc. are far less effective. SAFE letter to the members of Congress,
June 3, 2013.

SAFE has proposed an 8-step strategy to address the fiscal problem. Blog page of our website, 5/6/13 entry. What we would stress in this letter, however, is not the points in our plan as such but rather the goal the plan is aimed at – balancing the budget within say three years and keeping it that way.

C. Plugging leaks – Lax as they are, current budgetary controls have had some effect in limiting the growth of government programs – which creates an incentive to find alternative revenue sources. There are several possibilities, as will be discussed, and their use might proliferate if there was a serious effort to balance the budget.


#FEES – Let’s start with a practice that seems reasonable enough, namely charging user-based fees for services provided. Funding services with fees may actually be preferable to using tax revenues because it puts the burden on users versus the population as a whole. Establishing government charges and fees, Government Finance Officers Association, accessed 9/3/16.

When certain services provided especially benefit a particular group, then governments should consider charges and fees on the direct recipients of those that receive benefits from such services. *** Well-designed charges and fees not only reduce the need for additional revenue sources, but promote service efficiency.

Here are two examples at the federal level, neither of which we would be inclined to quibble with. Visitors to national parks are charged entrance fees that partially defray the cost of maintaining park facilities and paying park employees. Applicants must pay fees to obtain passports, which are necessary for travel outside of the United States. If you don’t visit national parks or travel abroad, you don’t have to pay these fees.

In other cases, fees look a lot like taxes. Consider all the mandatory charges that are tacked on to monthly cell phone bills, regardless of whether you benefit from the functions being funded or not. Up to 35% of your cell phone bill may be taxes and fees, Jeanne Sahadi, cnn.com,
10/9/14.

All in, wireless customers end up paying tax and fee rates that are about twice as much as the average sales tax rate on other goods and services, the Tax Foundation found.

To keep service fees under control, we would suggest some common sense principles:

•Agencies should not be empowered to collect fees for services that recipients don’t choose to receive. Thus, one wouldn’t expect to pay the IRS a fee to cover the cost of a tax audit.

•Authority to impose fees or raise fee levels should not be delegated to administrative agencies, thereby incentivizing regulatory expansion. This was reportedly one of the motivations for the Federal Communication Commission to regulate the Internet. Obamas’ plan for a backdoor internet tax, James Gattuso, dailysignal.com,
11/14/14.

The tax, which could total over $7 per month on the typical American’s broadband bill, would be imposed as a consequence of regulating the internet via “net neutrality” rules that President Obama has urged the FCC to adopt.*** [Telecommunication companies] would have to pay a portion of their Internet revenue to the FCC’s “Universal Service Fund (USF),” which provides subsidies for Internet service.   This fee currently is set at 16.1 percent of revenue, or $7.25 per subscriber per month according to one estimate. And don’t look for the FCC to waive this new found windfall. [Commissioner] O’Reilly (who opposes the plan) reports the FCC already is planning a “spending spree” on USF subsidies.

•Fees collected should be remitted to the US Treasury rather than held and used by the administrative agencies in question, thereby ensuring that all government operations will remain subject to legislative oversight.

#LOANS – Let’s say the government makes a loan to cover the cost of a given facility or program, the rationale being that the expenditures involved are a capital investment that will generate future benefits. The loan isn’t charged against the current budget, although the cash outlay increases the federal debt (subject to reversal when the loan is repaid). If the borrower defaults, the loan loss will be charged against a future budget.

Here’s an example of such a loan, which the vice president recently announced in a Wilmington, Delaware train station named in his honor. Critics suggest that the loan outlays will wind up being paid for by taxpayers because Amtrak invariably loses money overall, so it would have been more honest to provide the funds in the form of a government grant. The new $2.45 billion question at Amtrak, Susan Crabtree, Washington Examiner,
8/30/16.

"Amtrak is not relying on federal grants for this project," the company said in a fact sheet about the new investments in Acela trainsets it plans to make with the money. But that statement has drawn scrutiny from budget hawks in Washington who argue that Amtrak has never turned an overall profit, and has taken billions of dollars each year to continue to exist even though it's Northeast corridor is used the most and makes the most revenue.

Loan guarantees have a similar effect, except that there is no initial increase in the federal debt. They can make a given operation look like a money maker when it is actually a burden on taxpayers. Some examples: Fannie Mae & Freddie Mac (now operating under government conservatorship), Solyndra ($535M loan guarantee went sour), and the Export-Import Bank.

In the last case, there has been a running debate about whether the EIB does or doesn’t make money for taxpayers. The answer boils down to assumptions about default rates. Press release, House Financial Services Committee, Rep. Jeb Hensarling,
5/22/14.

If the Export-Import Bank were to use fair-value accounting, as the [Congressional Budget Office] recommends, the Bank’s ledger would actually show a loss of money for the taxpayers – not a profit.  I have long believed that many taxpayers feel it is indeed time to exit the Ex-Im, and this CBO report certainly reinforces that belief,” said Financial Services Committee Chairman Jeb Hensarling (R-TX), who opposes re-authorizing the Export-Import Bank.

The main takeaway is to minimize the use of government loan and loan guarantee programs, which tend to obfuscate the economic merit of programs being supported and the level of risk the government is assuming. All of the above ventures are (or in the case of Solyndra were) dubious, in our opinion, and the government should never have gotten involved in supporting them.

#LEGAL ACTION – Government suits against business firms have flourished in recent years. The starting point was to blame financial institutions for the “Great Recession,” while ignoring the mistakes of government policy makers, and then sue the alleged culprits for restitution based on a raft of legal theories. The great bank robbery,
12/16/13.

There have been so many lawsuits stemming from the financial crisis that it’s hard to keep track. Most of them have resulted in settlements, and the aggregate payout by the big banks (notably Bank of America and JPMorgan) and other financial firms is expected to handily top $100 billion.

Even big firms can’t hope to match the resources and clout of the government in legal battles with the government, and smaller businesses are hopelessly outmatched. Like the Godfather, the Feds have grown accustomed to making offers their targets “can’t refuse.” Lawfare is a growing danger,
10/27/14.

Used for both offensive and defensive purposes, government lawfare threatens this country’s underpinnings. Legal guns for hire (attorneys willing to represent dubious positions and string out litigation endlessly) – shock and awe (inappropriate use of strong arm tactics) – zero tolerance (of private sector mistakes) – double standard (lack of concern about government failings).

Litigation re the 2008 financial crisis is winding down, but there are new controversies. Thus, Volkswagen has experienced a tidal wave of litigation as the result of the use of a “defeat device” in its diesel-powered cars to indicate compliance with nitrogen oxide emission restrictions in tests at auto inspection lanes.

Not to defend what VW (and probably other car companies) did, but it’s far from clear that the billions of dollars in fines that have been imposed already – plus additional penalties under consideration – are appropriate. The Environmental Protection Agency made a big mistake by imposing needlessly stringent limits for NOx emissions and then lashing out to show who was boss after learning that VW had finessed them. The auto emissions crackup, Holman Jenkins, Wall Street Journal,
4/22/16.

Take the Environmental Protection Agency standard that Volkswagen, in its still-unexplained obsession with reconquering the U.S. market with diesel cars, is guilty of flouting. EPA’s latest target of 0.07 grams of nitrogen oxide per mile represents a 90% reduction from NOx output of the average car on the road today. It represents a 97% reduction compared to the 100 million pickup trucks on the road. The law of diminishing returns, if agencies behaved rationally, would have caused EPA long ago to declare victory on nitrogen oxide and turn to other matters.

Ironically, a somewhat more enlightened approach seems to be emerging in emission restrictions for heavy trucks. Firms that cannot meet the EPA’s new greenhouse gas and fuel efficiency standards will be permitted to pay a fine for not doing so, which apparently won’t be set high enough to drive them out of business. Can’t meet EPA’s pricey truck rules? Just pay the fine, John Siciliano, Washington Examiner,
8/15/16.

Congress enacted a change that requires the EPA to establish the special penalties "to protect these technological laggards by allowing them to pay a penalty for engines that temporarily are unable to meet the applicable emission standard, while removing any competitive advantage those technological laggards may have," the EPA said. [Court challenges had raised questions about a previous EPA attempt to impose such a scheme by regulations.]

No doubt it is appropriate for governments to sue private firms in some cases, and they will surely continue to do so, but the old story about the king who killed the goose that laid the golden eggs comes to mind. We would urge that the federal government (and also other governments) remember that endless litigation against private firms – like high taxes and excessive regulations – can create an unfavorable climate for economic growth.

Also, side payments to activist groups (e.g., La Raza) should not be required in the settlements that are negotiated. To this end, it’s been proposed that all litigation recoveries flow to the US Treasury and/or bona fide “victims.” GOP moves to shut down Obama’s latest “slush fund,” Pete Kasperowicz, Washington Examiner,
8/30/16.


**********FEEDBACK**********

From the author of “A budget red line for the federal government,” which was posted and discussed in SAFE’s 1/4/16 blog entry: I agree wholeheartedly about Congress's “shenanigans,” and think that the solution might be to “red-line” the federal budget by limiting spending for the current year to actual revenues of the previous year. All sincere members of Congress should be able to accept this rule without violating their commitments to zealously represent the interests of their respective constituents. All they would have to do is commit to the TOTAL spending that Congress could gleefully spend, within which limit they would be free to compete in seeking to “bring home the bacon.” This presupposes that the whole Congress would abide by the prior resolution NOT to exceed the Red-Line, but if this idea got enough publicity I think it could become reality. What do you think? – SAFE member Dick Timberlake, GA [Comment: This approach is very straightforward, and if followed should result in gradual debt repayment. Assuming acceptance of the principle that budgets are meant to be balanced, it would deserve serious consideration.]

In a note forwarding our note about the entry: Makes sense to me.  Considering the immensity of the fiscal problem, this is one of those times when you feel like a Christian Scientist with appendicitis. SAFE has good ideas for what should be done, but political realities de-focus on constructive actions. – College classmate, SC

Why should they change? Politicians always push off nasty events upon others or off into the tax pits. There is no reason why they should change because not a single vote hangs on the spending or debt. This is not the age of Perot. – SAFE director

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