Current template: single.php

John Merrifield, Professor at UT-San Antonio’s College of Business [presenter]

John.merrifield@utsa.edu

Barry Poulson, Emeritus – University of Colorado

Barry.poulson@colorado.edu

Abstract

Since we published Restoring America’s Fiscal Constitution (2017), there has been a tax cut (including incentives to repatriate foreign earnings), a “+$300 Billion 2-Year Budget Deal,” and interest rates are rising faster than expected.  We use our dynamic simulation model to describe some plausible, though challenging, paths to a Debt/GDP Ratio at a consensus sustainable level of 60% by 2040.  We examine the prospects for debt reduction through faster economic growth, slower spending growth, entitlement reform, and for reaping significant revenue from selling federal mineral rights.  We examine some default, and near default, scenarios.

 

1. Introduction

Because the most noteworthy symptoms may arrive suddenly, the declared debt crisis – an outcome of policies widely described as “unsustainable” – has not gotten the attention our bona fide crisis deserves.  Certainly, many publications have stated the growing scope of the debt growth problem, and some proposed solutions, but the public, the Congress, and President Trump are not paying [much] attention.  Debt concerns were not a major issue in the 2016 campaign.  President Trump did declare a crisis, and Candidate Trump announced his support for Federal Mineral Rights sales as part of the solution, but the follow-up has been non-existent, or a well-kept secret.

Unsustainable means that one or more of the following will eventually occur: a.) A default that will cause a huge financial crisis and hastily-arranged spending cuts and tax hikes; b.) Printing money to avoid default may cause significant inflation; c.) Drastic spending cuts to avoid default; d.) Tax hikes to avoid default; and/or e.) Some near-term-enacted combination of slower spending growth (perhaps rule based), faster economic growth, and mineral asset sales.  In the abstract, most people favor the last option.  But specifics such as the challenges created by faster growth, managing rapidly increased access to mineral deposits, and naming the programs to be cut, or grown more slowly, will increase the opposition; maybe enough to force one of the other ‘options.’ This paper will explore those options and our dynamic simulation model will describe the scope of the challenge to avoid default, inflation, higher taxes, and or huge, sudden spending cuts.

Many people favor large spending cuts.  They see a financial crisis as one of few feasible routes to the significantly smaller federal government they want.  However, as the next section shows, even total elimination of the cabinet departments created since WWII (except HHS) would not even come close to eliminating the average CBO-projected budget deficit.

The purpose of this paper is to describe the pathways to a Debt/GDP ratio of less than 60% by 2040, and some consequences of failure to do so.  To the extent there is a rough consensus on a developed country, sustainable level of debt, Total Debt/GDP ~ 60% is it.  Note that we don’t accept the conventional wisdom that only the debt owed to the public matters.  The Total U.S. Debt to GDP ratio is already over 100%; about 30 percentage points above Debt/GDP counting only debt held by the public.  Interest must be paid on 100% of the debt.  That’s a key reason why the debt problem is likely much more than a burden on future generations.  Because rising debt together with higher interest rates can crowd out funding of government transfers and services, or force accelerated debt growth, the options a.) to e.) named above will impact nearly everyone alive now.

So, in the next section, we will describe the mounting consequences of kicking the can down the road.  We can do that without an inordinate use of space because we have published estimates for reaching Total Debt/GDP ~ 60% had we deployed the Merrifield-Poulson (MP) Fiscal Rule Option with a 20-year time horizon, starting in FY 1994 (Merrifield and Poulson, 2016), and another recent estimate for a 20-year time horizon, MP deployment in FY 2018 (Merrifield and Poulson, 2017).  In section 3, we examine the prospects for, and alleged requirements of, significantly faster economic growth.  Section 4 examines the 2040 results of reduced spending growth; total or just discretionary.  Section 5 examines the potential use of Federal Mineral Rights sales – something Candidate Donald Trump said was part of his deficit/debt reduction strategy – to impact the 2040 Debt/GDP ratio.  Finally, prior to a summary and concluding remarks, Section 6 will examine some consequences, good and bad, of imminent, or actual, default.

 

2. Kicking the Can Down the Road

As of this writing, most authoritative sources expect a planned FY 2019 deficit[1] of $1 trillion; about five times the combined budgets of five of the cabinet departments created after WW2: Education, Energy, Housing and Urban Development, Transportation, and Homeland Security.  In the Congressional Budget Office’s (CBO) most recent (June 2018) Long-Term Budget Outlook, the projected FY 2019 change in the national debt is $1.34 trillion.  Typically, off-budget spending causes the national debt to grow by more than the planned deficit.

Had we adopted the Swiss Debt Brake-like, Merrifield-Poulson (MP) fiscal rule in 1993, taking effect in 1994, the 2015 Debt/GDP ratio would have been 54.5%; below the 60% level that is a rough consensus view of what is sustainable, especially when it is the total debt, not just the debt in the hands of the public.  Keeping the Debt/GDP ratio below the sustainable 60% level, compared to its actual 2015 value of nearly 100%, would have ‘only’ required an approximate two percentage point cut in the growth rate of discretionary spending from its actual average value of over five percent to 3.3%.  Naturally, with our aging population, and the addition of the Bush 43 prescription drug entitlement, keeping the Debt/GDP ratio below 60% going forward probably would have required a further cut in the rate of increase in discretionary spending.  But having failed to seize that opportunity, the costs of attaining Debt/GDP below 60% is now MUCH higher.

With the March 2017 CBO Long-Term budget outlook as the counterfactual, it would take an approximate discretionary spending freeze for twenty years just to keep the 2037 Debt/GDP ratio where it is now; at about 100%.  While that is far below the ‘current law’ CBO projection for 2037, 100% is still unsustainably huge.  With the March 2017 outlook as the counterfactual, bending the CBO 2037 Debt/GDP projection below 60% would require an approximate mix of discretionary spending growth limited to 1.35% per year, and $700 billion per year in combined asset sales and entitlement savings.  The federal government’s most valuable assets are mineral rights; rights to over $50 trillion in mineral assets by one current estimate.  Either a discretionary spending growth rate of just 1.35%, or $700 Billion/year in savings or extra revenues without higher tax rates, would be a major achievement.  Using the CBO’s March 2017 projections, we need both to achieve a sustainable debt level by 2037.  Even if we can defy the current conventional wisdom at the CBO, and from Obama Administration economists, and regain the long-time norm of at least 3% GDP growth, it would still take holding discretionary spending growth to 1.2%/year and entitlement savings / asset sales of $300 billion per year to get Debt/GDP below 60% by 2037.  And that was before recent deficit-increasing, enacted legislation.

The CBO’s most recent, June 2018, Long-Term Budget Outlook, takes account of the 2017 tax cut, and the Trump Administration-approved spending increases.  With those policy changes and the passage of another two years, it takes an additional $100 billion per year ($800 vs. $700) to reach Debt/GDP of 60% by 2037, or an additional 2.5 years at $700 billion per year to get below the 60% threshold.  That’s alongside a 1.2% limit on the growth rate of discretionary spending.  Kicking the can down the road has been very costly.

 

3. Faster Economic Growth

Much faster economic growth is the only way to lower Debt/GDP to a sustainable level without politically difficult (an understatement), massive savings-generating entitlement reform, or difficult, perhaps economically impossible, levels of annual revenue from mineral asset sales.  Despite recent quarterly growth at a 4.2% and a 3.5% annual rate, and likely 2.9% for all of 2018, the CBO has the annual growth rate quickly reverting to the two percent rate that many economists assert is the new normal.  That school of thought says it would be very difficult to budge the fundamentals enough to even regain the long-time normal of just over three percent.  And there is at least one analyst that believes that over three percent is undesirable:

President Trump promised to increase economic growth to 4 percent. That’s faster than is healthy. Growth at that pace leads to an overconfident irrational exuberance.  That creates a boom that leads to a damaging bust.”

We might need to risk that increased instability.  The debt crisis may force acceptance of many risks, or trade-offs, that might otherwise be unacceptable.

Tax Rate Reduction

Notable economists, including long-time Fed chair Alan Greenspan, argue that the 2017 tax cuts unleashed “animal spirits” that created sustainable momentum.  Their basic point is that tax cuts can be a key ingredient of a well-crafted economic policy reform that increases revenue more in the long-run than it reduces it in the short-run.  Indeed, despite the 2017 tax rate cut, FY 2018 revenue was slightly higher than in 2017.

Trade Policy

President Trump appears to be attempting to be the first president to win a trade war.  Early signs hint at a surprisingly high potential for success.  If ‘victory’ yields more than an elimination of the newly-imposed trade barriers, economic growth will get a boost.  Probably more important than the slight economic and fiscal boost emanating from freer trade, is to avoid the consequences of the usual trade war stalemate where machismo and trade barrier-created, concentrated gains in import-competing industries prevent the acts of war from being removed quickly, or at all.  Key examples include: a.) how long it took to substantially erode the Smoot-Hawley tariffs that at least greatly deepened the Great Depression, or were a principal cause; and b.) the persistence of some trade barriers – case in point, the “Chicken Tax” that resulted from a 1968 trade dispute.  Because of French and German tariffs on U.S. chicken exports, President Johnson imposed a 25% tariff on imported trucks that still exists; undiminished by successive GATT and WTO rounds of tariff reductions.  Early signs point to noteworthy persistence of some of the recently-imposed barriers, even if the Trump Administration achieves its trade war objectives.  Higher costs to consumers and industries, alongside disruptions associated with industry adjustment to domestic sources of raw materials and intermediate goods, could induce a recession.  Long-term malaise could result from not being competitive with countries that do not deny themselves access to the world’s lowest prices.  The CBO counterfactual that projects a 2040 Debt-held-by-the-Public/GDP of 124% – about 150% for Total Debt – does not include effects of recessions, or greater malaise than already implied by the projected 2% growth rate.  So, we can easily do even worse than the CBO-projected, terrible outcomes of ‘business-as-usual’ (no major fiscal-restraint-inducing policy change).

Immigration Policy Reform

Notwithstanding Alex Nowrasteh’s assertion that, “there is no strong fiscal case for or against sustained large-scale immigration (Powell (ed.), 2015; p 64),” a wide-open immigration policy seems like a sure-fire policy for large-scale debt reduction that many people favor without its economic growth and fiscal benefits.  Maybe, for maximum fiscal benefit, we need to greatly increase immigration, but be more selective than ‘let in everyone that is not a criminal or terrorist.’

The most recent noteworthy recent attempt at immigration policy reform, 2013’s S. 744, would have done many of those things.  However, the reasons for its legislative failure probably also underlie its limited scope.  Still, even though S. 744’s projected benefits were small in relation to the scale of the fiscal crisis, the projected fiscal benefits are noteworthy.  Two chapters in Ben Powell’s (ed., 2015) The Economics of Immigration asserted noteworthy effects that can be scaled up.  For example, Richard Vedder found higher rates of entrepreneurship in states with higher concentrations of legal immigrants.  That replicated a finding by Wadhwa et al (2008):  Legal, skilled immigrants have started a disproportionate percentage of new engineering and technology companies.  Alex Nowrasteh noted that (p 56):

“One CBO model determined that if S. 744 became law, it would lower the projected Federal budget deficit by $875 Billion over twenty years.”

“A second, more dynamic, CBO model determined that if S. 744 became law, it would boost GDP by 5.1 to 5.7% over twenty years, and lower the projected Federal budget deficit by $1.197 Trillion over twenty years.”

The political factors underlying the S. 744 cautious attempt to find a politically viable path to noteworthy reform may also underlie William Galston’s proposed path to faster growth without stirring up too much controversy (“without increasing the aggregate level of immigration”).

“There is only one way to boost the growth rate of the workforce: expand dramatically the number of working-age immigrants admitted each year. If the U.S. prioritized working-age entrants the way most other advanced countries do, it would increase annual labor-force growth by up to 0.3%.”

One of the authors (JM) of this chapter is a first-generation immigrant, but despite the fiscal benefits, he’s conflicted about the mixed effects of large-scale proposals that would yield massive population growth.  Obviously, his personal struggle with the pros and cons are but a microcosm of the reasons why immigration policy is extremely controversial.  But uncontroversial is the fact that the current fiscal crisis significantly increases the importance of the fiscal impacts of accelerated legal immigration.

[At Least] Revenue Neutral Tax Base Change

Given the difficulty achieving accurate, uncontroversial dynamic scoring, a useful part of a debt-reduction strategy would be to adopt likely growth-accelerating tax base shifts that are revenue neutral based on the static scoring required by law.  The debt reduction benefits would be the reason to overlook effects that have been the reason we haven’t already adopted tax policy changes likely to accelerate economic growth.

The two prominent candidates for more serious consideration based on a likely debt reduction dividend are: 1.) a carbon tax; and 2.) a consumption tax.  Set at levels that would offset foregone income tax revenue on a static scoring basis both would likely more than offset loss of revenue from reduced taxation of business and/or individual income.  Some people condition their support of a carbon tax on the total elimination of income taxation; that, otherwise, income tax rates would gradually creep upward after the initial reductions.  Indeed, even with total elimination, upward creep in other taxes may become a matter of fiscal necessity.  And it may be that a carbon tax large enough to offset all income tax revenue might not exist.[2]  Or some increased revenue may have to offset shrinkage in the carbon use tax base, in part because of the tax, but also as technology improvements make renewable energy sources more competitive.

Consumption tax rates large enough to offset enough income taxation (with static scoring) to yield economic growth benefits, or to eliminate income taxation, might stir enough tax evasion and avoidance to prevent that potential from being realized.

 

4. Slower Spending Growth

It’s obvious that it is very politically costly to cut spending.  Through well-crafted, enforceable fiscal rules, we can create political cover for cuts that must be made to facilitate the periodic political necessity to increase some categories of spending[3] faster than the overall rate specified by a rule.  For example, a threat, short of actual attacks that would yield emergency spending, might argue for faster defense spending growth than the average rate allowed by a fiscal rule.  That could force some categories of non-defense spending to be cut; a true cut; fewer dollars in the next fiscal year.  The fiscal rule forces the prioritization of competing uses of a fixed sum instead of the budget-busting practice of, in the face of disagreement, to use debt to avoid difficult choices.  Indeed, without the binding external constraint, the result is no longer a budget plan; just a spending plan.  When years of failure to make tough choices precede the enactment of effective fiscal rules, it takes especially low rates of spending growth to restore fiscal sustainability.

Indeed, as was shown above, in the kicking the can down the road discussion, regaining sustainability in a 20-year timeline will require very low limits on discretionary spending growth, large savings through entitlement reform, and perhaps additional major policy changes, such as massive asset sales, to restore sustainability.  Since we are still kicking the can down the road, a 20-year timeline means ‘what are the menu of possibilities to restore sustainability by 2040.’

Some might argue that it is enough to just reverse course.  Never mind specific goals such as Debt/GDP less than 60% by 2040, just get the GDP growing faster than the debt.  That may be all that we can achieve.  Given the counterfactual of rapid increase in Debt/GDP, any reduction in Debt/GDP will require significant fiscal restraint.  Even with a return to the long-time normal of 3% annual real GDP growth, just a one percentage point per year drop in Debt/GDP will require some combination of an annual cap on discretionary spending growth at 0.4% with no entitlement reform savings or asset sales, or discretionary spending at 2.4% per year with entitlement reform savings / asset sales yielding $500 billion per year.  So, each $50 billion in entitlement savings or revenue from asset sales allows an additional 0.1% per year in discretionary spending growth.  If the economic growth pessimists are correct, or the debt begins to slow economic growth, it will take more entitlement reform savings or asset sales.

But slow progress may not be an option.  It may not be enough to curb the drastic, sudden policy changes or financial crisis we hope to avoid.  Or a strategy that may seem capable of yielding some progress, may not.  For example, without significant steps towards sustainability, higher interest rates might preclude the debt reduction that might otherwise result from small steps.  The adverse U.S. fiscal circumstances have already significantly raised the U.S. Government’s borrowing costs.  We pay 2.7 percentage points more than Germany pays to borrow money; a gap expected to rise above three percentage points in the near future.  Three percent of ~$21 trillion, and growing, is a lot of additional annual cost.

Only if the Trump Administration manages to reach and sustain 4% growth – double the size of the economy in 18 years – can we, relatively painlessly, get Debt/GDP to 60% by 2040.  With 4% growth, we can reach Debt/GDP ~ 60% in twenty years with a combination of $100 Billion per year in asset sales or entitlement savings, while still increasing discretionary spending by 2% per year.  It is important to note that in each of the scenarios described above the MP Fiscal rule sets aside emergency funding sufficient to meet emergency spending requirements of the last 24 years;  a period that included the Great Recession, lesser recessions, and the off-budget spending that financed overseas military operations, especially the fighting in Iraq and Afghanistan.

With less optimistic economic growth scenarios, it will take much more entitlement reform and or asset sales than described above.  With slightly-improved, sustained economic growth – 2.5% versus CBO’s 2.0% projection – the MP fiscal rule will not yield Debt/GDP < 60% in 2040 without $400 billion per year in entitlement reform savings (less spending by $400 billion per year than currently projected by CBO), alongside discretionary spending growth capped at 1% per year.

 

5. Federal Mineral Rights Sales

Even though the President expressed interest in mineral rights sales as part of debt reduction strategy, and there is no other plausible alternative to higher taxes, questions about the potential to convert mineral rights into cash mostly yield blank stares.  If there are well-developed answers to that, or the policy changes that would be needed to realize that potential, they are a well-kept secret.  We need to quickly document the structural impediments to quickly selling or leasing federal mineral rights, and eliminate as many of those barriers as we can in a pre-crisis atmosphere.

We have to also recognize that even the best-case scenario for generating a significant cash flow from federal assets is no excuse for complacency.  Having rights to over $50 trillion[4] in oil, gas, and minerals does not make a $21 trillion, and rapidly growing, national debt acceptable.  Those mineral rights may help us avoid a devastating financial crisis, but only as a partner to significant fiscal restraint, and only on a one-time basis.  The mineral rights can only be sold once.

The right to mine the assets is worth much less than the minerals themselves.  The mining companies will only pay a royalty for access to the minerals; a fraction of the difference between delivered market value and extraction cost.  Much of the federally-owned mineral wealth may not be profitably minable, and lower prices for some minerals will increase the wealth in that category.  That coal reserves are a large share of federal mineral wealth makes that a major concern, which could grow in scope as climate change politics, actual policy changes such a carbon tax, and technology gains make renewable energy sources more competitive.[5]  Note these assertions by the Wall Street Journal’s Greg Ip:

“Coal has become a sunset industry as cleaner energy sources rapidly get cheaper.  In the U.S., coal is headed toward obsolescence.”

To a lesser extent, such issues impact the value of all of the federal government’s fossil fuel reserves.  The rate at which federal mineral rights are made available will also affect the total amount generated by those sales.  Where the industry associations are not already maintaining a current estimate of ‘Demand’ – properly seen as function of all of its key determinants through a fully-specified, multiple regression analysis – that needs to be pursued so that we can determine the trade-off between the near-term annual rates at which mineral rights can generate revenue, and the total amount generated from the salable assets.

 

6. Imminent or Actual Default

The leading edge of default is already visible.  Rising interest rates will be both a cause and an effect of increasingly unsustainable federal fiscal circumstances.  Even without those ever more dire circumstances, the ongoing gradual escape from the Great Recession-induced monetary expansion will raise the federal government’s already-huge borrowing tab.  The dire circumstances have created a large, and growing risk premium best seen in the soon-to-be over three percentage point difference between the German government’s, and U.S. government’s, borrowing costs; almost enough for the risk premium costs to be solely responsible for U.S. debt growth.

Spiraling debt service costs can be the proximate cause of the drastic measures that avoid the worst elements of a full-blown financial crisis.  Or poorly-conceived drastic measures can bring on the crisis and make it worse.  That’s been a central aim of the Friedman Project and this book; good decision-making, even in a crisis atmosphere, which may be necessary before the necessary reforms can become politically feasible.

Consider, for example, the farm subsidy issue; policies and expenditures that are arguably unconstitutional and inarguably economically inefficient.  Political inertia is the only argument for permanently retaining them.  But in the midst of, or under threat of, a financial crisis, can we go cold turkey on farm subsidies?  Because the value of the subsidies is capitalized into land values, and farmers borrow against the value of their land, yanking those subsidies could add widespread rural bank failures to an existing financial crisis.  Probably, because of that, economic efficiency arguments, and fiscal concerns argue for an ASAP gradual end to farm subsidies, but not an abrupt end in a financial crisis atmosphere.

Those are the kinds of issues we need to sort through in advance of a crisis atmosphere.  There are many spending cut recommendations; for example, based on ideology, including unconstitutionality assertions.  We need to reprocess the documented rationales for spending cuts[6] into spending program rankings based on economic efficiency issues, and short-term stability factors.  Part of the former needs to include estimates of the rate of diminishing returns to rationalize program cuts vs. program elimination.

After we learn what the Great Recession teaches about the new relationship possibilities for monetary expansion and inflation, we need to examine the consequences of well-designed (damage minimizing) monetary expansion as part of a default-avoidance strategy.  It may be a de facto existing strategy that we need to improve as we seek to maintain historic low interest rates in the face of still high levels of liquidity, and the crowding out effects of ongoing debt growth.

In the increasingly cited words of then Obama Administration Chief of Staff Rahm Emmanuel: “Never let a serious crisis go to waste.  It’s an opportunity to do things you think you could not do before” – we need to find some silver linings to the default, near-default cloud cover.  In light of the typical immense difficulty cutting government programs, the default fear is a key opportunity to seize no matter what someone’s political preferences are.  Even seekers of significant government expansions, such as single payer health care, can find programs worth cutting, if only to eliminate future competition for the new government programs they want.  Well-developed rationales that will resonate in a crisis need to be crafted well in advance of a crisis.  That comes back to the need to assess and rank programs in terms of core government functions such as defense and justice, and secondarily, in terms of economic efficiency.

Pressure to raise taxes should be tempered by Hauser’s Law that basically says that it is very difficult for the Federal Government to collect more than 20% of GDP.  I attribute Hauser’s observation to our de facto narrow federal income tax base.  When marginal tax rates were high enough to qualify as borderline confiscatory – until 1986 – there was a lot of tax avoidance, especially by the wealthy; also, maybe more evasion than we believe.  Then we enacted the 1980s tax reforms that sharply lowered rates, and took a lot of people off the tax rolls.  We’ve so narrowed the income tax base to the relatively wealthy that the nearly half of total income earned by the bottom 80% of income earners accounts for less than 15% of income tax revenue.  87% of federal income tax revenue comes from the top 20% of income earners.  An actual or imminent debt-driven financial crisis may create an opportunity to reduce or adjust the progressivity of a tax structure that creates a seemingly dangerous political economic condition that may be a significant underlying cause of debt growth.  There is disagreement on the optimal degree of progressivity, but there can be no disagreement on the danger inherent in excusing a large share of the electorate from the fiscal costs of the increased government spending they can vote for.  As Candidate Romney said in the 2012 election campaign, “everyone needs to pay something,” and for efficiency, if not political expediency, everyone’s tax payments should vary with the amount the government spends.  Until the symptoms of the debt crisis are more widely seen, it will be politically difficult to increase the tax burden of lowest income Americans; so that everyone pays something.  But likewise, it will be difficult to increase revenue just by increasing the rates applied to already-heavily-taxed, higher income taxpayers.

 

7. Summary and Concluding Remarks

Clearly, all possible avenues for avoiding or coping with a fiscal and/or financial crisis need to be fully explored for possible deployment on short notice.  Especially, the real (as opposed to ‘just’ political[7]) consequences of spending cuts need to well-documented before we see strong pressure for huge cuts; sadly, something not yet evident.

Download this Post

References

Brandus, P.  2017.  “Opinion: Trump’s intriguing idea, cut debt by selling off federal assets,” MarketWatch: http://www.marketwatch.com/story/trumps-intriguing-idea-cut-debt-by-selling-off-federal-assets-2017-03-28.

Federal Real Property Council.  2006.  FY 2005 Federal Real Property Report: An Overview of the U.S. Federal Government’s Real Property Assets, June.

https://www.gsa.gov/portal/mediaId/198883/fileName/2005_FRPP_Data_Dictionary_July_2005.action

Leeson, Peter T. and Zachary Gochenaur.  2015.  “The Economic Effects of International Labor Mobility,” in: Powell, Benjamin (ed.).  The Economics of Immigration, New York: Oxford University Press.

Nowrasteh, Alex.  2015.  “The Fiscal Effect of Immigration,” in: Powell, Benjamin (ed.).  The Economics of Immigration, New York: Oxford University Press.

Merrifield, J., and B Poulson. 2017a. Restoring America’s Fiscal Constitution.  Lanham, MD: Lexington Press.

Merrifield, J., and B Poulson. 2017b. Can a New Homestead Act Solve the Debt Crisis?, American Spectator, May 31.

Shughart, W., and C. Close. 2017. Liquidating federal assets: a promising tool for ending the debt crisis, Executive Summary, Independent Institute.

http://www.independent.org/publications/article.asp?id=9008

Vedder, Richard K.  2015.  “Immigration Reform: A Modest Proposal,” in: Powell, Benjamin (ed.).  The Economics of Immigration, New York: Oxford University Press.

Wadhwa, Vivek and Saxenian, AnnaLee and Rissing, Ben A. and Gereffi, G.  2008.  Skilled Immigration and Economic Growth.  Available at SSRN: https://ssrn.com/abstract=1141190

Wall Street Journal. 2017.  Rebuilding Plan Shifts Burden to States, Saturday/Sunday September 2-3, p. A2.

[1] Most years, the national debt increases by much more than the difference between planned spending and expected revenues.

[2] The Carbon Tax Laffer Curve peak may be below the amount generated by income taxation, and generally the tax rate that delivers the most revenue is above the most efficient (MB = MC) rate.

[3] See this article to get a solid feel for the difficulty cutting spending, even in a declared fiscal crisis, and to see how the absence of a firm limit on spending, combined with disagreement on priorities, yields increased spending:  https://www.theatlantic.com/politics/archive/2018/02/trump-budget-congress/553085/

[4] Based on very old geological surveys; need updating.

[5] For example, battery technology is improving significantly.  A breakthrough would greatly improve the competitiveness of renewables such as wind and solar.

[6] For example, https://www.heritage.org/sites/default/files/2018-06/BlueprintforBalance_2018.pdf and http://www.crfb.org/blogs/sen-rand-paul-proposes-500b-annual-spending-cuts

[7] For example, USDOEd cuts would be politically difficult even though there is no evidence of aggregate academic progress because of federal education spending, and states could assume the cost of specific programs deemed effective.

Federal Fiscal Overview

4 thoughts on “Federal Fiscal Overview

  • Avatar
    December 14, 2018 at 11:10 AM
    Permalink

    This chapter-to-be is the necessary starting point for the matters to be addressed in this book. It is great work. I suggest a small addition in relations to the following excerpt: “Note that we don’t accept the conventional wisdom that only the debt owed to the public matters. The Total U.S. Debt to GDP ratio is already over 100%; about 30 percentage points above Debt/GDP counting only debt held by the public. Interest must be paid on 100% of the debt. That’s a key reason why the debt problem is likely much more than a burden on future generations.” This observation is spot on. Accordingly it might be worth teasing this out a bit. This could be done by noting the intricate relationship between the intragovernmental debt and the debt held by the public in two ways. First, the declining balances in the Social Security and Medicare trust funds are serving to deprive the Treasury of a source of funds to finance the debt relative to recent years. This puts greater pressure on the public to put up the necessary funds to finance the debt. Second, the two trust funds are projected to become insolvent in the not-too-distant future. It is likely this will lead to a reversal in the relationship between the trust funds and the Treasury, where the trust funds will become borrowers from the Treasury as opposed to lenders to the Treasury. This will exacerbate the debt problem. Given the potential scope of such lending by the Treasury, I would go so far as to say that the projected insolvency of these two trust funds could drag down the financial position of the Treasury with them. Admittedly, this is based on where the Treasury is now regarding the financing of the debt. Nonetheless, the Social Security and Medicare programs pose a deadly financial threat to the federal government as a whole.

    Reply
    • John Merrifield
      December 21, 2018 at 12:21 PM
      Permalink

      The tease out might not fit in an intro chapter. I will work to include that in Phase 2 of the Friedman Project.

      Reply
  • Avatar
    February 27, 2019 at 4:42 PM
    Permalink

    John,
    Your paper gives a good overview of the issues to be considered. I wish to contribute the following questions and (hopefully) constructive feedback:
    Could you provide a brief summary of the dynamic simulation model you refer to? Or perhaps an appendix on methodology? For the reader who hasn’t read your book.
    The comprehension of the comparison of calculations would be aided by the presentation of the data via a table.
    You mention default as a major risk. You do not address what you mean by default. It would be quite unusual to expect the U.S. which prints its own legal tender currency (that also happens to be the world’s primary reserve currency) to default in any sense akin to Greece. Default by inflation is the more plausible alternative. A discussion of what kind of default you mean would be helpful.
    You write “Note that we don’t accept the conventional wisdom that only the debt owed to the public matters. ” Could you explain why you reject this standard economic assumption that it’s the publicly held debt matters for economic analysis?
    You suggest “Had we adopted the Swiss Debt Brake-like, Merrifield-Poulson (MP) fiscal rule in 1993…”things would be very different today. Could you briefly describe this rule. Again, for the reader of your paper who has not read your book.
    In your economic growth section, do you account for the fact that Social Security and health care grow in near lock-step with growth? That would factor into the feasibility of that method of improving the fiscal outlook and is something that is often missed in theoretical exercises.
    In your immigration section, could you articulate how immigration would aid growth and the fiscal outlook? Does the composition of the immigration pool matter?
    You could also be clearer whether sections on immigration, trade etc. reflect model assumptions or are additional considerations that go beyond what the model factors in.
    Thank you for your contribution to this important issue.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.