"Deficits and Debt Limit Options"

Sydney M. Williams

swtotd.blogspot.com

Thought of the Day

“Deficits and Debt Limit Options”

September 18, 2017

“The purpose of government is to enable the people of a nation to live in safety

and happiness. Government exists for the interests of the governed, not for the governors.”

                                                                                                Thomas Jefferson (1743-1826)

A recent front-page article in The New York Times dealt with the fate of yellow-cab drivers in New York. The reporter, Winnie Hu, provided a heart-breaking look at those (mostly immigrants) who bought medallions at high prices before Uber and others entered the market, and who are now suffering from fewer riders and lower prices for medallions. She did not write of the role government played, in limiting the number of medallions, which artificially inflated their price and which helped cause the upsurge in unconventional competition. She did not write of creative destruction, where new technology drives out the old, and without which our economy and productivity would stagnate. And, she did not point out the options consumers now have – more competition and greater flexibility.

Governments are facing financial crises. Debt is high, and growing. Deficits are expanding. Yet, our infrastructure needs repair and/or replacement, and our defense needs are not being met. Eleemosynary institutions that rely on government support are facing hard times. There are many reasons for this situation, but the gist is that unionized government workers, entitlements, and the bureaucracies to support them, limit options. Mandatory spending on welfare programs has risen inexorably. Union demands, especially at the state and local levels are untenable. Revenues have not kept pace. The solution lies not in more taxes, but in more robust economic growth.

Demographics add to the problem. As a nation, we are aging. In 2015, 15% of the population was 65 and older, up about three percentage points from 2000. In 2030, that number, according to the U.S. Census Bureau, is expected to be 21%. At the same time, the working-age population (18 to 64) is expected to decline from 62% to 58%. In other words, demands on government for retirement and health benefits will increase, while the number of working taxpayers decreases.

We can persist along the current path: borrowing more heavily, increasing taxes, and cutting “discretionary” spending, while increasing deficits and debt. Or we can try to extricate ourselves by changing direction: We can rein in mandatory spending (i.e. entitlements), temper union demands and employ tax and regulatory reform to let the economy grow more quickly.

We don’t need so-called “budget-neutral” tax cuts. We need tax cuts that spur economic growth – simplification and lower nominal rates. While The New York Times contemptuously decried Mr. Trump’s tax reform proposal, saying it favors the wealthy, they were disingenuous. He does want to cut corporate tax rates from 35% to 15%. He also does want to cut personal income tax rates, including those for the top brackets. But he has recommended disallowing many deductions, such as state and local income taxes – a favorite of coastal liberals. The Times knows this, and they know that that would negatively impact their wealthy and elitist readership. A million-dollar wage earner in New York City would lose $127,000 in tax deductions. A California resident, with the same income, would lose $133,000 in tax deductions. Their objections have nothing to do with equality or fairness. Their objections are self-serving. There is, though, a hitch on the President’s proposal – ironically, one noted by conservatives, not liberals. What, for example, would prevent the very wealthy from declaring themselves one-person S-Corporations, so to qualify as a corporate taxpayer? Congress needs to ensure that mom-and-pop businesses can benefit, without the system being abused by “big-bucks” earners in high-income-tax state venues – individuals who can afford high-priced lawyers and accountants.

As for regulatory reform, President Trump has made a good start. He has unwound many of the regulations President Obama imposed on the economy through executive actions. But more needs to be done.  We need regulations, but, when they serve the bureaucrats who administer them (providing assured employment at good wages) at the expense of the people and economic growth, they must be removed or relaxed.

Over the past decade, the good news is that we did not go into depression, as some feared in the wake of the credit debacle of 2007-2009. The bad news is that economic growth, coming out of recession, was the slowest in recent history. When President Obama assumed the Presidency in early 2009, one of the first decisions he made was to form a bi-partisan commission to recommend fiscal stimulus. The Simpson-Bowles Commission was formed in 2010 and reported back about a year later. Their recommendations were ignored by the President and Congress. Tax and regulatory reform were not to be. So, the only game in town became the Federal Reserve, which cut Fed Fund rates to zero, and then instituted a program of repurchasing government and agency debt (quantitative easing) – which caused their balance sheet to expand more than four-fold, and which allowed long rates to remain historically low.

In many respects, the Fed’s actions succeeded: The recession did not deepen; in fact, it improved. The stock market went up three-fold from its bottom. Credit spreads tightened and commercial real-estate cap rates fell. But, we were left with double the national debt and artificially low interest rates, which mask debt’s true cost; GDP growth has been one full percentage point below historic levels. Workforce participation is at the lowest levels in forty years. Income inequality has risen. Wages are stagnant. Labor productivity, according to the Bureau of Labor Statistics, is less than one quarter of the average for the past 40 years. Identity politics have created the greatest societal division since the 1960s. And now the Fed must normalize interest rates and unwind its balance sheet. Rising rates will pressure an already extended budget.

Staying on the current glide, the Country faces reduced options. Slow economic growth reduces tax receipts. With mandatory items consuming ever-larger portions of the budget, spending cuts will have to continue to come from infrastructure, housing, science, the arts, foreign aid, the environment, and defense and homeland security. If we want to keep our options open, we will have to restore some semblance of financial order and increase economic growth. Else, deficits and debt will dictate options.

As Thomas Jefferson noted years ago, the purpose of government is to serve the needs of the people, to provide for their security and to ensure their happiness – not to provide cradle to grave care, and not to do those things we can do for ourselves. We are not the youthful nation we were then. We are mature and we are aging. But we are also the sole democratic guarantor of world peace, which means we need a strong military. Our aging population means there will be greater demand for healthcare and pension accounts. Technology and globalization bring enormous rewards, but they also bring competition and the challenge of “creative destruction.” We face risks, not only natural ones, but from terrorists and nations that would do us harm. Governments must be run in a fiscally responsible way, so that we will have options to confront threats and to assess opportunities when and wherever they occur.

"A Lesson in Government and Government Compassion"

Sydney M. Williams

30 Bokum Road – Apartment 314

Essex, CT 06426

Thought of the Day

“A Lesson in Government and Government Compassion”

August 7, 2017

“Practically all government attempts to redistribute wealth and income

tend to smother production incentives and lead toward general impoverishment.”

                                                                                    Henry Hazlitt (1894-1993)

                                                                                    American journalist of economics and business

This is a primer, written as a reminder to myself as much as for readers. With our government grown large and complex, with demands placed on it that were never envisioned by the Founders, with its purpose enshrouded in a miasma of social demands and political correctness, and with its being used by those who enrich themselves at the expense of the needy, it seemed appropriate to recall its original intent, and to acknowledge that, from a perspective of government largesse, wealth must precede compassion.

Without government, anarchy would reign, chaos would ensue and the strongest would rule. So, government is necessary for man to survive, at least civilly. The question has always been – what form of government best serves man? Winston Churchill, a sometime satirical critic of democracy (“The best argument against democracy is a five-minute conversation with the average voter”), nevertheless admitted it was the best form of government yet devised. Most would agree. Additionally (and concomitantly), we should remind ourselves that private economic growth is a necessary prelude to public compassion.

Most people are, and have been, ruled by authoritarians: royalty, military or civilian dictatorships, religious leaders, a cabal of strong men, or an oligarchy of the wealthy. Examples today would include North Korea, Syria, Iran, Uganda and Venezuela. China and Russia restrict the rights of their citizens. (Incidentally, the leaders of three of those countries – Russia, North Korea and Syria – show up on a list of the world’s richest political leaders.) The origins of these governments lie in the military like Uganda, religion like Iran, or socialism like Venezuela. China and Russia came to be despotic regimes by way of revolution against imperial powers. But, unlike ours, their revolutions devolved into even harsher regimes. The consequence for their peoples: the murder of millions of their citizens, deprivation of human rights, unequal opportunities, sustained poverty, and no desire to provide adequately for their people. While both have emerged from the worst of their self-inflicted atrocities, both have recently reverted to authoritarian ways.    

In democracies, where the fortunate among us live, the essential purpose of government is twofold: To keep its citizens safe against threats from home and abroad, and to assure that its citizens’ civil rights are not abrogated. Compassion in government, a common expectancy today, can only be achieved with sustained economic growth. President George W. Bush once said, “The major role of government is to create an environment where people take risks to expand the job rate in the United States.” A belief in, and encouragement of, free market capitalism is necessary to attain the things we today want government to do: to care for the indigent, the aged, the infirm, to provide healthcare for all, to educate our youth and to protect the environment. A nation may be rich in resources, as is ours, but without the rule of law and without a legal framework that allows people to own private property those resources may sit idle. One has only to look at nations like Venezuela, Argentina, Nigeria and Rwanda – poor countries with abundant resources. A successful nation needs a freely elected government, along with men and women who are entrepreneurial, aspirant, creative and willing to take risk, those who see opportunity and exploit it. Government should act as referee: assure fairness, protect the innocent, see that laws are upheld, and prevent the willful destruction of resources for short term gain. It should not be the arbiter of who becomes successful.

To accomplish this, a successful nation must make available a basic education, and it must strive to provide equal opportunities for all. As a country becomes powerful and wealthy, demands on its resources intensify. That is unsurprising. A free and independent nation, grown rich because of adherence to the principles of free-market capitalism, can afford to be compassionate. But it must be careful lest it slay the goose that lays the golden eggs. Without wealth created through private enterprise, compassion becomes empty promises – wind puddings with air sauce, as my mother-in-law used to say.

To achieve the goal of a representative republic and to avoid the tendency of man to accrue power, the Founders established a government in which leverage was diffused – a separation of control – a legislative branch to create laws, an executive branch to implement them, and a judicial branch to adjudicate them.

As we recall that history, we should not forget what the Founders did not promise: equality of outcomes, the promotion of gender studies, health care, the protection of our rivers and forests, etc. They had little idea of the of how big, rich and complex the United States would become. They had no inkling of labor-saving devices that would be forthcoming, from cars to washing machines to telephones. They realized that people are not all the same. They knew they were not creating Nirvana, but I like to think they would approve of the charity and humanity that are central to today’s citizens and government. However, I also like to think that they believed we should live within our means, and that we should not derail the engine of economic growth, which has brought so much good to so many.

There is a reason that immigrants seek our shores – we are a land of opportunity. We are a place where hard work and ability provide awards, where gains made legally cannot be confiscated, where the right to speak out, to protest, to practice one’s religion are not inhibited, where, if accused of a crime, a jury of one’s peers determine one’s guilt or innocence, where discrimination is not absent, but not so prevalent as in those countries where it is exercised by government. The people must ensure those principles are never reneged.

As well, as charitable people we should strive to do what we can to help those in need, regardless of what government does; though our government does and should play a role. But the promise of equal outcomes is nothing more than an empty campaign pledge – a promise that what is Sally’s will be given to Harry. Such policies do not recognize inherent differences in people: Some are stronger; others are smarter. Some have high aspirations; others are content to be followers. Some work hard; others prefer personal pursuits. Some shun the material world for that of art, music or dance. Some of the most talented are willing to forego high incomes, so that they may teach others, attend their medical needs, or do research. We are a nation of doctors, plumbers, lawyers, electricians, artists, stockbrokers, storekeepers, actors and accountants. A marvel of our communities is that society’s needs get filled without government edict.

What should government do? Simplify the tax code, eliminate prohibitive regulation, reduce dependency, encourage personal responsibility, celebrate the dignity of work and motivate entrepreneurs. Let economic growth reach its potential. Let the next generations enjoy the fruits of democracy and free-market capitalism, as have we. Keep in mind, civil rights and economic freedom are inextricably entwined.

Here endeth the lesson.

"The President's Budget and Other People's Money"

Sydney M. Williams

swtotd.blogspot.com

Thought of the Day

“The President’s Budget and Other People’s Money”

March 27, 2017

“The proof of liberal virtue is generosity with other people’s money.”

                                                                                                            George Will (1941-)

                                                                                                            Political Commentator

Spending other people’s money dates back centuries. It was Aristotle who allegedly said, “Three groups spend other people’s money: children, thieves and politicians. All need supervision.” John Randolph, a Virginian planter and Congressman between 1799 and 1833, once wrote: “…that most delicious of all privileges – spending other people’s money.”

This attitude is common to both political parties, but more so for Democrats, the party of ‘big’ government, than Republicans. In his 2007 book “Who Really Cares: The Surprising Truth About Compassionate Conservativism,” Arthur Brooks noted that liberals are less likely to give to charity than conservatives, despite average incomes 6% higher. They claim to be generous, but with tax payers’ money – not their own.

Nobody denies the right of government’s need to spend. A nation must defend itself. It must ease commerce through roads, bridges, tunnels and ports. It educates its youth. It has a moral obligation to ensure the well-being of its poor, elderly and those unable to care for themselves. Citizens understand, so pay taxes…willingly in most cases. But politicians should keep in mind the enormity of the responsibility that is theirs, and remember they are servants to the people. They must acknowledge the labor that went into taxes paid, to treat the money they spend with respect. (Total government spending, including federal, state and local, represents about 36% of GDP.) In the modern welfare state, the line between capitalism and socialism has become blurred, reminding us of Margaret Thatcher’s wisdom: “The problem with socialism is that eventually you run out of other people’s money.”

The President’s recently submitted $1.065 trillion budget is a blueprint of where he would like the country to go. The 2018 budget proposed by Mr. Trump was limited to “discretionary” items. He did not address the 70% of the budget represented by mandatory spending, which includes Social Security, Medicare, Medicaid, unemployment compensation, earned income and child tax credits, SNAP and certain expenses in Defense, Agriculture, Education and Veterans Affairs – safety nets mislabeled “entitlements.” To place Mr. Trump’s 2018 proposal in perspective, President Obama’s 2016 budget totaled $4.1 trillion, of which $1.15 trillion (28%) was discretionary. If one included, as one should, interest expense of $283 billion as a mandatory item, then “true” discretionary spending represented just 21% of the 2016 budget – not a lot of wriggle room, when the goal is to increase defense spending (a discretionary expense) by ten percent.

To listen to howls coming from Democrats over Trump’s budget one would have thought he was the Grinch determined to starve and make homeless the poor and the elderly. President Trump’s proposal, as stated above, does not touch entitlements. It neither raises taxes nor increases the deficit. It keeps spending at the same level, diverting funds from the EPA, the State Department (USAID and Treasury International Programs), Agriculture, Labor and Commerce to Defense and Veteran’s Affairs.

As expected, reactions were hyperbolic.  Nancy Pelosi: “…President Trump has shown he does not value the future of children and working families.”  Senate Minority Leader Chuck Schumer: “Once again, the Trump Administration is showing its true colors: talk like a populist, but govern like a special interest zealot.”  Representative Jim Hines (D-CT): “…all kinds of pain will be felt around the country…”

On January 20, 2009, federal debt was $10.6 trillion. Eight years later, it was $19.9 trillion. In other words, Mr. Obama, during an eight-year stretch without a recession and with a stock market up 148%, almost doubled the national debt. The cost of this borrowing has been masked by eight years of artificially low interest rates, a situation that is only now changing. Higher interest rates will add to costs, pressuring deficits and debt. In the fiscal year ending last September, the deficit rose to $587 billion, the highest in five years. Despite favorable economic tail winds, Mr. Obama did not leave the nation in good fiscal shape.

These deficits, of course, do not include the unfunded liabilities of welfare programs, for which we, as taxpayers, have responsibility. Determining the absolute level is not easy; but estimates range, from an “official” $55 trillion up to $222 trillion. Whatever number is right, it is crushingly large.

Over the past eight years, we saw an increase in spending on social welfare programs, including the Affordable Care Act, yet poverty increased. During those years and keeping in mind that a nation’s first responsibility is to protect its citizens, we saw defense spending, as a percent of GDP, decline from 5.5% to 4.4%. And global tensions rose. Consider: Chinese aggression and Russian belligerence increased. Islamic extremism persists, and the Korean Peninsula gets more dangerous by the day. Iran has become more truculent. Ukraine has been invaded. Democracies in South Korea, Japan and Israel are vulnerable, as are the Baltic States and those within the reach of China. Time moves forward, but human nature remains unchanged.

You may dislike Trump the man. You may believe the cartoon caricature that the media has created. But you cannot deny the dilemma we face – that we are living beyond our means in a dangerous and fractious world. We need to increase spending on defense. And we must rein in the administrative state, and the unprecedented powers it has given to agencies like the EPA. Unnecessary regulations have sapped the vitality of our economy, the engine that allows us to live well, securely, and to do the good we want.

The President’s budget speaks to his desire to beef-up defense and provide better for veterans, but without raising taxes or incurring higher deficits. It addresses fraud and waste in agencies where funds have been cut. It does not touch entitlements. Despite the fear-mongering, it is, in fact, modest and perhaps a bit timid given the forces we face. We cannot dismiss the spreading of violence abroad as not being our problem, nor is it compassionate to provide false expectations as to benefits that we may never be able to afford. There are consequences to living beyond our means – increased deficits and higher taxes. The first will bring higher interest rates and, ultimately, a declining currency; the second will result in decreased liberties and impediments to economic growth.

If you think the howling is loud now, wait ‘til we tackle – as at some point we must – entitlements. However, there are things we can do now to ease the burden that will become our children’s: We can raise the age of eligibility for Social Security and Medicare. We can means-test. We can encourage savings for retirement and health care by granting larger exemptions. What we need are serious conversations and debates, not the Ostrich-like behavior of politicians who place their childish partisan bickering above needs of the nation; nor does it help when a sycophantic media puts loyalty to favored causes and friends above real news.