The View from Right Field

Cutting Taxes and Raising Spending Is Amazing – Until It Isn’t

What the United States is doing is amazing.  We are both cutting taxes and raising spending while the economy is growing and the federal deficit is already $500 billion.  This will raise the deficit to more than $1 trillion a year (did I say, “while the economy is growing”?).  And it looks like we might get away with it.  It’s amazing.

Other countries couldn’t do this.¹  But when you are big enough and you can print your own money,² you can get away with things little countries can’t.  If other countries tried to do what we are doing, they would soon find that nobody would lend them money and that, if they tried to just print more money, people would refuse to accept their money to pay for things (see, for example, Zimbabwe and, now, Venezuela).

Illinois Needs Another Richard Ogilvie – And a Paul Simon, Too

First, a little history for people who may not remember Richard Ogilvie (other than being the guy for whom the Metra train station in downtown Chicago is named) or who think Paul Simon is the guy who used to sing with Art Garfunkel.

Richard Ogilvie was a Republican who was elected sheriff of Cook County in 1962 and then County Board President four years later.  (A Republican getting elected countywide in Cook County?  Yes, it used to happen – a long, long time ago.)  Then in 1968, Dick Ogilvie was elected governor. 

In 1969, Governor Ogilvie proposed, and the state legislature passed, Illinois’s first income tax.¹  The rate was 2.5% on individuals and 4% on corporations², and it went into effect July 1, 1969.  Perhaps not surprisingly, the tax was not popular with at least some voters, and Governor Ogilvie was defeated when he ran for reelection in 1972.³  Still Governor Ogilvie thought it was the right thing to do, so he did it, even though he knew it meant he might not get reelected.

Paul Simon might have been even better.  He was a Democrat, and in 1968, he was elected Lieutenant Governor.  It was the only time a governor and lieutenant governor of different parties were elected in Illinois.  (The Illinois constitution has since been amended to require prevent it from happening again.)

The Department of Defense Is Our Ultimate Safety Net

The Chicago Tribune reported yesterday on the budget proposal by House Republicans for the federal government’s fiscal year budget 2016, which starts October 1, 2015:

“House Republicans released a 2016 spending blueprint Tuesday that seeks to fulfill the GOP goal of balancing the budget in 10 years, but does so by slashing Medicare and other safety net programs while dramatically boosting military spending.”

While there are lots of problems with this sentence (see the footnote below), I want to focus on the most important, which is a point that I have made many times before (here, here, and here): The first job of the federal government is to defend the United States.  The preamble of the Constitution makes that clear:

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.” (emphasis added)

Balancing Budgets. Paying Off Debt. It Can Be Done.

New Zealand has an election coming up this Saturday.  Given the way the United States (and Illinois) spends money, I thought this political ad from the National Party* was interesting:

  

Look again at the first two promises in National’s economic plan: 

“One, we’ll live within our means.
Two, we’ll start paying off debt.”

And the amazing thing is they mean it.  In the early 1990s New Zealand’s gross government debt as a percentage of GDP was around 60%, slightly less than the United States.  By 2007, under both National and Labour-led governments, the level was cut to 20%.  Due to the global economic crisis, debt levels increased back above 30% since 2008** (here and here), but the government is projecting a slight surplus in the current fiscal year and actually paying down debt thereafter (here and here).

It’s amazing.  It shows what a country can do when it wants to, both its voters and its politicians.  Unfortunately, it seems that the United States (and Illinois) has neither the politicians nor the voters who care about this.

One final point:  New Zealand is a small country.  (It has slightly fewer people than Louisiana)  If it needs money, it has to borrow it.  It can’t just print money.  Actually, I suppose it could print money, but after a very short while who would take New Zealand’s money to buy things from overseas?  A small country in a global economy has to run a sound economic policy and a sound budget.  At some point, it will be necessary for the United States (and Illinois) to do the same.  The longer we wait to start to get our budgets in shape, the harder – and more painful – it will be when we finally have to do it.
----------
* The National Party is currently heading up a center-right coalition in New Zealand.  New Zealand has a mixed-member proportional representation system very similar to Germany’s.  The result is that almost all governments are coalitions.

** Comparable figures for the United Sates would be a little over 60% in 2007 and 100% today (here and here).

The Ryan-Murray Budget Deal

Two thoughts on the Paul Ryan-Patty Murray budget deal.  First, as The Wall Street Journal said this morning, the deal isn’t good; there are all kinds of problems with it.  But it is the “least bad agreement” available.  The alternative would probably be another government shutdown, and Republicans do not need another circular firing squad, like we had last October.  Instead of the public focusing on Republicans shutting down the government, this deal gives us a chance to focus their attention on the inability of the Obama administration to run the government we currently have while at the same time trying to make it bigger.

Second, the only way this deal was done was that President Obama was not involved.  Given that the deal can probably only pass the House with lots of Democratic votes, Speaker Boehner couldn't be involved.  But President Obama could have been involved – except, of course, that he couldn’t.  If this deal had depended on the President’s bargaining skills and ability to negotiate, it wouldn’t have happened.  The President doesn’t seem to be able to handle people disagreeing with him, at least without belittling them and impugning their motives.  The reason this deal got done was the he wasn’t involved.
----------
UPDATE (12/11/13 10:20 pm): I corrected Senator Murray's first name.  I apologize for the error.

How Much Can We Ask Our Children to Pay?

Social Security has always been an inter-generational transfer program.  Workers pay in, and the money is promptly turned around and sent out to people who have retired.  At one point, when the ratio of workers to retirees was high, more money came in than went out.  No longer.  Now, with relatively fewer workers and relatively more retirees, more money is going out than is coming in.  That trend is going to continue, and the difference between the amount going out and the amount coming in will increase.*  When the Social Security Trust Fund is exhausted (see the first footnote below), the federal government will have to figure out some other way to get money from workers to pay retirees – and retirees will make sure they do.

Obamacare is another inter-generational transfer program.  In fact, it is designed as that.  Younger, healthier people are required to buy insurance, at above-market rates, so older, less healthy people (whether workers or not) can buy insurance at below-market rates.**  (Here and here.)

Finally, there is the biggest inter-generational program: the deficit.  The huge deficits we are incurring today will have to be paid by our children tomorrow.  To the extent that the deficits are building for the future, then the young get a benefit from them.***  To the extent that they don’t do that and merely finance current consumption, then the young are being asked to pay the bills for what their parents wanted to buy and didn’t want to pay for.

At some point, we are going to have to ask:  How much should we ask the young to pay for the old, and how much should we ask the old to pay for themselves?
----------
* Some people say that this “deficit” between what Social Security is now paying out versus what it is taking in is not a problem because of all the surpluses that were collected in the past.  There is still a huge balance from past surpluses that won’t disappear for another twenty years.  Actually, the surpluses in the past were just lent to the federal government to spend on other things.  There is no special fund that has been set aside.  When Social Security needs more money to pay out benefits than it is collecting in taxes, which is the situation now, the federal government just goes out and borrows money and gives it to Social Security to pay to people.  (For a detailed post on Social Security, see here.)

** Obviously, there are younger people who are, because of health conditions, not paying above-market rates, and there are older workers in great health who are paying above-market rates for insurance.  But on average, the program is designed as an inter-generational transfer program:  Healthy young people pay for older, sicker people. 

     I understand that Obamacare is supposed to be financed, in part, by cuts to Medicare.  (Here and here.)  That would reduce the inter-generational transfer aspect of Obamacare.  It does not eliminate it, however, and it is unclear to me, from a political point of view, how many of those cuts will happen.

*** Examples would be the deficits that financed World War II and the end of the Cold War in the 1980s.  The spending in the ‘80s led to not only freedom for many countries, but also reduced defense spending in the ‘90s.

Shutdown Winners and Losers

The common wisdom on the government shutdown is that the Republicans lost and President Obama won.  I don’t disagree with the former.  The Republican loss was just about assured when they said their goal was to defund Obamacare.  That wasn’t going to happen, so they were going to look like they lost.

But did the Democrats really win?  I know the mainstream media said they did, but the media was going to say that almost no matter what.  In looking through some old Wall Street Journals, however, I found this article by Gerald Seib on October 8: “Democrats’ Goal: ‘Break the Fever’ Of Constant Crises.”*

“Breaking the fever is code for ending the cycle of recurring, last-minute crises over spending bills and increases in the nation's borrowing limit—the debt ceiling.  The White House believes these crises give outsize power to a minority of conservative House Republicans who don't have the strength to push their agenda into law but can, in a crisis, stop the action.

More important, Democrats are convinced they must break the cycle now, or see much of the Obama second-term agenda sink away.

‘The only way for us to go forward is to all make clear that the era of threatening default is over,’ Gene Sperling, head of the White House National Economic Council, said Monday at a breakfast organized by Politico.”

That didn’t happen.  The budget was only put off until January 15 and the debt ceiling until February (maybe March).  Not only that, but the sequester is still in place, with another installment coming January 1, and taxes did not go up.  That sounds more like something Republicans wanted than the Democrats.

As for getting Congress to move on to other things, such as immigration, the farm bill and corporate tax loopholes, like the President mentioned in his post-shutdown press conference, it is hard to see that happening.  Certainly, the President didn’t help himself when he trash talked the Republicans in his press conference: “You don’t like a particular policy or a particular president, then argue for your position.  Go out there and win an election.”  That’s not the way to get the other side to work with you.**

So, the Republicans clearly lost, but it doesn’t look to me like the President got what he wanted either.
----------
* This was the title in the print version.  The online title was different, as you can see.

** If the President wants to see how to reconcile with the other side, now that the national parks have re-opened, he might want to go out to Appomattox Court House National Historical Park (it’s only a short detour from Washington), and see how Ulysses S. Grant did it.  I also note that all of the Republicans in the House of Representatives are there because they won an election.

The Budget and the Debt: We Have to Do Something Now.

This post reprises some of the points I made a month ago, but it is important, so let me do it again.

The print edition of yesterday’s Chicago Tribune had an article entitled “U.S. debt details you may not know.”*  The article said “[t]he U.S. debt burden is starting to decline.  That’s right – it’s going down, not up.”  The article is right that the Congressional Budget Office projects that the amount of federal debt held by the public will go from 75% of gross domestic product, where it is today, to 71% of GDP by 2018.

What the article did not mention, however, is that 2018 is the low point.  After that, the percentage starts going up again.  The CBO projects the percentage will be back to 75% of GDP by 2023 and up to 100% by 2038.

The article also did not mention that the CBO projections are based on all current laws remaining in place.  That means the amount of the sequester will increase every year.  It means the cut in the Medicare reimbursement rate for doctors will actually be implemented, instead of being put off every year.  Without these (and more) staying in place, the CBO projects the debt could be close to 190% of GDP by 2038.

In other words, while the article was technically correct as to certain CBO projections, it was substantively misleading.  As CBO director Douglas Elmendorf has said, “The federal budget is on a course that cannot be sustained indefinitely.” 

The best time to start fixing the budget, and the debt, is now.  By making adjustments to entitlement and other programs now, we can give people time to plan for the future, instead of imposing huge cuts at the last minute.  That is what President Reagan and a divided Congress did in 1986.  That is what we need to do now.
------------
* I could not find it online.  That is just the way the Tribune is.

Is Ted Cruz a Democratic Mole?

Obviously, he isn’t, but the strategy (I use the word loosely) that he and his followers in Congress* have forced on the Republican Party couldn’t have helped the Democrats more than if it had been planned by the Democratic National Committee.  As Obamacare collapses around the Administration, what is America focusing on?  The inability of the House Republicans to agree on anything with respect to ending the government shutdown or increasing the national debt limit.

Ted Cruz claims he wants to get rid Obamacare.  But instead of letting the disaster that is Obamacare be the lead item on front pages across America, Senator Cruz decided to organize a circular firing squad for Republicans in Congress.

If Republicans lose control the House of Representatives in November of 2014 (something I did not think was possible until very recently), we will have Ted Cruz, et al, to thank for it.

One more thing.  I am getting tired of hearing Republicans in Congress demand that not only should Congressmen and certain of their staffers be forced to buy their health insurance on the new exchanges, but also they should lose the contribution that the federal government is currently making to the cost of that health insurance. 

I don’t know why certain Republicans can’t get it right, but here are the facts:  Before Obamacare kicked in, congressional staffers, like employees of most big companies, and like other federal employees, got their health insurance through work – and their employer paid part of the cost.  Obamacare changed this by requiring some congressional staffers, not all, to get their health insurance through the new exchanges. 

It may be fine to make Congressmen and certain staffers get their health insurance on the exchanges, but why should the federal government no longer pay the same part of the cost of their health insurance that it was paying before?

Should these staffers get a pay cut?  I ask because that is the effect of this position.  If that is what these Republicans want, then they should say it.  Don’t talk about special treatment – because that is phony.  Just say you want to Congressional staffers to get a pay cut.  Because that is what you are doing.
---------
* I almost said “his Tea Party followers in Congress”, but I didn’t because it would be unfair to most of the people who believe in Tea Party principles.  I do not believe they are as stupid as their followers in Congress. 

Solving the Shutdown – Assuming That Is the Goal

Many in the media (how is that for understatement) are blaming Republicans for the shutdown.  That is certainly true in that, if the Republicans had been willing to spend all of the money the Democrats want to, there would have been no shutdown.

In terms of PR, certain Republicans unfortunately forced this to be about more than government spending.  They decided to try to do things, like delaying the individual mandate under Obamacare for a year, that sound great to the die-hards, but look bad to the middle, and that aren’t going to happen.  The President and the Senate Democrats aren’t going to do this.  Demanding it just makes you look foolish.  (Note:  This is not John Boehner’s fault.  I very much doubt he wanted to make these demands, but I don’t think he had a choice.)  Focusing on Obamacare makes you look intransigent.  Focusing on spending would have made the Republicans look responsible.  But the crazy right wasn’t having it.

Still, the fact that some on the right are crazy, doesn’t mean some on the left aren’t looney.  It’s interesting to compare the President’s refusal to negotiate with Republicans on the need to increase the national debt with his excitement over being allowed to have a telephone conversation with the new Iranian president. 

Which gets to the point.  When it comes to the shutdown, if you want to figure out who is the main cause, look at who is benefitting from it.  Clearly, the mainstream media is blaming the Republicans.  Democrats seem to think it is helping them.  After meeting with the President on Monday, former White House Press Secretary Robert Gibbs said the President should “sit back and watch.”

As it did with the sequester, the Administration seems to trying to make things worse than they need to be.  In 1995 Bill Clinton didn’t shut down the Lincoln Memorial.  Barack Obama did.  It appears the Administration has more people working to keep the World War II memorial closed that it had keeping it open.

The bottom line, in my opinion, is that if John Boehner thought he had somebody to negotiate with, he would.  Remember: When President Obama was threatening to attack Syria, both John Boehner and Eric Cantor came out in support of the President right away.  But President Obama seems to think he is better off winning, as opposed to negotiating.  While it is unfair to attribute the thoughts of a blogger to a President, one wonders if the President is thinking along the lines of Andrew Sullivan:

“This time, the elephant must go down.  And if possible, it must be so wounded it does not get up for a long time to come.”