Enough with the sequester, let’s talk about the long-term

On March 1st, the Obama administration will be forced to institute an $85 billion across-the-board cut to spending on military and domestic programs in the United States. This cut is the result of the summer 2011 standoff over raising the debt limit. Like the debt limit and the fiscal cliff before it, the sequester is only a problem because Washington made it a problem – there is no reason that spending should have to fall immediately other than politicians said it must happen. It’s certainly not because the bond markets think the government is in trouble: as of the time this article was written, two- and five-year US Treasuries have a yield of less than 1%. That means that investors and other nations are essentially paying the United States to keep their money safe for the next few years once inflation is factored in. 

So the market isn’t freaking out about our debt and deficits now. That’s not to say that the bond vigilantes might not come out and demand higher rates over the next few years, right? That would seem likely if it appeared that the United States’s fiscal situation was getting worse, but according to the latest report from the non-partisan Congressional Budget Office, it seems that deficits are going to become less of a problem over the next few years:

With revenues expected to rise more rapidly than spending in the next few years under current law, the deficit is projected to dip as low as 2.4 percent of GDP by 2015. In later years, however, projected deficits rise steadily, reaching almost 4 percent of GDP in 2023. 

Essentially, this means that we don’t really need to worry about the deficit for the next decade because, as a percentage of gross domestic product, the debt will be remain roughly where it is today. In other words, compared to the economy as a whole, the debt will stay relatively the same size. To better illustrate this point, here’s a graph from the CBO report showing the debt as a percentage of gross domestic product over the last 70 years and the projected debt through the net decade:

Screen Shot 2013 02 25 at 1 47 04 PM

So what should policymakers focus on over the next decade? According to the CBO, the most pressing issue in the coming decades is going to be our aging population and the effect that will have on entitlement spending:

After 2017, if current laws remain in place, outlays will start growing again as a percentage of GDP. The aging of the population, increasing health care costs, and a significant expansion of eligibility for federal subsidies for health insurance will substantially boost spending for Social Security and for major health care programs relative to the size of the economy.

Anyone who has even a slight interest in politics knows that entitlement spending is one of the touchiest subjects in Washington and has been for decades. Any attempt by either Republicans or Democrats to make Medicare and Social Security more fiscally sound is met with hyperbolic criticism. With that said, some plans hurt recipients more than others: raising the eligibility age of Medicare from 65 to 67 would cost patients twice as much as it would save the government, for instance. The safest bet seems to be the fabled “balanced approach” put forward by those on the left and in the center of the political spectrum: use spending more effectively so as to minimize the pain felt by those who rely on the safety net to get by, and increase revenue via closing tax loopholes and raising the percentage of earnings subject to tax to historical levels. Back in early January, Henry J. Aaron wrote a piece for The Atlantic proposing policies that would do just that, including:

  • Boosting the payroll tax rate from 6.2 to 7 percent
  • Taxing currently-exempt cash compensation
  • Raising the cap on earnings that are exempt from the payroll tax (in 2012, payroll taxes were only applied to incomes under $110,100)
  • Reducing benefits for high earners who claim them early
  • Replace Medicare Advantage plans with a more affordable and more efficient “super-Medicare” with slightly higher premiums for those who want more benefits
  • Spending more money to police Medicare fraud
  • Raising the Medicare eligibility age to 67 once the Affordable Care Act is fully implemented in 2014

Any combination of these policies would have a major impact on the long-term budget while causing as little pain as possible on either those who rely on Medicare and Social Security and the tax payers paying for them. Implementing them would reduce government spending by trillions of dollars over the next several decades while preserving the safety net Americans have come to expect from their government.

Update: This article has also been syndicated over at A New Take. The edits they’ve done make it look much nicer, so go check it out!

The Case for a Higher Gasoline Tax

The Case for a Higher Gasoline Tax – NYTimes.com:

THE average price of gasoline in the United States, $3.78 on Thursday, has been steadily climbing for more than a month and is approaching the three previous post-recession peaks, in May 2011 and in April and September of last year.

But if our goal is to get Americans to drive less and use more fuel-efficient vehicles, and to reduce air pollution and the emission of greenhouse gases, gas prices need to be even higher. The current federal gasoline tax, 18.4 cents a gallon, has been essentially stable since 1993; in inflation-adjusted terms, it’s fallen by 40 percent since then.

While I do think that the gasoline tax should go up over time, I also agree with Obama’s decision to focus on improving mileage standards was a smart one. Think about the millions of people living in small towns or rural areas where even a bus route just isn’t feasible. You’re increasing their burden without them getting any of the benefits. You could say that everyone benefits from slowing climate change, but people have a hard time putting a monetary value on something that abstract and that far into the future. 

German manufacturing workers make fifty percent more per hour than those in the U.S.

german manufacturing bmw

The Atlantic:

The conventional wisdom among some observers of the U.S. economy is that manufacturing can’t compete with low-cost labor in China. Germany has shown this viewpoint to be utter rubbish. One study by the US Bureau of Labor Statistics found that hourly manufacturing compensation (wages plus benefits) was $48 in Germany and only $32 in the United States (that study was for all manufacturing workers, not just those in SMEs, but Germany’s manufacturing workers in SMEs make comparable wages to those working for their large corporations).

It’s possible to have a thriving manufacturing sector and have great pay and provide real benefits to workers and still compete with China. Germany proves it. So why don’t we?

Denmark spends 4% of their GDP on job training and support – the same as the U.S. does on the military – while the United States spends only 0.7%.

denmark government flag

Steven Hill:

But Germany’s vocational training isn’t top of the class by European standards. That prize goes to Denmark. Over four percent of Danish gross domestic product is spent on job training and support — about the same percentage the U.S. spends on its military budget while allotting a mere 0.7 percent to job retraining and support. And Danes have job placement down to a quasi-science. Experts prepare what is known as a “bottleneck analysis,” using pollsters to survey employers on what jobs they will need in coming years. The feedback is then used to identify the next labor shortages and to pick the correct training courses for individuals. One Danish jobs analyst said, “In our system, we can make supply and demand match,” an impressive boast that shows a proactive government can help a flexible labor market.

If our politicians valued the American worker as much as they value the military-industrial complex, we’d be much better prepared for the kinds of jobs that are going to be needed in the coming decades.

Let’s switch from gasoline to natural gas

The Second Coming | Foreign Policy:

Compressed-natural-gas vehicles and electric vehicles — one-third of U.S. electricity is currently generated from natural gas — are slowly making their way into the marketplace. But battery-powered cars remain prohibitively expensive for most car buyers. A natural gas-derived liquid fuel called methanol (wood alcohol), however, is both substantially less expensive than gasoline on a per-mile basis and very cheap to enable on the vehicle side — roughly $100 extra per new car.

Essentially, all that is needed for a regular car to be a flexible-fuel car are a fuel sensor and a corrosion-resistant fuel line. In some provinces of China, where methanol is made primarily from coal, this alcohol is sold at numerous fuel stations. This logic is one thing even Iran and Israel can agree on: Both natural gas-rich countries have plans to begin selling methanol-based fuel at gas stations.

I believe that the transition from fossil fuels to renewable energy is going to be a very incremental process. The infrastructure just isn’t there to switch from coal and natural gas to solar and wind and the myriad other renewable options in even a few years. Washington isn’t willing to spend the money to make it happen faster. If we can switch from gasoline to natural gas-based methanol in a few years and save drivers money at the pump and not have to subsidize anything, I’m willing to accept not reducing carbon as quickly as we’d like.

The GOP doesn’t support policies that help struggling Americans

The minimum wage and the doom of the GOP.:

One thing Republicans could do in response to President Obama’s popular plan to help economically struggling Americans is say “yes” and vote for it. But obviously they won’t do that.

So something else they could do is take up one of several alternative policies that economists tend to like better. They could embrace a larger Earned Income Tax Credit. They could embrace a Guaranteed Basic Income. They could target their assistance at families with a bigger refundable child tax credit. But they’re not going to do any of those things either. Nor are they going to say that the real solution is expansionary monetary policy to create tight labor markets and the chance for workers to obtain higher market wages without government intervention. They’re just going to offer nothing, until at some point Democrats have enough seats to pass the minimum wage hike or a handful of Republicans defect and join them.

There are many policies that the GOP could support that would help your average American struggling through these hard economic times and fit within the Republican modus operandi of always lowering taxes. They choose not to pursue enacting them.

Further evidence that Marco Rubio is a scumbag

From Rubio’s response to the State of the Union:

One must ask whether we will still be a free enterprise nation and whether we will still have economic freedom. America is on the cusp of having a government-run economy. President Obama is transforming America into something very different than the land of the free and the land of opportunity.

What evidence could Rubio possibly have to back up this claim? Oh right, he doesn’t have any. This is a bulls— claim meant to rile up Tea Partiers who want to “take back this country” (maybe even redeem it?) from the Muslim Kenyan socialist with fascist tendencies. 

How anyone takes the GOP seriously is beyond me.

Marco Rubio is either a liar or a dolt

This is either a gross misunderstanding of how the debt and deficits work or a gross misrepresentation of those concepts.

Here’s how this really works:

Revenue – spending = net income

If net income is positive, we have a surplus. If net income is negative, we have a deficit. 

Old debt – net income = new debt

So if you have a surplus, you subtract a positive number from the debt and get a new, smaller debt. If you have a deficit, you subtract a negative number from the debt, thus getting a new, larger debt.

Let’s put some numbers behind this to make it clear. You have a government spending $6 a year, and taking in $3 a year in revenue. The government has a debt of $10.

$3 (revenue) – $6 (spending) = -$3 (net income)

We have a deficit of $3 this year.

$10 (old debt) – (-$3) (net income) = $13 (new debt)

The debt is now $13.

Next year, this government passes a bill raising tax rates, but they also increase spending. Now, revenue is at $5 and spending is at $7.

$5 (revenue) – $7 (spending) = -$2

The deficit has fallen to $2 this year.

$13 (old debt) – (-$2) (net income) = $15

The debt is now $15. 

As you can see, it’s most certainly possible to increase taxes and spending and decrease the deficit, as long as the tax increase is larger than the spending increase. (I won’t get into whether or not that’s a good idea because that depends entirely on the specifics of what taxes and spending we’re talking about.) To claim that a package isn’t reducing the deficit because the debt gets bigger is either a sign of ignorance or deceit.

United States posts $3 billion budget surplus in January

U.S. posts $3 billion budget surplus for January | Reuters:

The budget registered a $3 billion surplus, the first time there had been a surplus in January since 2008, Treasury Department data showed on Tuesday. Economists had been looking for a $2 billion gap. The surplus compared with a $27 billion deficit in January 2012.

It appeared the Treasury got a boost from the expiration of a payroll tax reduction on January 1 following the last-minute “fiscal cliff” deal. In its estimate last week, the Congressional Budget Office said the Treasury got an extra $9 billion in taxes from the expiry.

The January surplus means the government’s cumulative deficit for the fiscal year, which starts in October, is $290 billion, 17 percent lower than the comparable first four months of fiscal 2012.

Taxes go up, revenues go up, deficit goes down. 

CBO: Government austerity has hurt the economy

gap between gdp and potential gdp

Austerity Has Harmed The Economy According To CBO | TPMDC:

In other words, intentional efforts to reduce annual deficits and stabilize the debt are working. But if you retrain your gaze from the government’s balance sheet to the real economy, you’ll see the impact of that austerity is fewer people working and slower growth. According to CBO, the recovery won’t really pick up steam until next year, and the economy won’t have recovered until the end of 2017, when it will reach its output potential, and unemployment will fall to 5.5 percent.

Austerity does not work. Austerity hurts the economy. Duh.

At least Obama gets to say he accomplished a campaign promise:

The report does contain a thin silver lining for President Obama, who pledged in his 2008 campaign to halve the deficit in his first term.

“At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion; and at 5.3 percent of GDP, it would be only about half as large, relative to the size of the economy, as the deficit was in 2009,” if current laws don’t change, according to CBO.

This isn’t a real victory. A real win for Obama would have been getting unemployment down below 7% during his first term and fixing the long-term deficit via adjustments to Social Security and Medicare.