The economic shock from the shutdowns in response to the COVID-19 pandemic were unprecedented. Never had state governors imposed stay-at-home orders that cut people off from their lives and livelihoods. Those costly policies were bad enough, but then came historic increases in deficit spending and money creation.
While these may have been well-intentioned policies early on, their repercussions—amplified by misguided macroeconomic policy since January 2021—continue to plague many Americans. The antidote is pro-growth policies.
There was a vibrant economy on the eve of this shock. In fact, about three quarters of the flows of people into employment were Americans returning to the workforce—the highest on record.
For context, 2.3 million prime-age Americans—people between the ages of 25 and 54—returned to the labor force during Trump, after 1.6 million left during the Obama recovery. This happened with a robust private sector providing many opportunities because the Trump administration focused on removing barriers by getting the Tax Cuts and Jobs Act of 2017 through Congress and providing substantial, sensible deregulation.
We often hear that these tax cuts were “trickle-down economics” or “tax cuts for the rich and big business.” But the change in real (inflation-adjusted) wages was positive across the income spectrum. The bottom 10% of the wage distribution rose by 10% while the top 10% rose half as fast. And real wealth for the bottom 50% increased by 28%, while that of the top 1% increased by just 9%.
The results show those tax cuts weren’t designed for the “rich.”
In 2019, the real median household income hit a record high, and the poverty rate reached a record low. Poverty rates fell to the lowest on record for Blacks and Hispanics, and child poverty fell to 14.4%—a nearly 50-year low. Clearly, Americans were doing well across the board, especially those who had historically been left behind.
These stellar results were from reducing barriers by government in people’s lives—a stark contrast to what happened by state governments during the pandemic and exacerbated thereafter by Biden’s big-government policies.
While there were similar spending bills passed into law during both administrations, it’s comparing apples and oranges.
Trump supported congressional efforts in March and April 2020 when huge swaths of the economy were shut down, 22 million Americans were laid off, and 70% of the economy faced collapse. In contrast, Biden substantially increased regulations immediately and passed a nearly $2 trillion spending bill in March 2021—an amount equal to approximately 10% of the U.S. economy, at a moment when the U.S. economy was already 10 months into recovery.
Another difference was that Trump introduced sunsets for emergency pandemic provisions so that they would expire. But Biden continued and expanded many of them, increasing dependency on government.
Through March 2022, employment is back up 20.4 million but remains 1.6 million below the peak in February 2020. While Biden touts the most jobs gained in one year in 2021, more jobs were recovered in just the two months of May and June 2020 than in all 12 months of 2021, and nearly two-thirds of this jobs recovery was during Trump. Moreover, job gains of 6.7 million in 2021 were far less than the glorified projections coming from the White House of around 10 million.
Just think if Biden had practiced the pro-growth policies of Trump.
Instead, inflation is at a 40-year high and looks to continue to soar, fueled by a host of self-imposed costly policies in Washington.
This includes Biden’s over-regulating of the oil and gas sector, massive unnecessary spending bills, and attempts to drastically raise taxes. And the Federal Reserve has more than doubled its balance sheet over the last two years, purchasing a majority of the $6 trillion increased national debt in that period, which is a 25% increase to $30 trillion.
These policies, which simultaneously boost demand while constraining supply, have brought the prospect of stagflation—high inflation and low growth—back for the first time since the late 1970s.
Rather than directly addressing the crisis, Biden has consistently deflected the issue by first doubting the reality of inflation to now falsely blaming it on corporate greed or Russian President Vladimir Putin. But the causes and consequences fall at his feet.
It’s time to return to the proven, pro-growth policies that worked during the Trump administration, along with an essential missing factor then of spending restraint by Congress. Doing so will provide a solid foundation for more opportunities to let people prosper.
This commentary was based on the remarks by Mr. Ginn and Mr. Goodspeed on a panel at the Texas Public Policy Foundation’s 2022 Policy Orientation.
Watching the screen on a gas pump while filling your vehicle’s tank is liable to induce a panic attack. Paying for a used car almost requires taking out a second mortgage. Speaking of mortgages, members of the middle class are being priced out of the housing market as home prices march relentlessly upward. Many price increases are out of control.
How did we get here? A little over a year ago, and in the years before the Covid-19 pandemic, most prices were relatively stable. But more recently, general price inflation is at a 40-year high.
The late economist Milton Friedman helped explain the inflation and stagflation of the 1970s. His explanation helped shape the strong economic recovery of the 1980s, built on the principles of limited government, with sound monetary policy that resulted in a steep decline in what had been rampant, double-digit inflation.
Inflation Is a Monetary Phenomenon
Friedman pointed out that “inflation is always and everywhere a monetary phenomenon.” The seemingly force majeure is actually a manmade problem, caused by the Federal Reserve (Fed) creating too much money. These principles of money and inflation aren’t new.
But those lessons are being disregarded by some in the economics profession. People like Stephanie Kelton have been promoting Modern Monetary Theory (MMT), which is virtually a complete reversal of what Friedman espoused and history demonstrated. This theory contends that the federal government’s current deficit spending isn’t an issue — it can, and should, be solved by the Fed creating money to fund it without concern about inflation as long as the U.S. dollar is the world’s reserve currency.
President Joe Biden has not openly endorsed MMT, but he’s no fan of Friedman either. Instead, he seems content to have many mostly younger congressional Democrats advocate for MMT, which provides convenient and seemingly academic reasoning for financing more federal spending without explicitly raising taxes. It has a similar political appeal that Keynesianism presented almost a century ago, and MMT is just as flawed.
But proponents of MMT do get one thing correct — the Fed can create money to service the debt and avoid a default. But in real terms, meaning adjusting for inflation, this assertion is false. Creating money to service the debt devalues the currency. Investors then receive a lower real return on their holdings of federal debt.
Furthermore, everyone is hurt by inflation, whether they own government bonds or not. Inflation is essentially a tax, as it robs people of their purchasing power at no fault of their own. Everyone who received a 7.5 percent raise over the last year probably thought they would be able to afford more stuff, but they were deceived. Inflation rose just as much — so there was no real raise.
False Claims That Taxes Are the Solution
But MMT proponents claim that the massive budget deficits are what allow people to save money. Were it not for those deficits, they contend, people would have no cash to save. At first glance, the pandemic seemed to support that. People received transfer payments from the government and saved much of them due to uncertainty. But more recently, people’s savings are being depleted as this dependency on government dries up and prices soar.
Now that inflation is running amok, MMT adherents believe tax increases are the primary (if not only) cure. They claim inflation is not caused by the Fed creating too much money, but by people having too much money to spend; taxation will remove that excess liquidity and stop inflation.
However, MMT doesn’t explain why it’s only inflationary when people spend money, but not when the government spends it. Somehow the Fed creating money by purchasing government debt miraculously doesn’t bid up prices for scarce resources. The theory sounds more like a belief than science — something that must be trusted rather than demonstrated.
Specifically, MMT ideology is built on mathematical relationships between economic variables like private and public savings and debt rather than a strong theoretical construct, and breaks down quickly when analyzed with sound economic theory. Moreover, these relationships seem to be used to derive a funding mechanism for their big-government policy goals, such as a federal jobs guarantee, universal healthcare, and other costly initiatives.
How Taxation Might Stop Inflation
But MMT is not entirely wrong on using taxation to stop inflation. If those taxes are used to pay for deficit spending — which really should be done by spending less — rather than the Fed financing it, then higher taxes can lower inflation. But that is far too nuanced of an explanation for MMT, which paints in much broader brushstrokes.
Regardless, MMT cannot dispel the hard truths of monetary policy, which is inflation comes from one place — the Fed. When the Fed creates money faster than the real economy grows, prices will rise; it’s that simple.
To alleviate the uncertainty and distortions across the economy of bad policies in Washington, there should be binding fiscal and monetary rules based on sound economics instead of ideology. This should include changing government spending by less than the growth in personal incomes and only changing the money supply to keep prices stable.
Almost two years after President Biden declared “Milton Friedman isn’t running the show anymore,” the late economist is clearly the one with the last laugh. Perhaps next time, the president will think twice before speaking ill of the dead.
Government spending is at the heart of sound public policy. But out-of-control spending for decades has created substantial economic destruction and ongoing threats that must be remedied before things get worse. Fortunately, we have examples of how fiscal rules can solve this problem. We must put these rules into place before our economy gets any worse.
Excessive federal government spending has created mounting budget deficits that have driven the national debt to $30 trillion. This debt has given the Federal Reserve ammunition to use to excessively print money, resulting in the highest inflation in 40 years. And inflation destroys our purchasing power as it is a hidden tax that erodes our livelihood.
Controlling spending takes discipline, and applying fiscal rules can help.
Policymakers should follow the examples a century ago of Presidents Warren G. Harding and Calvin Coolidge, who demonstrated that controlling spending and cutting the debt is possible.
President Harding assumed office in 1921 when nation was suffering an overlooked severe economic depression. Hampering growth were high income tax rates and a large national debt after WWI. Congress passed the Budget and Accounting Act of 1921 to reform the budget process, which also created the Bureau of the Budget (BOB) at the U.S. Treasury Department (which was changed in 1970 to the Office of Management and Budget in the Executive Office of the President). President Harding’s chief economic policy was to rein in spending, reduce tax rates, and pay down debt. Harding, and later Coolidge, understood that any meaningful cuts in taxes and debt couldn’t happen without reducing spending.
Charles G. Dawes was selected by Harding to serve as the first BOB Director. Dawes shared the Harding and Coolidge view of “economy in government.” In fulfilling Harding’s goal of reducing expenditures, Dawes understood the difficulty in cutting government spending as he described the task as similar to “having a toothpick with which to tunnel Pike’s Peak.”
To meet the objectives of spending relief, the Harding administration held a series of meetings under the Business Organization of the Government (BOG) to make its objectives known.
“The present administration is committed to a period of economy in government…There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures…We want to reverse things,” explained Harding.
Not only was Harding successful in this first endeavor to reduce government expenditures, his efforts resulted in “over $1.5 billion less than actual expenditures for the year 1921.” Dawes stated: “One cannot successfully preach economy without practicing it. Of the appropriation of $225,000, we spent only $120,313.54 in the year’s work. We took our own medicine.”
Overall Harding achieved a significant reduction in spending. “Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922,” noted Jim Powell, a Senior Fellow at CATO Institute. Harding and the Republican Party viewed a balanced budget as not only good for the economy, but also as a moral virtue.
Dawes’s successor was Herbert M. Lord, and just as with the Harding Administration, the BOG meetings were still held on a regular basis. President Coolidge and Director Lord met regularly to ensure their goal of cutting spending was achieved.
Coolidge emphasized the need to continue reducing expenditures and tax rates. He regarded “a good budget as among the most noblest monuments of virtue.” Coolidge noted that a purpose of government was “securing greater efficiency in government by the application of the principles of the constructive economy, in order that there may be a reduction of the burden of taxation now borne by the American people. The object sought is not merely a cutting down of public expenditures. That is only the means. Tax reduction is the end.”
“Government extravagance is not only contrary to the whole teaching of our Constitution, but violates the fundamental conceptions and the very genius of American institutions,” stated Coolidge.
When Coolidge assumed office after the death of Harding in August 1923, the federal budget was $3.14 billion and by 1928 when he left, the budget was $2.96 billion.
Altogether, spending and taxes were cut in about half during the 1920s, leading to budget surpluses throughout the decade that helped cut the national debt.
The decade had started in depression and by 1923 the national economy was booming with low unemployment. If this conservative budgeting approach—which was tied with sound monetary policy for most of the period—had been continued, the Great Depression wouldn’t have happened.
Officials at every level of government today should learn from this extraordinary lesson that fiscal restraint supports more economic activity as more money stays in the productive private sector.
With spending out of control at the federal level and in many states and local governments, the time is now for spending restraint and strong fiscal rules to set the stage for more economic prosperity today and for generations to come.
We were promised job growth—after all, that was the main selling point for the March 2021 American Rescue Plan Act (ARPA) from President Biden and the congressional Democrats. Promise made—promise broken.
In February 2021, the Congressional Budget Office (CBO) issued its economic outlook and projected 6.252 million jobs would be added in 2021 without ARPA. The White House then projected ARPA would add 4 million additional jobs for a total of 10.252 million more jobs in 2021.
ARPA was said to be necessary for the labor market recovery. Without it, job growth would slow, but with it, job growth would blossom. ARPA promised to get Americans back to work, get COVID-19 under control, and return the country to normal.
None of this happened.
According to the U.S. Department of Labor, the economy added just 6.116 million jobs in 2021, 136,000 fewer jobs than the CBO estimated without ARPA. At a cost of $1.9 trillion, ARPA was expensive from the start as it was added to an already bloated national debt. Now it appears the law added no jobs to the economy, and possibly cost jobs. It was not just expensive, it was also a detriment to the recovery.
The marketing behind ARPA was nothing new; many spending bills have been sold to the American people as stimulus measures. But labeling government spending as “stimulus” is a misnomer. When the government spends money, it usually only stimulates more government, not productive activity in the private sector.
This is partly because the government has no money of its own and it must get resources from the private sector before it can spend or redistribute them. That means any government spending has a cost which is often ignored by political pundits—but must be paid for all the same.
Whether government spending is financed through taxes, borrowing, or inflation, it represents a burden on the private sector. Whatever alleged benefits are to be derived from government spending must be weighed against the cost of first acquiring the resources needed for that spending.
The more government spends, the greater the burden on Americans.
This was evident in the 2008-09 Great Recession and the slow recovery that followed. Despite record spending by the federal government (once again called stimulus), the economy recovered at the slowest pace since the Great Depression of the 1930s. While total output lagged, employment lagged even more when compared to other recessions.
The labor market has now bogged down again.
Despite 10.6 million job openings, the economy is still missing 3.6 million jobs as compared to before the pandemic and there are still 6.3 million people unemployed.
Instead of supercharging the labor market recovery, trillions of borrowed dollars in new spending are hindering it. Because of direct cash payments, welfare expansions, unemployment “bonuses,” and other government transfer payments, many people are rationally choosing not to return to work. And while some of these programs have expired, their costly effects on people and the federal budget persist.
On top of those pressures, exaggerated fears of the omicron variant along with mixed messaging from government health officials have made some people afraid to go back to work. Other people, particularly in the health care industry, have been hesitant to take a COVID-19 vaccine and have consequently been forced out of their jobs because of ill-advised mandates.
The common factor in these examples is bad policy on the part of the government. Whether it is excessive regulation or spending, these public sector mistakes impact people’s lives in a very real—and negative—way.
ARPA failed to deliver on its promise of growing jobs and instead grew government, especially government debt, which now stands at a mind-boggling nearly $30 trillion, far exceeding the entire U.S. economy.
That debt is like an anchor weighing down future economic growth because it constantly requires interest payments, which sap the nation’s economic growth, meaning fewer jobs and less income. In FY 2021, taxpayers funded the second highest interest payment on the national debt—to the tune of a whopping $562 billion, with no end in sight.
ARPA is just the latest in a long line of massive government spending programs that were billed as stimulus for the economy, but only stimulated more government. That is something to keep in mind the next time Washington promises us more jobs.
President Biden and Congressional Democrats have proposed roughly $6 trillion in new spending over a decade of hard-earned taxpayer dollars. To put this into perspective, this exceeds the economic output of every country except the U.S. and China, matches the $6 trillion authorized for COVID-related items since the pandemic—with nearly $1.5 trillion unspent—and exceeds the annual federal baseline budget of $4.8 trillion.
To put it bluntly, this reckless spending will destroy America’s fiscal and economic institutions by pushing us toward insolvency, dependency, and insanity.
The first proposal that the Senate, with some Republican support, recently passed a motion to proceed on is a mostly a progressive wish list of spending. It’s $1.2 trillion on “infrastructure,” with an unfunded $550 billion of it being new spending as the rest are funds previously authorized but not yet spent.
But it has just $110 billion, or less than 10%, for what’s historically been considered infrastructure—roads and bridges. The other 90% is to fund mass transit waste, green energy nonsense, and more items that the states or the private sector could do.
This first proposal should die or at least be cut down to actual infrastructure projects.
The second proposal is a reconciliation package deemed as “human infrastructure” at an astronomical cost of likely $5 trillion over a decade (with little backing documentation on what human infrastructure is).
This proposal will not only dramatically expand the federal government’s role in everyday American life but will contribute to stagflation not seen since the 1970s. It would fundamentally expand people’s dependency on the federal government and destroy the potential of Americans.
Here’s how it spends money we don’t have and turns America into something she is not.
Authorizing Runaway Government Spending
The Texas Public Policy Foundation’s Chief Economist Vance Ginn and economist E.J. Antoni break down the massive spending proposals in President Biden’s recent address to Congress.
$225 billion toward high-quality childcare and ensuring families pay only a portion of their income toward child-care services, based on a sliding scale
Raising taxes from one pocket to put money in the other is just shuffling dollars. The subsidies will also increase the overall cost of child care for those who need it.
$225 billion to create a national comprehensive paid family and medical leave program
Americans should be free to negotiate compensation packages like paid leave as they see fit; it shouldn’t be dictated by a bureaucrat. The consequence of a government-mandated paid family and medical leave will be lower wages and less opportunities for those with less skill and experience.
$200 billion for free universal preschool for all 3- and 4-year-olds, offered through a national partnership with states
Parents want valuable schooling options for their kids, especially during critical years of early development, not rhetorical fallacies that something is free. Instead of creating another spendthrift program with a profligate bureaucracy behind it that will reduce the quality of preschool like government has to K-12 education, government should focus on removing imposed barriers of high taxes and marriage penalties that reduce parents’ resources to meet their child’s unique needs.
$109 billion toward ensuring two years of free community college for all students
College, including community college, is not always the right fit. Some people enter trade or technical schools or begin their careers right after high school. This is especially true among those with lower lifetime earnings. “Free” college programs just take tax money from those with lower earnings to pay for the tuition of those who will likely have higher potential lifetime earnings. Government-guaranteed funding for higher education will also further inflate costs and reduce quality as things are rationed without market prices.
About $85 billion toward Pell Grants, and increasing the maximum award by about $1,400 for low-income students
Pell Grants, like many subsidies for higher education, benefit school administrators more than students. As subsidies increase, so does tuition, and so do administrative costs. Students eligible for Pell Grants often take out student loans to cover the remainder of their education expenses and they graduate with heavy debt burdens. To help make higher education more affordable, government should remove demand subsidies and supply restrictions, forcing schools to compete for students by slimming down their bloated administrative departments and by increasing access to lower tuition.
A $62 billion grant program to increase college retention and completion rates
There is no evidence that a lack of funding is causing retention problems at colleges and universities. There is, however, substantial evidence that low-quality government-run primary and secondary schools have failed to provide students with the knowledge and skills to succeed at the college level. The solution is not more government spending, but more educational choice throughout the education system.
A $39 billion program that gives two years of subsidized tuition for students from families earning less than $125,000 enrolled in a four-year historically Black college or university, tribal college or university, or minority-serving institution
Subsidies in higher education is what’s leading to the rapid increases in tuition, so doubling down on that is poor policy rather than finding ways to increase competition and lower prices while improving quality.
$45 billion toward meeting child nutritional needs, including by expanding access to the summer EBT program, which helps some low-income families with children buy food outside the school year
This is another government program that is fraught with waste and inefficiency. We would do better to lift burdensome regulations and taxes off the backs of small business, stimulating development, investment, and job growth. A parent with a well-paying job can afford to feed his or her own children.
$200 billion to make permanent the $1.9 trillion COVID-19 stimulus plan’s provision lowering health insurance premiums for those who buy coverage on their own
This sounds like a subsidy for those buying health insurance, but it is actually a subsidy for the insurance companies. After the implementation of the Affordable Care Act, which would supposedly reign in profits of the insurance companies, those profits reached record highs. People want more choices for healthcare, not handouts to insurance companies.
Extending through 2025, and making permanently fully refundable, the child tax credit expansion that was included in the COVID-19 relief bill
As Ronald Reagan said, nothing is so close to eternity as a temporary government program. The justification for transitory COVID-19 relief was the pandemic, which is now far past its peak as we approach herd immunity. There is no reason to continue these temporary relief measures going forward.
Making permanent the recent expansion of the child and dependent care tax credit
These tax credits are accomplishing the opposite of the bipartisan welfare reforms of the 1990s. Instead of rewarding work, they reward idleness. These government handouts will serve to trap people in a cycle of poverty and dependency.
Making permanent the earned income tax credit for childless workers
This is another example of a government program taking on a life of its own. The American Rescue Plan Act (ARPA) tripled the credit and gave benefits to childless workers that were previously reserved to working parents. The justification for this ill-conceived measure was the temporary hardship from government-imposed lockdowns; there is no reason to make them permanent but rather open their economies so people can find jobs and prosper. The effect of these government handouts is to keep people in low-wage jobs because the tax credit is quickly phased out as income rises. Once again, these programs cause dependency on government instead of letting people prosper.
Let’s start with a simple fact: It’s not economic “stimulus” when someone comes along, takes money from your right pocket and puts some of it back in your left pocket (keeping much of it for “other uses”). That’s sleight-of-hand, not stimulus, which is a reason the government can’t stimulate anything other than more government.
That’s more and more true when less and less of the funds go back in your pocket. And make no mistake, President Joe Biden’s plans for a third “stimulus” bill—eclipsing the previous two—isn’t about helping struggling Americans hit hard by the pandemic and the shutdowns. Instead, it’s a massive, pork-laden bill that seeks to keep many of his lavish campaign promises and shore up support among key constituencies.
And nowhere is this more evident than in the area of climate activism.
According to CNBC, “The recovery plan, to be unveiled this week, will likely involve installing thousands of electric vehicle charging stations and building millions of new energy-efficient homes.” (Note to President Biden: Out-of-work Americans can’t afford new electric vehicles.)
Biden’s plan to “Build Back Better” also “supports his broader goal to achieve carbon-free power generation by 2035 and net-zero emissions by 2050”—an impossible goal that, even if it was achievable, would have little effect on global temperatures.
But that’s not all.
The Washington Post reports that it would spend “hundreds of billions of dollars to repair the nation’s roads, bridges, waterways and rails. It also includes funding for retrofitting buildings, safety improvements, schools infrastructure, and low-income and tribal groups, as well as $100 billion for schools and education infrastructure.”
And he plans a slew of massive tax hikes to help pay for it.
He could raise the corporate tax rate from 21% to 28%, which would destroy hundreds of thousands of jobs, and raise taxes on American individuals. These actions and others would undo key parts of the Tax Reform and Jobs Act of 2017 that combined with deregulation helped launch tangible economic prosperity until the global pandemic.
Each of these initiatives—climate activism, massive “infrastructure” spending and tax hikes—is bad economic policy in and of itself. Together, they’re a trifecta of terrible, guaranteed to overburden our economy and saddle us and future generations with more government, more debt and less opportunity.
History demonstrates that despite the promises of a Green New Deal, new green jobs prove elusive—and the ones that are created are very, very expensive, which requires more government spending of our hard-earned tax dollars that reduces growth and jobs in the process.
Here’s what President Obama said in his 2008 acceptance speech at the Democratic National Convention: “I’ll invest $150 billion over the next decade in affordable, renewable sources of energy—wind power, and solar power, and the next generation of biofuels—an investment that will lead to new industries and 5 million new jobs that pay well and can’t be outsourced.”
That never happened.
Obama himself later acknowledged that “Shovel-ready was not as shovel-ready as we expected.” That went for both the climate jobs (his policies sent solar panel manufacturing to China, for example, and other companies simply misled the government, took the money and declared bankruptcy) and for infrastructure jobs.
The good news is that we know what works. We can truly support more self-sufficiency, dignity, and human flourishing by fully opening the economy up.
Americans aren’t clamoring for a Green New Deal (when they’re told what it will cost), but they sure would like to dine out, see family members again and open up their businesses without the heavy-handed pandemic measures imposed by governments at every level.
It begins with Congress rejecting the third “stimulus” boondoggle. States should also reject some if not all of the latest round of bailout money to keep from unnecessarily expanding government programs and losing some independence to the federal government. And Congress should instead adopt the Texas Model of less spending, lower taxes and more reasonable regulation.
A great next step would be for the Biden administration to lift its “halt” on new oil and gas permits on federal lands and in federal waters.
That action alone would achieve all three of Biden’s stated goals for his “stimulus”: It would reduce emissions by allowing access to cleaner-burning natural gas, it would support many new and existing high-paying jobs for Americans (instead of outsourcing them to other countries, which we’ll be forced to buy our petroleum from), and it would support infrastructure improvement through the taxes producers pay for their use of our roads and bridges.
Another step would be to rein in excessive government spending that is bankrupting our country.
Ultimately, we can regain the prosperity we had before the pandemic—but not with Biden’s progressive plan.
In this Let People Prosper episode, we discuss the key elements of real property tax cuts (slower growth rates and lasting tax reductions), movement afoot to eliminate civil asset forfeiture, and potential expansions in local liberty that are being discussed at the Texas Legislature. As we get closer to the end of session, these are critical aspects that you don't want to miss.
In this Let People Prosper episode, we discuss how to expand local liberty, reform the criminal justice system, and help people prosper by focusing on spending restraint at every level of government. Please watch and share this episode!
In this Let People Prosper episode, James Quintero, Chance Weldon and I discuss the Conservative Texas Budget related to SB 500; Teacher Retirement System (TRS) of Texas related to SB 12; superintendent pay reform in HB 880; local debt issues in HB 440, HB 477, and SB 30; and a legal case regarding child safety.
In this Let People Prosper episode, James Quintero, Dr. Derek Cohen, and I discuss key bills regarding local liberty issues related to debt transparency (HB 440 & HB 477), criminal justice reform efforts, property taxes (HB 2, HB 705, HB 648), and teacher pay/retirement (SB 3/SB 393).
In this Let People Prosper episode, James Quintero, Dr. Derek Cohen, and I discuss the following:
In this Let People Prosper episode, I am interviewed by Liz Wheeler on her show the Tipping Point on One America News.
We discuss the high cost of deficits and debt and the need for government spending relief along with the latest farm bill which continues the expansion of welfare.
In this Let People Prosper episode, let's discuss the report released by the U.S. Treasury today that notes the federal budget deficit was $779 billion, an increase of 17%, in fiscal year 2018. Again, the evidence shows that government doesn't have a revenue problem but rather a spending problem.
The largest increase in expenditures was in interest paid on the debt that increased by 23.6% to $325 billion, which is about half of what our taxpayer dollars are used to fund national defense, about one-third of what we pay for Social Security, and about 8% of total federal expenditures. A problem is that interest on the debt will continue to increase at a rapid pace because the national debt looks to continue to grow and the Federal Reserve is expected to raise their targeted federal funds rate, which is currently 2-2.25%.
Each dollar spent by the government is funded by either taxes, debt, or inflation. Each of these drain resources from the productive private sector. In other words, each dollar crowds out our ability to satisfy our desires and prosper. So, we must be able to prove without doubt that each dollar is spent more effectively by politicians than by individuals in the private sector.
Sure, there are roles for government, but, in my view, the federal government should have three main functions: national defense, justice system, and very few public goods. The total of national defense is just above $600 billion per year, so assuming the rest may run $400 billion per year, that $1 trillion federal budget would be only 25% of the $4.1 trillion spent today. Given a $1 trillion federal budget, the budget surplus would be $2.3 trillion, allowing for substantially lower taxes at every level--preferably one flat rate on final consumption.
You'll also notice that tax collections did increase even after the large Trump tax cuts indicating that the robust growth of a dynamic economy supported more revenue, even if it was less than what it could have been otherwise. Moreover, higher tax revenue negates some of the noise by the Congressional Budget Office of a $1.5 trillion deficit over a decade based on a static economic model, but we don't live in a static world and the data today are another revelation of that fact.
When we consider these details, the crowd out effect of government spending and interest on the $21.5 trillion debt, which is greater than our country's entire economic output of $20 trillion, is a huge cost to the prosperity of our nation that we must get control over before it's too late. But the cost is even greater than that because the $20 trillion GDP includes government spending, which is about 20% of GDP. If you exclude government spending, which there is good reason because it's a transfer of funds from the private sector, then the national debt would be $21.5 trillion/$16 trillion, or 134%! That's what we are looking at trying to pay back over time and is currently more than $65,000 per American.
As Reinhart and Rogoff wrote in their book This Time Is Different, there's likely a threshold when the debt-to-GDP ratio gets too high such that it hinders economic growth. I don't think that threshold is very high and that we are far above it, and moving further above it quickly unless things change.
We are seeing the benefits of the tax and regulatory reforms along with the benefits of a long--though relatively weak before recently--expansion, but these benefits will quickly expire if government spending is not restrained, trade barriers continue to be imposed, and the national debt continues to rise.
The best path to let people prosper is by getting rid of government barriers to opportunity, so we must reduce government spending.
President Trump’s Council of Economic Advisors recently released a reportshowing that there is a large portion of non-disabled, working-age adults (16 to 64 years old) who are receiving government non-cash welfare payments funded by taxpayers but aren’t working. For example, of those on Medicaid, 53 percent of non-disabled, working-age adults don’t have a job.
These perverse incentives created by relaxed work requirements for able-bodied workers who receive welfare payments not only hurts their financial prospects today and over time, but is an extractive institution hurting civil society.
Institutions are the framework that makes up society. They are the rules of the game. Institutions can include formal laws and rules, but also more informal social norms, families, and churches. Institutions can be considered inclusive, like capitalism, or extractive, like socialism, as noted by Acemoglu and Robinson.
Economist Douglass North remarked in his 1993 Nobel Prize in Economics lecture that “if the institutional framework rewards productive activities then organizations—firms—will come into existence to engage in productive activities.” On the opposite side, if institutions reward unproductive behavior, the result will be more unproductive behavior and increased poverty.
Unfortunately, the institutional framework in the U.S. has many extractive programs in our welfare system that have incentivized unproductive behavior and made many people poor in the process.
As another example of a costly welfare program, the Supplemental Nutrition Assistance Program (SNAP) provides assistance to more than 10 million non-working, non-disabled working-age adults. Of all the childless adult recipients on SNAP, 63 percent do not work, which is higher than the rate of recipients with infants (57 percent)—often the most difficult age to raise a child.
Clearly, the incentives to work while getting welfare are little to none, even when you are able to work and don’t have a child. Welfare should be based on need, and with the unemployment rate at record lows and more job openings than people unemployed, there are few excuses to not work.
Work ethic, personal responsibility, and independence are all informal institutions. They are the rules of our game. These institutions are inclusive, because they allow individuals to be self-sufficient, and become productive members of civil society.
When these incentives and social norms are eroded, our institutions become extractive, redistributing resources from productive workers to welfare recipients. This process is done by government bureaucrats subjectively determining who gets what and when. Moreover, these institutions create a situation that crowds out inclusive social institutions, such as families and private charities and churches, which have been the backbone of civil society for centuries.
Our current welfare system, specifically the Temporary Assistance for Needy Families (TANF), has been reformed before, making it more inclusive. This includes putting the recipients on a path to individual responsibility and prosperity by increasing work requirements to receive welfare, thereby increasing recipients’ productivity that helps them actually get off government welfare.
Chicago economist Casey Mulligan has explained that the income cliff when someone earns more income and is dropped from government welfare programs acts like an implicit marginal income tax that reduces their incentive to work. It’s time to stop this sort of welfare for non-disabled working age adults. This would not only improve the relatively low but improving employment-to-population ratio for the prime age working group(25 to 54 years old) but also help to reduce welfare and the taxes paid by workers to fund these programs.
The Trump administration’s recent report highlighting these issues and calling for an increase in work requirements of welfare programs for able-bodied people is a step in the right direction to let people prosper.
BY VANCE GINN AND DREW WHITE, OPINION CONTRIBUTORS
Original can be found at The Hill
The good news keeps coming. Since the passage of the Tax Cuts and Jobs Act, announcements about increased investment in the U.S. and various companies offering employees bonuses haven’t stopped.
The vast majority of Americans will prosper from the Tax Cuts and Jobs Act. As an economist and policy analyst, we’ve been skeptical of the Trump administration’s direction on some issues, like NAFTA renegotiations, but we’re encouraged by the results of regulatory and tax reforms because they let people prosper, the flipside of what’s been stifling us.
This first major rewrite of the federal tax code in a generation is a historic moment for our republic. The institutional framework that stifled Americans can again work for We the People instead of for bloated governments.
We admit that the bill isn’t perfect and encourage Congress to follow this massive $5.5 trillion gross tax cut with spending restraint. That’s especially important because without spending reductions roughly $500 billion could be added to the national debt in the next decade. Also, doing so will help keep the roughly $112 trillion in federal IOUs from requiring government to further infiltrate our lives.
We’ve experienced government’s overreach during the worst recovery since WWII of about two percent annual growth while the national debt almost doubled under the Obama administration’s high tax and spend policies. This reshaping of institutions increased barriers to prosperity through excessive regulations, like ObamaCare, and higher taxes that redistributed resources among people.
America voted for a new institutional direction in 2016.
Regarding regulations, the Trump administration has already repealed 67 of them while creating only three. Entrepreneurs can now budget lower costs longer which contributes to more investments in workers and capital. The result is faster economic growth with a three percent average annualized growth the last three quarters of 2017 matching GDP’s long-term average, which has lifted consumer sentiment.
The tax bill’s most sweeping changes include cutting the corporate tax rate and individual income tax rates for most Americans. Sixty percent of the gross tax cuts go to families while the rest goes to businesses.
As expected, critics claim these changes benefit the rich. Interestingly, the corporate tax rate cut once had bipartisan support, as President Obama proposed cutting it to 28 percent, and progressives passed and extended much of President Bush’s personal income tax cuts.
Regardless, permanently cutting the corporate tax rate from 35 percent, the highest in the developed world, to 21 percent, slightly below the worldwide average, drastically improves employment prospects.
Often missed in the discussion is that corporations simply submit taxes to the government because people pay them through higher prices, lower wages, and fewer jobs available. Cutting the corporate tax rate means corporations can pass those savings along to people.
Businesses are reporting they will pay bonuses and higher wages, immediate pay increases to let people freely prosper.
On the individual income tax side, most taxpayers will pay less tax until at least 2026. According to good tax policy, the tax bill doesn’t flatten as it leaves seven income tax brackets, but it broadens the base by eliminating many exemptions and deductions and simplifies the code by doubling the standard deduction.
Critics claim that these changes could increase income inequality. But history shows that the tax code is not the place to deal with supposed income inequality as it fluctuates whether taxes are high or low. By changing the institutional incentives through this tax bill, more people can move up the income ladder.
But, do only the rich get a tax cut? No. The Tax Foundation calculated the changes in tax liability for multiple households and found that each of them would pay less tax.
An individual earning $30,000 with no kids could pay $379 less in taxes. An individual earning $50,000 with two kids could pay $1,892 less in taxes. A married couple filing jointly earning $165,000 with two kids could pay $2,224 less in taxes. And a married couple filing jointly earning $2 million could pay $18,904 less in taxes.
All income groups receive a tax cut.
Higher income people pay fewer dollars than those with lower income, but that’s because they pay more in income taxes. For example, the top 10 percent of income earners pay 70 percent of federal income taxes collected. However, the share of income taxes paid could become more progressive under these tax changes.
It’s not just more money in people’s pocket, but doubling the standard deduction lets many people spend less time on their taxes and more time with their families. This is great news for working Americans.
Icing on the cake would be for Congress to restrain government spending, the ultimate burden of government.
Bipartisan welfare reform in the 1990s helped cut spending but more importantly improved the lives of many Americans as they returned to work or received better assistance. The amount of waste, fraud, and abuse in these programs along with too many dollars to bureaucracy and not to people make welfare a good place to start.
Reforms to the major drivers of Medicaid, Medicare, and Social Security must be on the table to restrain spending growth while improving them for the truly needy.
Until then, let’s celebrate the Trump administration’s new institutional direction that has long supported prosperity. Skepticism is healthy to provide proper checks and balances on government. But when pro-growth policies like regulatory and tax reforms improve human flourishing, we’re much more optimistic about the future.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist and Drew White is senior federal policy analyst, both at the nonprofit Texas Public Policy Foundation.
This commentary was originally featured in The Hill on August 24, 2017.
The discussion of raising the debt ceiling before the federal government potentially defaults on September 29 is an excellent opportunity for Congress to demand tax cuts and restraining government spending for pro-growth budget neutrality. Budget neutrality would allow increased economic activity from restraining government while allocating more tax revenue from that growth to pay down expected ballooning deficits.
This would help move the country past President Obama’s government-centered policies such as the ironically named “stimulus” plan, ObamaCare, Dodd-Frank, and the numerous lesser known regulations and programs. The result of this approach, along with unconventional monetary policy, was the slowest economic recovery since WWII and a doubling of the national debt to a level exceeding annual U.S. economic output.
Instead, Congress can and should pursue a limited government approach that’s repeatedly helped achieve more economic prosperity in Texas and other places that have practiced it.
A good start was Congress recently putting to rest the misguided border adjustment tax (BAT).
While advocated as a way to maintain tax revenue neutrality when lowering the industrialized world’s highest corporate income tax, the argument assumed an economically questionable strengthening of the dollar value to mitigate higher costs of goods and services paid by Americans.
For example, the Texas Public Policy Foundation and R Street Institute published a study highlighting how the BAT could substantially raise property-casualty insurance premiums from the effects on the international reinsurance market. With mounting opposition to the BAT, Congress rightfully dismissed this bad idea that would have grown government.
There are, however, some very good ideas available that depend on restraining government spending to provide relief from onerous regulations and burdensome taxes.
On the regulatory front, the Heritage Foundation noted that from 2009 to 2015 more than 20,000 new rules resulted in a net burden on businesses and individuals of approximately $108 billion. Fortunately, the Trump administration has begun dismantling onerous regulations by a pace of 16 regulation rollbacks for each new regulation.
With many costly regulations and mounting expenditures with ObamaCare, Congress should fully repeal it. This would not only set the stage for a market-based, patient-centered healthcare system that would provide better care, but it would also help bend the cost-curve of a major driver of excessive government spending. Until Congress demonstrates the fortitude to overcome the obstacles to accomplish this, it should move to restraining government by providing tax relief and cutting spending elsewhere.
The Texas model of low taxes, relatively less government spending, and sensible regulations provides a good guide. During the last two legislative sessions, there’s been a push to pass a “Conservative Texas Budget,” whereby spending growth increases by no more than state population growth plus general price inflation. Fortunately, the state legislature has taken steps to passing two such budgets in a row. These allowed for $4 billion in tax and fee relief in the 2015 session and budget growth of less than 4.5 percent during the upcoming 2018-19 period.
Texans are rewarded for this fiscal conservatism. Texas has created almost 30 percent of the increase in U.S. employment since the start of the Great Recession, stayed below a five percent unemployment rate for three straight years, and had lower supplemental poverty and less economic inequality than comparable states — California, New York, and Florida. Moreover, Texas was the top state for net domestic migration from 2010 to 2016 and has led the nation in exports for 15 straight years.
The Texas model of limited government has been tried and tested, and similar pro-growth fiscal policies should be implemented at the federal level.
As a first step, Congress should work toward budget neutrality, whereby a dollar of a tax cut will be much more effective if it’s met with a dollar cut to spending. This approach helps to minimize any influence a tax cut might have in contributing to the growth of projected deficits and likely reduce current deficits over time due to continued spending restraint.
As the all too familiar practice of raising the debt ceiling nears, Congress has the opportunity to look to the Texas model as it focuses on reforming the institutional framework of the federal government. By fully repealing ObamaCare, simplifying the tax code, broadening the tax base, lowering tax rates, and continuing to cut excessive regulations, America can again be the beacon of fast-growing prosperity for the world.
FEDERAL TAX DEBATE: REFORM SHOULD FOCUS ON SIMPLIFICATION, EFFICIENCY, & BUDGET NEUTRALITY WITHOUT A NEW "BORDER ADJUSTMENT"
Here are my thoughts on the border adjustment and federal tax reform in general as they could influence the U.S. economy, especially Texas.
I disagree with some of the analysis and findings by Kotlikoff (see full article below), whom is a highly respected economist regarding life cycle economic modeling and analysis, but he tends to be Keynesian in his approach, as you can see throughout his piece. Much of what he states about the border adjustment, also known as the border adjustment tax (BAT) though it is not technically a tax, is reflected in the Tax Foundation’s (TF) talking points.
TF claims that the border adjustment will be more efficient than our current corporate income tax system by leveling the playing field for goods that are consumed in the U.S. Moreover, TF argues that it is not a tax but rather a “border adjustment” of the current corporate income tax such that corporations report consumption of their imported goods as income since it is consumed here instead of exports that are consumed elsewhere. TF and Kotlikoff also put a lot of emphasis on the far-reaching assumption that the dollar value will adjust accordingly to not make the border adjustment cause increases in consumer and producer prices.
While theoretically TF is correct on several points, the BAT argument fails on at least the following levels:
Tax revenue neutrality is a failed argument that has been tried multiple times (e.g., Kennedy-Johnson tax cuts, Reagan tax cuts, Bush tax cuts); tax reform should focus on budget neutrality such that the economic drain of a rising $20 trillion in federal debt is plugged as soon as possible.
The vision, like in Texas, should be to not tax businesses that simply submit taxes to the government while people pay the actual cost through the form of higher prices, lower wages, and fewer jobs available. In economic terms, the tax incidence is ultimately on people. Ending the corporate income tax would eliminate whether we are taxing income based on imports or exports, removing the concern over the border adjustment.
Considering we are unlikely to eliminate federal taxes on businesses today, reducing the corporate tax rate to as low as possible while not changing the tax base, thereby distorting the marketplace more than it should, balancing the budget should be based on economic growth and slowing and cutting government spending so budget neutrality is achieved. There’s no need to add a “new tax,” though it’s not technically a new tax, in the form of the border adjustment.
The Texas Public Policy Foundation (TPPF) recently commissioned a study with the R Street Institute that highlights the cost increase of $3.4 billion in Texas' property-casualty insurance premiums over the next decade from the border adjustment, which is just a small portion of the potential costs to Texas and other states. TPPF's research also shows that taxes on income and higher taxes in general are detrimental to economic activity among states; therefore, shrinking the size and scope of government by cutting government spending is the best path toward prosperity, not providing revenue neutrality with a new border adjustment.
Fortunately, President Trump’s announced tax plan does not include the BAT. While I have concerns about the contribution of Trump’s tax plan to the already estimated increases in the national debt from current policy, economic growth will reduce some of the static analysis revenue losses. Considering that neither President Trump's nor the GOP tax plan will pay for itself, as some economists suggest, the focus must be on budget neutrality as Congress cuts and restrains government spending.
At this point, I prefer the Trump tax plan and think it would best reduce tax burdens to allow more incentives by entrepreneurs to produce—the driver of economic activity. However, this is an opportunity to highlight that there shouldn’t be taxes on businesses, like TPPF argues to eliminate Texas' business franchise tax, and that the federal government should continue to simplify the tax code to provide more efficiency in the code by moving to a flat tax, which I prefer a flat consumption tax, and subsequent increased economic activity. This is also an opportunity for the U.S. to increase its economic competitiveness through tax reform to counter the unfortunate protectionist arguments in D.C. that could lead to potentially worse negotiated trade deals and fewer beneficial trade agreements, which is very disconcerting.
Below are two recent WSJ articles that provides different views on this issue. I hope the debate will continue so that the appropriate institutional framework for fiscal policy will prevail. In general, this framework should be based on the core principles of taxation, which includes simplicity, efficiency, and competitiveness. By following these principles and focusing on budget neutrality without shifting to a new tax base, the U.S. can be more prosperous and Texans will benefit in the process.
On Tax Reform, Ryan Knows Better
The House proposal beats Trump’s plan, which is more regressive and would induce huge tax avoidance.
May 11, 2017 6:58 p.m. ET
As Republicans push toward a major rewrite of the U.S. tax code, they must evaluate two competing proposals: the House GOP’s “Better Way” plan and President Trump’s framework, introduced last month. Either would greatly simplify personal and business taxation, but pro-growth reformers should hope that the final package looks more like the House’s proposal.
Let’s begin the analysis with personal taxes. Both plans eliminate the alternative minimum tax, deductions for state and local taxes, and the estate tax. The House plan eliminates exemptions, while Mr. Trump’s outline is unclear. Both raise the standard deduction, reduce the number of income-tax brackets, lower the top marginal tax rate, and provide a big break to those with pass-through business income. On this last point the Trump plan is particularly generous. It taxes pass-through income at 15%—far below its proposed top rate of 35% for regular income. The large gap between these rates would induce massive tax avoidance by the rich. The Better Way’s proposed rates are much closer: 25% and 33%, respectively.
Another criterion to judge tax reform is its effect on the budget. Absent any economic response, the Better Way proposal would lower federal tax revenue by $212 billion a year, according to a recent study I conducted with Alan Auerbach, an economist at Berkeley. But some economic response is likely. The House plan would cut the U.S. corporate tax rate from one of the highest among developed countries to one of the lowest. Computer simulations—which will be included in a forthcoming journal article I am writing with Seth Benzell and Guillermo Lagarda —suggest that increased dynamism could raise U.S. wages and output by up to 8%. Under this optimistic scenario, federal tax revenue would rise by $38 billion a year.
We are in the process of simulating the Trump plan, and it is too early to say whether it produces less revenue. The plan’s potential for tax avoidance, however, is a major red flag.
Which plan is more regressive? Both personal tax reforms appear to help the rich. But the Better Way’s business tax reform actually appears highly progressive. Despite the popular perception that the corporate income tax is paid by the rich, my research suggests it represents a hidden levy on workers. This causes American companies and capital to flee the country, reducing demand for U.S. workers, whose wages consequently shrink.
The Better Way plan transforms the corporate income tax into something different: a business cash-flow tax with a border adjustment. Notwithstanding innumerable mischaracterizations by the press, politicians and business leaders, the cash-flow tax implements a standard value-added tax, plus a subsidy to wages. Every developed country has a VAT, which is an indirect way to tax consumption. All of these levies have border adjustments, which ensure that domestic consumption by domestic residents is taxed whether the goods in question are produced at home or imported. Unlike the Better Way, Mr. Trump’s plan does not include a border adjustment, which means it effectively taxes exports and subsidizes imports. This undermines his goal of reducing the U.S. trade deficit.
Where is the progressive element to the cash-flow tax? It’s in the subsidy to wages, which insulates workers from the brunt of the VAT. They will pay VAT consumption taxes when they spend their paychecks, but they also will have higher wages thanks to the subsidy. The folks who truly pay the cash-flow tax are the rich, because they pay the VAT when they spend wealth that was earned years or decades ago.
As my study with Mr. Auerbach shows, this quiet but large wealth tax makes the overall House plan almost as “fair” as the current system. Our analysis—in contrast with studies done by congressional agencies and D.C. think tanks—assesses progressivity based on what people of given ages and economic means get to spend over the rest of their lives.
Consider the present value of remaining lifetime spending for 40-year-olds. The richest quintile of this cohort accounts for 51% of the group’s spending, and the poorest quintile for 6.3%. Under the House tax plan, those figures move only modestly, to 51.6% and 6.2%. And the Trump plan? Hard to say, given how easily the rich could transform otherwise high-tax wage income into low-taxed pass-through business income.
The Trump tax plan strikes out on all counts. Whoever knew tax reform could be this complicated? We specialists in public finance did. The bottom line is that the U.S. needs more revenue and less spending to close the long-term fiscal gap. The nation’s true debt—the present value of all projected spending, including the cost of servicing the $20 trillion in official debt, minus the present value of all current taxes—has been estimated by Alan Auerbach and Brookings’s William Gale to be as high as $206 trillion.
The Better Way plan moves in the right direction, but if the economy doesn’t respond as hoped, there’s a risk of larger deficits. One way to prevent that would be to eliminate the ceiling on earnings subject to the Social Security payroll tax. That could add $300 billion to the Treasury each year, according to our calculations. But even without that adjustment, the House plan seems far superior to both the current system and the Trump plan. The press, politicians, and business leaders should get things straight, including this key point: The Better Way tax plan is indeed a better way.
Mr. Kotlikoff, an economist at Boston University, is director of the Fiscal Analysis Center.
Economists Say President Donald Trump’s Agenda Would Boost Growth — a Little
The WSJ’s monthly survey of economists gauges the impact of a fully implemented Trump plan
Updated May 11, 2017 10:34 a.m. ET
One of the most-watched economic forecasts in Washington will come later this month when the White House releases its budget.
Here is what it would look like if done by economists surveyed by The Wall Street Journal.
Over the course of the next decade, the estimated cost of many items on President Donald Trump’s wish list will depend critically on his own team’s projections for economic growth, unemployment and interest rates.
Per the longstanding custom, however, the White House budget differs from most economic forecasts in one crucial way. Most forecasters estimate the path for the economy they believe is most likely, taking into account that many political promises will never come to fruition. But White House forecasts are an estimate of what the economy would be like if the president’s full agenda were implemented.
To establish a baseline of what a reasonable forecast might look like under Mr. Trump, respondents to The Wall Street Journal’s monthly survey of forecasters provided their own estimates of the economy if all of Mr. Trump’s initiatives were enacted.
If the president’s agenda were enacted, forecasters on average think long-run gross domestic product growth could rise to 2.3%, an 0.3 percentage point increase from their 2% baseline. Unemployment would average 4.4% under this scenario, instead of 4.5%. Interest rates set by the Federal Reserve would be about a quarter-point higher. Short-term rates would be about 3.1%.
So an improvement, but a modest one.
Early on, White House officials have reportedly considered penciling in growth rates as high as 3.2% a year. But the respondents to the Journal’s survey—a mix of academic, financial and business economists who regularly produce professional forecasts—say numbers so high will be hard to attain, because the policies under consideration just might not pack that punch.
Key Trump initiatives, which face a challenging road through Congress, include overhauling the health-care system, simplifying the corporate tax code, cutting income taxes, rewriting regulation and investing in the nation’s infrastructure.
“If you were to assume that such initiatives get passed later this year, there should be positive economic benefits, especially for 2018,” said Chad Moutray, chief economist of the National Association of Manufacturers.
Over the course of a decade, 3.2% growth would leave the economy nearly $2 trillion larger than 2.3% growth. So the lower estimates of economists are significant.
“Fewer regulations may raise long-term growth 0.1% to 0.2% by stimulating productivity growth,” said Nariman Behravesh of IHS Markit Economics. “It should have hardly any effect on the long-term unemployment rate and inflation rates.”
It is “hard to quantify, but measures would not boost long-term productivity,” said Ian Shepherdson of Pantheon Macroeconomics. “But they probably would push up both short and long-term interest rates.”
The White House always has some incentive to put forth overly optimistic numbers. For one thing, the White House staff generally believe in the wisdom and benefits of the president’s agenda. And if growth rates are boosted and unemployment comes down, it does wonders for budget projections.
Tax revenue climbs and spending on programs such as unemployment or Medicaid may dwindle.
In recent months, economists’ forecasts for the coming year haven’t changed much. They expect growth for this year of 2.2%, down from 2.4% in the March survey. They place the odds of recession in the next year at just 15%, compared with 20% at this time a year ago.
For now, many are waiting to see more detail in Mr. Trump’s agenda and retain doubts about how much he will be able to accomplish.
“Infrastructure spending is great, but it has to be paid for and that creates drag at some point,” said Amy Crews Cutts, the chief economist of Equifax. “The proposed tax breaks won’t stimulate the economy nearly enough to pay for themselves let alone fund other new initiatives, which leads to deep cuts in the long run."
The survey of 59 economists was conducted from May 5 to May 9. Not every economist answered every question.
Texas performs relatively well in measures of financial stability by ranking 16th nationwide in fiscal health and 2nd lowest in state debt per capita among the top 10 most populous states. These rankings along with historically high growth rates in economic output and population (see Chart 1) indicate that Texas has remained steadfast in having sound fiscal management.
However, a recent TPPF paper shows that there are increasingly troubling signs of fragility in the state’s fiscal position.
These signs of a rising burden of state liabilities (i.e., state debt and public pensions) could cost taxpayers billions of dollars without key reforms.
State debt outstanding, which is just the principal, amounted to $49.8 billion at the end of fiscal year (FY) 2016. While this amount is small compared with the $1.7 trillion economy, it has increased by 52.7 percent per capita since FY 2006 and is up to $1,790 owed per every man, woman, and child in Texas.
Debt outstanding tells only part of the story because the interest owed on this debt is also a taxpayer expense. Total debt service outstanding, which includes the principal and interest owed, is $80.8 billion, meaning every Texan owes roughly $3,000!
If these trends continue, they could jeopardize Texas’ AAA credit ratings by all three major credit rating agencies and raise the debt burden on taxpayers.
To reduce this concern, we recommend increasing debt transparency by requiring the following information on ballot propositions for voter approval of issuances of GO state debt: total debt service required to pay the proposed debt on time and in full and an estimate of the proposed debt’s influence on the average taxpayer’s taxes, as recommended for local debt.
Although state debt is a problem that must be addressed, the elephant in the room is state pensions.
Chart 2 shows the two largest state pension systems, Employees Retirement System (ERS) and Teachers Retirement System (TRS), with their estimated 8 percent annual return and the eight state debts with the highest computed compounded annual growth rates.
Volatile annual rates of return and fewer contributors paying for more beneficiaries are exhausting these defined-benefit (DB) plans. Assuming a less risky average 15-year Treasury rate of 2.3 percent compared with today’s 8 percent assumed return rate, Williams et al. estimate that unfunded liabilities for all of Texas’ state pensions of $360 billion ranks 3rd highest nationwide and of $13,120 per person ranks 14th lowest.
To alleviate this mounting state pension issue, we recommend changing these pension systems from DB plans to defined-contribution (DC) plans, whereby payments would be based on employee contributions and a defined government match with little to no transaction cost and the benefit of sustainability without higher taxes.
Finally, given the low computed compounded growth rates of state debt in Chart 2, we recommend that surpluses of state revenue be used to cut taxes before paying down state liabilities. This could be done by creating a budget-cutting tool called the Sales Tax Reduction (STaR) Fund or eliminating the state’s business margins tax. These tax cuts would help avoid leaving revenue unchanged for future spending.
Implementing ballot box transparency for state debt, converting public pensions to defined-contribution plans, and prioritizing state surpluses to cut taxes will help lower the burden of state liabilities on taxpayers.
Overview: Texas has a proven record of financial stability. Ranking 16th nationwide in fiscal health, 7th in lowest state debt per capita, and with historically high population growth rates accompanied by economic growth, these factors have kept Texas steadfast even during times of economic uncertainty. Relatively sound fiscal management has provided Texans a certain level of comfort, but increasingly evident signs of vulnerability are raising concerns about the state’s financial health.
This commentary originally appeared in Forbes on May 2, 2016.
Are American governments making promises that American taxpayers can’t keep? The answer may well be “yes” when it comes to public pensions.
Unfunded pension liabilities, or the difference between what’s been promised to future retirees and what’s actually on hand to provide for those benefits, have grown to absolutely epic proportions. This raises serious concerns about the sustainability of America’s retirement systems and its ability to make good on the promises made.
Last month, Moody’s Investor Services, one of the nation’s top credit rating agencies, estimated that federal unfunded pension liabilities (including civilian and military obligations) had risen to $3.5 trillion, or about 20% of GDP. In addition, Moody’s pegged state and local governments’ unfunded liabilities at roughly the same amount, bringing the total U.S. pension shortfall to 40% of GDP.
Making matters even worse, total U.S. unfunded liabilities that includes Social Security, Medicare and other debts top $100 trillion, according to the website usdebtclock.org.
Regardless, there’s an ocean of retirement-related red ink that, at some point, will have to be mopped up either through massive future tax increases, a substantial reduction in benefits, or some costly combination of the two.
Part of the reason that things have gotten so far out of hand is government’s penchant for hiding the ball. U.S. Congressman Devin Nunes echoed this frustration when he said: “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.” Nunes filed legislation recently to help get a handle on the issue.
In Texas, the problems with public pensions are less pronounced but still serious.
The latest figures from the Pension Review Board (PRB), the state agency charged with overseeing Texas’ state and local retirement systems, show that among the 93 systems monitored by the agency, unfunded liabilities topped $60 billion as of February 2016. That’s a spike in pension debt of $2.7 billion since June 2015 and an increase of $7.7 billion compared with two years ago.
Digging further into the data reveals that the funded ratio—a measure of a plan’s current assets as a share of its liabilities—averaged 80% across all plans. It’s generally held that a funded ratio of 80% or more signifies a firm financial footing, something that Texas’ systems are right on the brink of surpassing.
Looking at these plans’ amortization periods also hints at trouble. The PRB’s guidelines for actuarial soundness recommend that a plan’s amortization period ideally range between 15 and 25 years. However, 56 of the 93 plans exceeded that target as of February 2016.
Over a longer time horizon, it’s evident that fewer plans are able to achieve the recommended amortization period. A 2014 PRB report compares the financials of Texas’ 93 monitored plans in 2000 and 2013. The report finds that in 2000 roughly 46%, or 43 of the 93 plans, had amortization periods at or above 25 years. By 2013, however, that figure had grown to 65%, or 60 of the 93 plans.
On a more local level, the city of Houston—which is the largest city in Texas and the fourth biggest in the nation—is seeing its finances wrecked because of public pension problems. Its three major municipal systems, including the Houston Municipal Employees Pension System ($1.8 billion owed), the Houston Police Officers Pension System ($1.2 billion owed) and the Houston Firefighter’s Relief and Retirement Fund ($532 million owed), have unfunded liabilities totaling $3.5 billion. And thanks to a sweetheart setup, the city is limited on what it can do to bring down the swell of debt.
Recognizing Houston’s pension problems, Moody’s downgraded the city’s credit rating in March, citing “large unfunded pension liabilities (among the highest in the nation)” as one of core concerns. Shortly thereafter, Standard & Poor’s followed suit and dinged Houston’s credit rating citing: “the city’s large unfunded pension liability that has been exacerbated by what we consider optimistic rate of return assumptions and a history of lower-than-actuarially determined contributions…”
Be it from a statewide perspective or more locally, Texas’ public pension systems are clearly not headed in the appropriate direction. A course correction is needed before the problem metastasizes into something much, much worse.
At the core of the pension problem, both nationally and in Texas, is a fundamentally flawed system—the defined benefit (DB) system. DB-style pension plans promise current and future retirees a lifetime of monthly income, but do so without knowing whether the money will be in the fund.
These types of pension plans suffer from two major deficiencies: generational accounting and excessive expected rates of return.
The first is the issue of fewer people contributing to the pot of retirement benefits compared with the rapid pace of baby boomers receiving benefits that’s often more than what they contributed. Put another way, there are fewer dollars available for retirees. This is a huge burden on DB-style plans.
Another issue is the fact that many plans assume unrealistically high rates of return—like an 8.5% return expected annually by the Houston firefighters fund or an 8% yield assumed by Houston’s other two major pension plans. Houston is certainly not the only U.S. city guilty of being too bullish on future returns. This is a nationwide problem that’s leaving a wider gap in financial solvency over time. Moreover, many plan managers have invested in risky assets to achieve these returns that could come to bite them later.
For taxpayers and retirees, it’s imperative that substantive reforms are put in place. This starts with eliminating DB-style plans and transitioning to a more secure retirement option like defined contribution (DC) plans.
DC-style plans resemble 401(k)s in the private sector and the optional retirement programs (ORP) available for higher education employees in Texas. These DC-style plans put the power of an individual’s future in their own hands instead of depending on the good fortune of government-directed DB-style plans. DC-style plans are portable and sustainable over the long term as they are based on the contributions of retirees and a defined government match.
With DC-style plans, retirees will finally have the opportunity to determine how much risk they are willing to take. They also reduce the risk that the government will default on their retirement or fund those losses with dollars from taxpayers who never intended to use these pensions. By giving retirees more freedom on how to best provide for their family, they will be in a much better position to prosper.
Because of their efficiency, simplicity and fully funded nature, the private sector moved primarily to DC-style plans long ago. For the sake of taxpayers and retirees dependent on government pensions, it’s time for all governments to move to these types of plans as well.
With trillions of dollars in pension problems at the federal level and tens of billions of dollars in Texas, lawmakers at the federal, state and local levels must make changes now.
Specifically, they should transition all new employees and those interested into DC-style plans.If not, our kids and grandkids will be saddled with pension debt and forced into a future of higher taxes and broken promises that could have been avoided.
This commentary originally appeared in the print edition of the Midland Reporter-Telegram on April 17, 2016.
Low and falling oil prices are starting to take their toll on some Texas towns.
Moody’s Investor Services recently placed Midland city and ten other local governments that have been hit hard by the recent energy turmoil on watch for a possible credit downgrade. That comes on the heels of Houston’s actual downgrade by two credit rating agencies, both Moody’s and Standard and Poor’s, because of “high fixed costs” that includes outsized debts.
Oil’s collapse, while not welcome, is helping to shine a light on an emerging public policy threat facing Texas—too much debt propping up too much government.
This is a problem that was made clear at a recent Senate Finance hearing in Austin. Last month, staff with the Legislative Budget Board (LBB), the state’s chief fiscal advisors, informed members of the Senate Finance Committee that state and local debt outstanding, which refers to only the principal amount owed, had grown to a whopping $260 billion in fiscal year 2015. Include the interest component and Texas’ total debt soars to an unthinkable $415 billion, or roughly $15,000 owed by each and every Texan.
This rising red ink must be stopped before stressing families and wrecking the economy with higher taxes, especially at a time of potential bond credit downgrades and an uncertain economic future. By slowing spending, prioritizing debt payments, and providing increased ballot box transparency, those in Midland and all Texans can rest a little easier.
Dissecting state and local debt outstanding shows that there is $41 billion in state debt, $6 billion in revenue conduit that’s not technically a legal liability of the state, and $213 in local debt. Clearly, the major debt problem is at the local level where 82 percent of the total originates.
Evidence shows that while Texas has one of the nation’s lowest levels (45th) of state debt per capita. On the other hand, local debt ranks as the second highest next to California and the second highest in debt per capita next to New York among the top ten most populous states.
However, these amounts tell only part of the story. They don’t include interest owed that’s captured by debt service outstanding.
Instead of the $47.1 billion reported in debt outstanding for the state and revenue conduit, state debt service outstanding is $77 billion, or about $2,800 per person. Local debt service outstanding has reached a whopping $338 billion, or $12,250 per Texan.
Collectively, the total is $415 billion, or more than $15,000 owed by every man, woman, and child in the Lone Star State. This must be resolved before we are all burdened with even higher taxes, resulting in fewer opportunities to reach our full potential.
One way to get control of this costly problem is by scrutinizing all budget areas because excessive government spending results in more debt. This should be paired with zero-based budgeting such that every program starts at zero and every dollar spent must be reasonably explained as effective and efficient.
Another valuable option is to prioritize debt to consider which order they should be paid if given the opportunity. This would help determine the useful life of projects paid with debt, the interest rate, and other variables to best use taxpayer dollars.
Last, but certainly not least, Texans must urge governments to do better regarding debt transparency. This could be done by publishing on a local ballot for bond proposals how tax bills will be affected, how much the bond will cost in principal and interest, and current debt service outstanding per capita. We’ve called this ballot box transparency.
By controlling spending, prioritizing debt payments, increasing debt transparency, Texans can have a better sense of whether state and local lawmakers are being good stewards of their tax dollars.
Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at firstname.lastname@example.org.
James Quintero leads the Think Local Liberty Project at the Texas Public Policy Foundation. He may be reached at email@example.com.
By Dr. Vance Ginn & Kiara Pillay
The Legislative Budget Board (LBB) recently presented updated information about state and local debt in Texas for fiscal year 2015. These data show that state and local outstanding debt is $259.5 billion with $41 billion in state debt and $6.1 billion in revenue conduit (“issued by state entities on behalf of third parties and is not a legal liability of the state”) (see Chart 1), and $212.4 billion in local debt (see Chart 2).
While this is valuable information, “debt outstanding” refers to just the amount of upaid principal on a debt that will continue to generate interest until paid off.” A more accurate representation of Texas’ full obligation, or what their tax dollars could ultimately pay, is “debt service outstanding” which is defined as “the amount that is required to cover the repayment of principal and interest on a debt,” according to the Texas Bond Review Board(pg. 119).
When you consider debt service outstanding, the data by the Texas Bond Review Board paint a much more costly picture.
Instead of the $47.1 billion, or roughly $1,700 per Texan, reported in debt outstanding for the state and revenue conduit, the amount of state debt service outstanding is $77 billion, or about $2,800 per person. This means that the true debt that Texans are on the hook for is 63 percent higher than the reported debt outstanding.
While it’s true that Texas ranks relatively well as having one of the lowest levels (45th) of state debt per capita nationwide, that’s not to say that something shouldn’t be done about state debt. Senate Finance Chair Jane Nelson made a valuable recommendation at a recent committee meeting to prioritize state debt to consider which order debts should be paid off if given the opportunity.
The 100-pound gorilla in the room is not state debt but rather local debt.
The principal owed on local debt ranks as second highest next to California and local debt per person ranks second highest to New York among the top ten most populous states. Adding to this red ink is local debt service outstanding that has reached an exorbitant amount of $338.4 billion, which is up $30 billion in just five years, bringing local debt per person up to around $12,250 per Texan.
Combining state and local debt service outstanding, the total is $415.4 billion, or more than $15,000 owed by every man, woman, and child in the Lone Star State. That substantial amount must be resolved in some fashion before we are all burdened with even higher taxes and fees, resulting in fewer opportunities to prosper.
To combat a greater financial burden, Texans must urge the government to do better regarding debt transparency. One way would be for lawmakers at the state and local level to publish more details about their debt amount, particularly the debt service outstanding and what that means for taxpayers. This idea has been advocated by the Foundation through what’s called ballot box transparency, as noted in the Forbes piece above.
Specifically, this would include providing more information about a local bond proposal on a local ballot such as (1) how their tax bills will be affected, (2) how much the bond will cost in principal and interest, and (3) local debt service outstanding per capita.
By increasing debt transparency and prioritizing which should be paid first, Texans can have a better sense of whether state and local lawmakers are being good stewards of their tax dollars.
Vance Ginn, Ph.D.