Larry Summers, who was one of the front runners to become the chair of the Federal Reserve before withdrawing his name, penned an op-ed piece in the Financial Times that is a must read for those interested in long-term budget and growth issues in this country. He identifies how the latest spectacle in Washington is not really about what it needs to be about:
More fundamental is this: budget deficits are now a second-order problem relative to more pressing issues facing the US economy. Projections that there is a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder economically and more plausible politically than the long-term budget deals with which much of the policy community is obsessed.
The Republicans (especially the Tea Party) seem to be obsessed about government spending, and are trying to reign it in at all costs (including the threat of default). On the other hand, Democrats are perceived to be the party of handouts; providing a large safety net through higher taxes on the rich. The simple fact that Mr. Summers points out is that both parties can get what they want, they just need to understand they are going about it the wrong way. Instead of raising taxes on the rich or cutting benefits for the poor, the country can achieve both a social safety net AND reasonable tax rates by advocating growth policies.
To be sure, there are steps that matter profoundly for the long run that should be priorities today. Data from the CBO imply that an increase of just 0.2 per cent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase US economic strength relative to other nations, help state and local governments meet their obligations and prompt investment in research and development.
We can’t cut or tax our way out of this. Long-term growth is the only plausible solution. If we could get politicians focused on that truth, we’d be in much better shape.
Head over to read the entire thing: The battle over the US budget is the wrong fight
Everyone is acutely aware of the risks that lay in front of us. With two devastating bear markets, many investors are just waiting for the next shoe to drop. Just for a moment, I wanted to bring your attention to an alternative scenario. What if things went right? What if all of the things we are worrying about today, just don’t materialize like we think they will? This isn’t just wishful thinking. History is filled with examples of innovation overcoming seemingly insurmountable obstacles. The automobile solved the issue of manure from horses infecting our cities. New technologies for finding oil solved the peak oil crisis we were supposed to hit 20 years ago.
So, I’ve listed the major obstacles we face today, and I’ve taken the liberty to think about what could go right:
- Government debt- conventional wisdom shows that our government debt is going to continue to climb to astronomical levels, eventually causing massive inflation. The reality is the debt has been shrinking with growing tax revenue and cost controls. With small changes to Social Security (raise retirement age, means testing, etc) and healthcare innovation (see below) to drive down costs, we could eventually see a surplus.
- Healthcare- one of the main drivers of government debt has been healthcare. The US spends more than any other country on healthcare per citizen, by almost double. Medicare is the leading cause of future deficits, so this is both a healthcare and budget issue. Technology will most likely be the answer to this problem. As I write this, there is tremendous advances being made in the biotechnology and healthcare technology. Where do most healthcare costs come from in the US come from? Testing. The US performs twice as many tests on patients than other countries. Nanotechnology and smart phones applications are being developed to perform these tests at a fraction of the cost. Technologies that will diagnose and prescribe medicine for you without seeing a doctor are also being developed. The point is that the costs associated with healthcare today could be drastically different in the future due to new technology.
- Natural Resources- there is a finite supply of natural resources in this world and eventually we will run out. This has been discussed for decades. In 1974 Jimmy Carter said we could use up all of the proven reserves of oil within the next decade. Why haven’t we run out? New technology has found millions of barrels of oil over the last several decades that could never be extracted before. In addition, natural gas, solar, wind and nuclear technology have come on line and it is hard to even predict where this will even take us in the next few decades.
- Education- the cost to educate a child is becoming absurd and the market for college loans is finally showing signs of cracking. Universities are now offering free online courses. I just took an MBA level course from the University of Virginia for free. Other sites like Khan Academy lets anyone watch online courses about nearly anything. Becoming educated will no longer require a $50,000 per year price tag. While no one knows how the educational system will change, there is a good chance that college will look a whole lot different in 20 years.
Innovation is not only the key to solving our problems, but will also be the key to growth over the coming decades ahead. When you bet against the economy and the market, you are betting against human ingenuity, which has almost always been a losing proposition. I am excited to see where that ingenuity takes us.
We have written before on this blog about how things are getting better in both the economy and with our own government finances. Growth is the magic cure to these ailments and the global economy has been steadily growing over the past several years. Reinforcing this trend, the Congressional Budged Office (CBO) released its updated budget projections yesterday. Here is a comment from the report:
“If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, the Congressional Budget Office (CBO) estimates, the smallest shortfall since 2008.”
In February, the CBO estimated the deficit would be $845 billion, which means that not only is it shrinking, but it is shrinking faster than many have expected. It seems as if small changes in taxes (raising top bracket and reinstating FICA wage taxes) and government spending cuts (sequester) has brought the deficit to less than half the shortfall in 2009, which was over 10% of GDP. Even more, the CBO released longer term estimates for the government budget:
While the deficit is expected to shrink substantially over the next few years, the trend upward is projected to start again around 2015. While some may view this as ominous, when you look at the deficit in terms of percentage of GDP (green line) what we find is that the so called crisis in government debt, is becoming less of an issue. This is a much better metric to use when evaluating debt levels, since GDP (or, to be more specific, the taxes from GDP) is what is available to meet your debt obligations. Although many may want to see a balanced budget or surplus in the near term, this chart shows that the economy and government are moving in the right direction and the crisis that many thought would be upon us by now, seems to be averted.
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President Obama made some big waves with both Republicans and Democrats with his budget proposal. One of the big points of contention is his plan to limit the growth of Social Security. His plan is to change the method by which Social Security is indexed for inflation, by changing from the CPI (Consumer Price Index) to the Chained CPI. This small change is expected to slow the benefit growth rate and save the government approximately $130 billion over the next 10 years. Here is a look at the last 14 years of the two methods of calculating inflation (CPI is blue, Chained CPI is red):
By the tone from groups like AARP you would think that benefit payments are going to get cut in half and seniors will be left out of the street. Just a quick back of the envelope calculation shows that a 65 year old retiring in 1999, receiving $1,000 in monthly Social Security benefits would be receiving approximately $1,379 today (using current CPI crediting). If a Chained CPI was used, that same retiree would be receiving $1,332 per month. A $47 difference is real, but it is not the devastating impact that many groups would have you believe.
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