James Pethokoukis

Politics and policy from inside Washington

Scott Walker, America’s Thatcher

Mar 10, 2011 01:57 UTC

“Where there is discord, may we bring harmony. Where there is error, may we bring truth. Where there is doubt, may we bring faith. And where there is despair, may we bring hope.” — Margaret Thatcher, May 4, 1979.

Reducing the power of government unions has several major benefits: 1) It will begin to make it easier to rework pension and healthcare obligations; 2) it will begin to make it easier to restructure government so that it is more efficient and less expensive; 3) it will begin to end a system where a major political party often acts as a wholly owned subsidiary of a special interest; and 4) it will begin help save the U.S. education system where teachers unions are preventing children from being taught by competent teachers.

The very good news from Wisconsin:

Republicans in the Wisconsin state Senate passed the most controversial portions of Governor Scott Walker’s budget repair bill late on Wednesday, stripping out the sections that required the presence of their 14 absent Democratic colleagues in the upper chamber.

In an 18-to-1 vote, the Senate approved the curbs on collective bargaining by public employees that Walker has insisted are needed to help the state’s cash-strapped municipalities deal with a projected $1.27 billion drop in state aid over the next two years. The measure will now go to the Assembly, expected to vote on the matter on Thursday.

COMMENT

Mr. Walker recognizes that government employeee unions are different than private unions and should never have been allowed. Private unions adre limited by what the fruits of their labors can produce – get to much and your company goes bankrupt and the employees are out of a job. The government will never go bankrupt as it has the power to print money and raise taxes. Thus you can collectively bargain benefits way out of proportion to anything that your actual labor produces. I feel sorry for the individual employees who may loose some of their bargaining priveledges, but the free ride on the taxpayers has got to end.

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Can America grow its way out of its debt problems? No

Mar 9, 2011 14:39 UTC

That’s the question CNBC’s Larry Kudlow asked House Budget Chairman Paul Ryan yesterday, which resulted in a fascinating exchange:

KUDLOW:  But what do you say to supply siders and others who argue–regarding Social Security, not health care–if you grow the economy in the next 50 years at 3 1/2 percent per year, which is the long-term growth since World War II, then Social Security will fix itself?

Rep. RYAN: No, it doesn’t.

KUDLOW: Now that doesn’t mean we shouldn’t have a personal account option and so forth, but that’s what they argue. If you grow the economy, growth, growth, growth, then we don’t have to slash benefits and the Republican Party will look better, not worse.

Rep. RYAN: Except, first of all, nobody is talking about slashing benefits. We’re not even talking about touching benefits for people in and near retirement. But we’ve run those numbers on growth and Social Security and they don’t catch up, because when you have more growth and you have more Social Security contributions, you have more expenses. The more you pay in, the more you get out. So growth, you cannot grow yourself out of our Social Security solvency problem. I’ve run those numbers with the actuaries. You do need to make some changes in Social Security benefit for the future generations to make this program solvent.

KUDLOW: But the actuaries say you can only grow at 2 percent for the next 50 years.

Rep. RYAN: No. But even if you run bigger growth numbers through the system, you still don’t fix the problem. I’ve run those numbers. I’ve run the 3 and 3 1/2 percent growth numbers through the system. We are kidding ourselves if we think we can simply grow ourselves out of our entitlement problems. We can’t. We have an $88.6 trillion unfunded liability with our entitlement programs, according to the GAO. Last year that was a $76.4 trillion problem. Every year we delay fixing these entitlement programs. We go about $10 trillion deeper into our unfunded liabilities.

Me:  This is actually a tricky issue.  As the CBO forecasts it, America’s debt-to-GDP ratio could top 700 percent by 2080. But drill down into that prediction and you find that the CBO has plugged in a rather dismal long-term forecast of U.S. economic growth, just 2 percent or so. That’s only two-thirds of the average U.S. growth rate since 1970. But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent.

Under those conditions, according to a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So Kudlow is correct — if you could find a way to meet those conditions.

But here is the problem with that math:

1) It, as Ryan alludes to, ignores that Social Security benefits are linked to income growth.  So higher growth equals higher benefits, though a quirk in how benefits are figured means faster growth could reduce the program’s short-fall by 25 percent or so.

2) Healthcare costs continue to increase at a rate faster than GDP growth. So you have to find a way to bring down spending, or healthcare will consume an ever bigger part of the pie and continually boost government spending (unless you reduce Uncle Sam’s role). This chart from the CBO tells is all:

THE

COMMENT

Your logic is faulty re: averaging GDP growth since 1970. It would be like saying that a baseball player’s average batting average over 20 years was .300 when the reality is that his average was robust in his first 10 years and weak in his second 10 years:

First five years average: .340
Second five years average: .320
Third five years average: .290
Fourth five years average: .260

No major league baseball team would view this player as a .300 hitter in his last 10 years and if his agent was pedaling him as such he would be laughed out of every General Manager’s office in the league. The US economy is no different. The more robust 1970s, 1980s and even 1990s have nothing to do with today’s economy. And that history cannot be pulled forward to make today’s economy look better than it really is.

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