James Pethokoukis

Politics and policy from inside Washington

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:



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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When US debt payments consume all America’s revenue

Mar 9, 2011 01:42 UTC

Another scary chart from Mary Meeker’s USA Inc. report:


The Anti-Appropriations Committee

Mar 8, 2011 19:04 UTC

The U.S. lawmaking process is completely rigged toward favoring increases in federal spending rather than cuts. Sen. John Thune recently introduced a bill that would go a long way in tilting the playing field back the other direction.

Another good idea comes Orrin Hatch, the Utah Republican, and Mark Udall, a Colorado Democrat. They want to create a bipartisan Committee to Reduce Government Waste. A better name would be the Anti-Appropriations Committee. Its raison d’être would be finding and eliminating inefficient and duplicative government programs, like those the government’s chief auditor recently identified. A few thoughts:

1. It’s an old idea, but a good one. The committee’s model is the Joint Committee on Reduction of Non-essential Federal Expenditures, started in 1941 by Sen. Harry Byrd who objected to paying for America’s war effort by raising taxes. In its first three years, the panel claimed credit for some $2 billion in savings, equivalent to perhaps $25 billion today.

2. Under the Hatch-Udall bill, the committee could fast-track its annual recommendations to the Senate floor. Perhaps an even clearer mandate would be to give the panel a specific goal, such as finding cuts equal to some percentage of the previous year’s deficit, as Thune suggests in his bill.

3. But establishing an anti-appropriations committee would be just a first step. Another could be setting budgets for two years rather than one, giving Congress more time to craft and monitor fiscal plans. Lawmakers, after all, have only met the current annual budgeting deadline in four of the past 34 years. Other potential reforms would make it harder to skirt restrictions by labeling outlays as emergency spending.

Bottom line: Of course, none of this avoids the broader need to whittle down America’s long-term healthcare and retirement obligations. But new structures that emphasize discipline could put Congress a bit more in the mood to save rather than spend.

Who are the unemployed?

Mar 7, 2011 17:59 UTC

From James Glassman of JPMorgan (the purple and red are your worrisome colors):


An artificial recovery?

Mar 7, 2011 17:25 UTC

IBD’s Jed Graham shows what’s supporting consumer spending these days:

Three props to personal income — higher social insurance benefits, lower tax payments and higher government wages and benefits — are adding just shy of $1 trillion to personal income on an annualized basis relative to pre-recession levels.

Those government supports account for the entire $932 billion, or 8.7%, increase in personal disposable income — and then some — since the start of the recession. In other words, government income props, mostly deficit-financed, have paid for all the gains in personal spending and saving.



Wait. What? Now you don’t want tax cuts?

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Obama’s hidden budget strategy

Mar 7, 2011 17:09 UTC

The great Jim Capretta reveals all at NRO. Here is a bit, but read the whole thing:

The Congressional Budget Office (CBO) says the total tax hike over the next ten years will exceed $800 billion — a significant sum. But that’s really just the beginning of it. The authors of Obamacare were looking for a “game-changer” that went beyond a near-term tax hike. …  Their solution: Go back to 1970s-style bracket creep. … The Obamacare tax hikes associated with Medicare — 0.9 percent on wages and 3.8 percent on non-wage income — were sold as hitting only individuals with incomes exceeding $200,000 and couples with incomes above $250,000 annually. But those income thresholds are fixed. … . Consequently, as the years go by, more and more Americans will find themselves paying much higher federal taxes for Medicare — even though they are decidedly not the “rich” people the president said he was targeting.

Similarly, the so-called “Cadillac” tax on insurance plans — sold as a way to hold down costs in the most expensive arrangements — will quickly become a tax that nearly everyone in America pays. In 2018, when the tax goes into effect (conveniently after President Obama has exited the scene), insurers and employers offering plans with premiums exceeding $27,500 for family coverage will pay the tax. But in 2019 and beyond, that threshold will not grow with medical inflation. Instead, it will increase only with economy-wide consumer prices, generally a few percentage points below the inflation trend in the health sector. As the years go by, therefore, virtually all health-insurance plans will start bumping up against the “high-cost” tax t

By 2020, the total tax hike associated with Obamacare will already be bad enough — about 0.5 percent of GDP. But by 2035, because of bracket creep, it will have more than doubled — to 1.2 percent of GDP, according to CBO. And it won’t stop there. It will keep going up every year, in perpetuity.

The piece is a good reminder how the center-left consensus is that Americans are wildly undertaxed, and that dramatic tax increases must be part of the fiscal fix.  So transparency is to be avoided at all costs.  Another reason why tax simplification is not just about making it easier for folks to fill out their taxes.

The long walk back

Mar 4, 2011 18:57 UTC

WH economic adviser Austan Goolsbee:

The 0.9 percentage point drop in the unemployment rate over the past three months is the largest such decline since 1983, and it has been driven primarily by increased employment, rather than falling labor force participation.

Though unemployment remains elevated, we are seeing signs that the initiatives put in place by this Administration – such as the payroll tax cut and business tax incentives for investment – are creating the conditions for sustained growth and job creation. The steep decline in the unemployment rate and the overall trend of economic data in recent months has been encouraging,

The overall trajectory of the economy has improved dramatically over the past two years, but there will surely be bumps in the road ahead.

A now, a chart (via Calculated Risk):



I’m a little puzzled by this article by Mr. Pethokoukis. Does he see his role as a columnis/journalist as just passing along to Reuters readers whatever is fed hime by Austan Goolsbee? or other administration shills? I guess Pethokoukis doesn’t do this ALL the time. But why not stop the phoning-in journalism. I think Austan knows how to publish his own press releases.

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America, what’s gone wrong? I think it’s this

Mar 4, 2011 18:18 UTC

No one chart could sum up everything gone wrong with the U.S. economy, but this one comes close to showing America’s misplaced priorities:



Add education spending and you do just about have the whole story of America’s recent problems. Unproductive government-driven investment in health care, education, and housing is a black hole sucking up money that would otherwise be allocated according to its most productive use. This is the unintended consequence of government intervention played out on an economy-wide scale.

The solution is a full retreat of government from these area. When we will we as nation realize that? Will it even be possible to fix the mess we’ve created when we do?

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Kudlow: Rising oil prices aren’t a big problem … yet

Mar 4, 2011 18:08 UTC

The Great One, Larry Kudlow, on the rise in oil prices:

In any event, I side with clear-eyed Wall Street forecaster John Ryding, who believes the $10 or so oil-price hike will reduce real growth by only one-quarter of a percent while adding a like amount to inflation. Ryding expects 3.5 percent growth this year.

Historically, a combination of spiking oil prices and an inverted Treasury yield curve signaling ultra-tight Fed money are precursors to inflationary recession. This has pretty much held true for the last six economic downturns. But right now, the oil spike is modest and Fed money printing is ultra-easy. The yield curve is steep and upward sloping, with long-term rates 350 basis points above short-term rates. This argues against recession right now.

And let’s not forget: Corporate profits remain very strong, an extension of the Bush tax cuts is helping the economy grow, and the one-time payroll tax cut may help cushion the oil shock. So at the moment, barring a blowup in Saudi Arabia, the economy will survive.

Of course, as Larry hints, the risk is if that $10 turns to a sustained $20 or $30. Then you are chopping a point off GDP growth, assuming a linear relationship between oil prices and GDP growth. At some point, that relationship breaks down and the damage being done gets far worse. The airline industry, for instance, does not seem to operate real well at $140 a barrel oil, as became clear in 2008. Even the current price levels are hitting profitability:

The airline industry will earn almost 50% less this year than in 2010, as fast-rising oil prices pummel the sector’s profitability.

The International Air Transport Association has now downgraded its airline industry outlook for this year to $8.6 billion from the $9.1 billion it estimated in December. This is a 46% drop in net profits compared to the $16 billion earned by the industry last year.

IATA raised its 2011 average oil price forecast to $96 per barrel for Brent crude, up from $84 in December. This will increase the industry fuel bill by $10 billion to a total of $166 billion.

Matt Miller vs. Paul Ryan

Mar 4, 2011 17:28 UTC

Over at the WaPo, the great Jennifer Rubin takes Matt Miller to task for his completely unfair and wrongheaded critique of Paul Ryan.  See, Matt Miller has a thesis shared by many in the MSM and center-left think tank community. It goes like this:

1. As societies get richer — and older — they demand bigger government to provide more services.

2. Thus to prevent a fiscal crisis, taxes much go up since it is impossible to substantially cut spending.

3. And since Paul Ryan advocates, to Miller at least, the impossible — spending less government money on entitlements and keeping taxes low — Ryan is not a serious person when it comes to dealing with America’s debt problem.

The problem with Miller’s thesis is as follows:

1. Raising taxes high enough to deal with exploding healthcare costs would kill economic growth, making the debt problem even worse.

2. Ryan, via his Roadmap for America, demonstrates a way to provide a safety net that does not require bigger government. Miller refuses to acknowledge the viability of free market solutions.

3.  There is no political evidence that Americans are ready for dramatically higher taxes.


So the reason Miller is pointing out the absurdities of Paul Ryan’s plan is that the country is struggling to clean up the fiscal mess left by … Republicans like Paul Ryan. Ryan voted for budgetary and economic policies that added $5 trillion to the national debt over eight years. He supported the budgetary and economic policies that took a $230 billion surplus and turned it into a $1.3 trillion deficit. He was proud to endorse all kinds of measures, including two wars and Medicare expansion, that cost a bundle, but which Ryan and his cohorts never even tried to pay for.
But now Paul Ryan has decided it’s time to clean up the mess he helped create, and to do so, he wants to go after Medicare and Social Security.
Ryan’s “roadmap” is a right-wing fantasy, slashing taxes on the rich while raising taxes for everyone else. The plan calls for privatizing Social Security and gutting Medicare, and fails miserably in its intended goal — cutting the deficit.
When Matt Miller suggests that’s ridiculous, Pethokoukis concludes that HE’s being unfair and wrongheaded? Come ON.

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