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Tag: budget deficit

  • Sacramento City Unified School District faces unexpected $43 million deficit

    The Sacramento City Unified School District is facing a $43 million budget deficit, leading to a spending freeze starting Oct. 1.Administrators said the freeze is necessary to cover payroll and maintain operations. The district received the grim news about the massive budget shortfall at its Thursday meeting from the chief business and operations officer, Janea Marking. She showed a photo of a city about to be consumed by a large tsunami wave. “SCUSD, no one in particular, it’s in our DNA, has a bad, bad habit of uncontrolled, unbudgeted, unexpected expenses,” she said.The district is scrambling to find ways to come up with $43 million after unexpected budget items, including late payroll payments, unexpected invoices, and unauthorized contract payments. Managers say there were $62 million in unauthorized contracts last year, most for special education programs. “A contract that has not been authorized by the school district, but they provided a service ahead of time because they needed to provide services to students immediately,” Assistant Superintendent Cindy Tao explained.The spending freeze will affect non-classroom hiring, new contracts, travel, and non-emergency overtime, but not teachers’ contracts. “Stretched thin already, and we’ve just accomplished a lot of additional supports for our students that have been long needed and long deserved by our students,” said the president of the Sacramento City Teachers Association, Nikki Davis Melevsky.The SCTA wants the district to be accountable for why and how this happened.”They need to look into who signed these contracts, who authorized them, and why did they not go through the appropriate procedures so that the Budget Office would have been aware that they were out there and that they were needing to be paid?” asked Davis Melevsky.District spokesperson Alexander Goldberg discussed the spending freeze in a statement: “Those measures alone will not fix our problems. There will be many other budgetary sacrifices to make in the coming months to get the district back on a path to solvency before the end of the fiscal year. In reaching that goal, it is our every intention to avoid major disruption to student opportunities, programs, and the day-to-day educational experience.”School Board President Jasjit Singh said in an email, “The board is committed to ensuring our district is financially sound while maintaining the services crucial to student success. School district budgets are in a constant state of fluctuation. We are confident in our staff’s efforts to help cut costs and implement saving ideas.”The board is expected to get an update in December on where they stand financially after a couple of months of a spending freeze.See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel

    SACRAMENTO, Calif. —

    The Sacramento City Unified School District is facing a $43 million budget deficit, leading to a spending freeze starting Oct. 1.

    Administrators said the freeze is necessary to cover payroll and maintain operations.

    The district received the grim news about the massive budget shortfall at its Thursday meeting from the chief business and operations officer, Janea Marking. She showed a photo of a city about to be consumed by a large tsunami wave.

    “SCUSD, no one in particular, it’s in our DNA, has a bad, bad habit of uncontrolled, unbudgeted, unexpected expenses,” she said.

    The district is scrambling to find ways to come up with $43 million after unexpected budget items, including late payroll payments, unexpected invoices, and unauthorized contract payments. Managers say there were $62 million in unauthorized contracts last year, most for special education programs.

    “A contract that has not been authorized by the school district, but they provided a service ahead of time because they needed to provide services to students immediately,” Assistant Superintendent Cindy Tao explained.

    The spending freeze will affect non-classroom hiring, new contracts, travel, and non-emergency overtime, but not teachers’ contracts.

    “Stretched thin already, and we’ve just accomplished a lot of additional supports for our students that have been long needed and long deserved by our students,” said the president of the Sacramento City Teachers Association, Nikki Davis Melevsky.

    The SCTA wants the district to be accountable for why and how this happened.

    “They need to look into who signed these contracts, who authorized them, and why did they not go through the appropriate procedures so that the Budget Office would have been aware that they were out there and that they were needing to be paid?” asked Davis Melevsky.

    District spokesperson Alexander Goldberg discussed the spending freeze in a statement: “Those measures alone will not fix our problems. There will be many other budgetary sacrifices to make in the coming months to get the district back on a path to solvency before the end of the fiscal year. In reaching that goal, it is our every intention to avoid major disruption to student opportunities, programs, and the day-to-day educational experience.”

    School Board President Jasjit Singh said in an email, “The board is committed to ensuring our district is financially sound while maintaining the services crucial to student success. School district budgets are in a constant state of fluctuation. We are confident in our staff’s efforts to help cut costs and implement saving ideas.”

    The board is expected to get an update in December on where they stand financially after a couple of months of a spending freeze.

    See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel

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  • Trump’s reciprocal tariffs are struck down by federal appeals court, putting trade deals and huge revenue windfall at risk

    President Donald Trump’s trade war suffered a severe blow late Friday, when a federal appeals court stuck down most of his so-called reciprocal tariffs against global trading partners.

    The U.S. Court of Appeals for the Federal Circuit upheld an earlier ruling by the Court of International Trade, which found that the tariffs’ legal basis under the International Emergency Economic Powers Act (IEEPA) wasn’t valid, saying that the administration’s argument for the tariffs didn’t constitute an emergency.

    “Both the Trafficking Tariffs and the Reciprocal Tariffs are unbounded in scope, amount, and duration,” the majority wrote. “These tariffs apply to nearly all articles imported into the United States (and, in the case of the Reciprocal Tariffs, apply to almost all countries), impose high rates which are ever-changing and exceed those set out in the [U.S. tariff system], and are not limited in duration.”

    The 7-4 ruling won’t take effect until Oct. 14, as the court sought to give the Trump administration time to appeal to the Supreme Court. The decision also doesn’t cover sectoral tariffs, such as those on aluminum and steel, that were imposed under a separate legal basis.

    The judges also sent the case back to the trade court, which must decide if the ruling applies to anyone affected by the global tariffs or just the plaintiffs who filed the case. They include a collection of Democratic-led states and a group of small businesses.

    “ALL TARIFFS ARE STILL IN EFFECT!” Trump said in a post on Truth Social. “Today a Highly Partisan Appeals Court incorrectly said that our Tariffs should be removed, but they know the United States of America will win in the end.”

    In fact, the latest ruling marks the administration’s third defeat in court. In addition to the Court of International Trade, U.S. District Judge Rudolph Contreras had also found that IEEPA doesn’t give Trump the power to impose most of his tariffs.

    Trump’s “Liberation Day” tariffs—which shocked global markets on April 2 and triggered a massive selloff—helped leverage a series of trade deals. That includes an agreement with the European Union, which pledged to invest $600 billion in the U.S. and buy $750 billion worth of U.S. energy products, with “vast amounts” of American weapons in the mix. Similarly, the U.S.-Japan trade deal entails $550 billion in investments from Tokyo.

    Meanwhile, the reciprocal and sectoral tariffs are expected to generate $300 billion-$400 billion a year, a huge revenue windfall that was seen propping up the fiscal outlook.

    Last week, the Congressional Budget Office estimated that tariffs would shave trillions of dollars off the federal budget deficit. Meanwhile, S&P Global reaffirmed its AA+ credit rating and stable outlook on U.S. debt last week owing in part to “robust tariff income,” which should help offset the impact of tax cuts and spending in the federal budget. 

    But if the decision remains in place and applies to everyone affected, importers that paid the IEEPA tariffs could demand reimbursement from the federal government.

    Ahead of the ruling, there were hints that the court might rule against the administration. Earlier this month, Solicitor General D. John Sauer and Assistant Attorney General Brett Shumate sent at letter to the court warning of an apocalyptic doomsday outcome if the tariffs were struck down.

    “In such a scenario, people would be forced from their homes, millions of jobs would be eliminated, hardworking Americans would lose their savings, and even Social Security and Medicare could be threatened,” they wrote. “In short, the economic consequences would be ruinous, instead of unprecedented success.”

    The sudden dire tone suggested to some on Wall Street that the Trump administration expected to lose in the federal appeals court.

    James Lucier at Capital Alpha Partners said in a note earlier this month that Trump doesn’t have the legal authority to replicate the IEEPA tariffs under other tariff statutes. For example, the sectoral tariffs were imposed under separate authorization based on national security.

    “In other words, the president is in a jam because if the court strikes down the IEEPA tariffs, his trade deals have no legal basis,” he wrote.

    In another note on Wednesday, Lucier predicted that while the case is appealed to the Supreme Court, most countries would adhere to their trade deals with the U.S. to avoid antagonizing Trump, even if the administration has to come up with a new legal justification for its tariffs.

    But trading partners that held off on immediately retaliating against the U.S. may become more willing to strike back over time, changing negotiations over the details of any trade deals that haven’t been fully fleshed out, he added.

    “This could lead to months of uncertainty in global trade as the tariffs collected under IEEPA are refunded and the U.S. switches to a different set of levies,” Lucier warned. “Trading partners who cooperated with Trump may be less willing to cooperate the second time around.”

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    Jason Ma

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  • U.S. debt is so massive, interest costs alone are now $3 billion a day

    U.S. debt is so massive, interest costs alone are now $3 billion a day

    With U.S. debt now at $35.3 trillion, the cost of paying the interest on all that borrowing has soared recently and now averages out to $3 billion a day, according to Apollo chief economist Torsten Sløk.

    And that includes Saturdays and Sundays, he pointed out in a note on Tuesday.

    The daily interest expense has doubled since 2020 and is up from $2 trillion about two years ago. That’s when the Federal Reserve began its campaign of aggressive rate hikes to rein in inflation.

    In the process, that made servicing U.S. debt more costly as Treasury bonds paid out higher yields. But with the Fed now poised to start cutting rates later this month, the reverse can happen.

    “If the Fed cuts interest rates by 1%-point and the entire yield curve declines by 1%-point, then daily interest expenses will decline from $3 billion per day to $2.5 billion per day,” Sløk estimated.

    Apollo

    Meanwhile, the federal government closes out its fiscal year at the end of this month, and the year-to-date cost of paying interest on U.S. debt was already at $1 trillion months ago.

    But even if Fed rate cuts lighten the burden on interest payments, the next president is expected to worsen budget deficits, adding to the pile of total debt and offsetting some of the benefit of lower rates.

    In fact, a recent analysis from the Penn Wharton Budget Model found that the deficit will expand under either Donald Trump or Kamala Harris.

    But there’s a big difference between the two.

    Under Trump’s tax and spending proposals, primary deficits would increase by $5.8 trillion over the next 10 years on a conventional basis and by $4.1 trillion on a dynamic basis that includes the economic effects of the fiscal policy.

    Under a Harris administration, primary deficits would increase by $1.2 trillion over the next 10 years on a conventional basis and by $2 trillion on a dynamic basis.

    Still, JPMorgan analysts called the outlook unsustainable, regardless of who wins the presidential election, while acknowledging the prospect of bigger deficits with Trump.

    “Irrespective of the election outcome, the trend since the pandemic has been profligate fiscal policy that is absorbing substantial amounts of capital and is incentivizing additional private investment,” the bank said. “At the same time, the en masse retirement of baby boomers is shifting a substantial share of the population from a high-savings period in life to a low-savings period, depressing the supply of capital.”

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    Jason Ma

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  • Biden, Trump, and RFK Jr. are all anti-freedom

    Biden, Trump, and RFK Jr. are all anti-freedom

    Last week, presidential candidate Robert F. Kennedy Jr. asked me to moderate what he called “The Real Debate.”

    Kennedy was angry with CNN because it wouldn’t let him join its Trump-Biden debate.

    His people persuaded Elon Musk to carry his Real Debate on X, formerly Twitter. They asked me to give RFK Jr. the same questions, with the same time limits.

    I agreed, hoping to hear some good new ideas.

    I didn’t.

    As you know, President Joe Biden slept, and former President Donald Trump lied. Well, OK, Biden lied at least nine times, too, even by CNN’s count.

    Kennedy was better.

    But not much.

    He did acknowledge that our government’s deficit spending binge is horrible. He said he’d cut military spending. He criticized unscientific COVID-19 lockdowns and said nice words about school choice.

    But he, too, dodged questions, blathered on past time limits, and pushed big government nonsense like, “Every million dollars we spend on child care creates 22 jobs.”

    Give me a break.

    Independence Day is this week.

    As presidential candidates promise to subsidize flying cars (Trump), free community college tuition (Biden), and “affordable” housing via 3 percent government-backed bonds (Kennedy), I think about how bewildered and horrified the Founding Fathers would be by such promises.

    On the Fourth of July almost 250 years ago, they signed the Declaration of Independence, marking the birth of our nation.

    They did not want life dominated by politicians. They wanted a society made up of free individuals. They believed every human being has “unalienable rights” to life, liberty, and (justly acquired) property.

    The blueprints created by the Declaration of Independence and the Constitution gradually created the freest and most prosperous nation in the history of the world.

    Before 1776, people thought there was a “divine right” of kings and nobles to rule over them.

    America succeeded because the Founders rejected that belief.

    In the Virginia Declaration of Rights, George Mason wrote, “All power is vested in, and consequently derived from, the people.”

    By contrast, Kennedy and Biden make promises that resemble the United Nations’ “Universal Declaration of Human Rights.” U.N. bureaucrats say every person deserves “holidays with pay…clothing, housing and medical care and necessary social services.”

    The Founders made it clear that governments should be limited. They didn’t think we had a claim on our neighbor’s money. We shouldn’t try to force them to pay for our food, clothing, housing, prescription drugs, college tuition.

    They believe you have the right to be left alone to pursue happiness as you see fit.

    For a while, the U.S. government stayed modest. Politicians mostly let citizens decide our own paths, choose where to live, what jobs to take, and what to say.

    There were a small number of “public servants.” But they weren’t our bosses.

    Patrick Henry declared: “The governing persons are the servants of the people.”

    Yet now there are 23 million government employees. Some think they are in charge of everything.

    Rep. Alexandria Ocasio-Cortez (D–N.Y.), pushing her Green New Deal, declared herself “the boss.”

    The Biden administration wants to decide what kind of car you should drive.

    During the pandemic, politicians ordered people to stay home, schools to shut down and businesses to close.

    Then, as often happens in “Big Government World,” people harmed by government edicts ask politicians to compensate them.

    After governments banned Fourth of July fireworks, the American Pyrotechnics Association requested “relief in the next Senate Covid package to address the unique and specific costs to this industry,” reported The New York Times. “The industry hopes Congress will earmark $175 million for it in another stimulus bill.”

    Today the politically connected routinely lobby passionately to get bigger chunks of your money.

    For some of you, the last straw was when the administration demanded you inject a chemical into your body.

    When some resisted vaccinations, Biden warned, “Our patience is wearing thin.”

    His patience? Who does he think he is? My father? My king?

    At least Kennedy doesn’t say things like that. But he does say absurd things. In a few weeks I’ll release my sit-down interview with him, and you can decide for yourself whether he’s a good candidate.

    This Fourth of July, remember Milton Friedman’s question: “How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?”

    COPYRIGHT 2024 BY JFS PRODUCTIONS INC.

    The post Biden, Trump, and RFK Jr. Are All Anti-Freedom appeared first on Reason.com.

    John Stossel

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  • Heavily indebted countries can look just fine until suddenly they don’t, finance watchdog warns—’That is how markets work’

    Heavily indebted countries can look just fine until suddenly they don’t, finance watchdog warns—’That is how markets work’

    Indebted countries are vulnerable to a precipitous loss of confidence even though that risk is barely acknowledged in bond markets, the Bank for International Settlements warned. 

    The Basel-based institution said in its annual economic report released on Sunday that countries whose bloated fiscal positions are further stretched by higher interest rates should prioritize fiscal repair. Claudio Borio, head of the BIS’s monetary and economic department, said they must act “with urgency.”

    “We know from experience that things look sustainable until suddenly they no longer do,” he told reporters. “That is how markets work.”

    While the need to fix public finances has been a recurring theme for the BIS, the remarks coincide with heightened scrutiny on indebted economies. Worries about France this month prompted investors to demand the highest premium on its bonds since 2012. 

    The Basel officials didn’t specify any country in particular, but they did feature a chart looking at the debt and market pricing of some of the world’s biggest borrowers, including Japan, Italy, the US, France, Spain and the UK.

    In order to stabilize finances, advanced economies can this year run deficits no larger than 1% of gross domestic product, down from 1.6% last year, the BIS said. That’s a fraction of the current US deficit, which the International Monetary Fund described last week as “much too large.”

    “Though financial market pricing points to only a small likelihood of public finance stress at present, confidence could quickly crumble if economic momentum weakens and an urgent need for public spending arises on both structural and cyclical fronts,” the BIS said. “Government bond markets would be hit first, but the strains could spread more broadly.”

    Inflation is subsiding however, BIS officials acknowledge. The world is currently set for a “smooth landing,” General Manager Agustin Carstens said.

    Services still pose a risk to that outlook, with prices in that area out of step with pre-pandemic trends, the report said. In addition, increases in the cost of commodities due to geopolitical tensions could reignite inflation. 

    Given these pressure points, officials highlighted that central banks should be cautious about cutting rates too soon. That could prove costly to their reputations if such policy needs to be reversed amid a flare-up of inflation again, the report said. 

    Policymakers already did their fair share to contribute to that problem, the BIS suggested, repeating its accusation that “with the benefit of hindsight,” pandemic-era stimulus probably raised the risks of second-round effects.

    While central banks shouldn’t ease too soon, governments also have a part to play with too-loose fiscal policy, officials said. Instead, they should widen tax bases and deliver structural reforms to meet future challenges including demographic shifts and climate change.

    “Our main message is that central banks alone cannot deliver a durable increase in economic growth and prosperity,” Borio said. “Laying the foundation for a brighter economic future also requires actions from other policymakers, especially governments.”

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    Bastian Benrath, Bloomberg

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  • Surging immigration will reduce deficits by $1 trillion

    Surging immigration will reduce deficits by $1 trillion


    Higher levels of immigration are boosting America’s economy and will reduce the deficit by about $1 trillion over the next decade.

    In its semi-annual forecast of the country’s fiscal and economic conditions, released this week, the Congressional Budget Office slightly lowered its expectations for this year’s federal budget deficit. The CBO now expects the federal government to run a $1.5 trillion deficit, down from the $1.6 trillion deficit previously forecast.

    That reduction is due in part to higher-than-expected economic growth, which the CBO attributes to “more people working.” The labor force has grown by 5.2 million people in the past year, “mostly because of higher net immigration.”

    More immigrants will also help reduce future budget deficits—which are expected to average $2 trillion annually over the next 10 years, meaning any help is desperately needed.

    The changes in the labor force over the past year will translate into $7 trillion in greater economic output over the next decade, the CBO estimates, “and revenues will be greater by about $1 trillion than they would have been otherwise.”

    “The higher growth rate of potential GDP over the next five years stems mainly from rapid growth in the labor force, reflecting a surge in the rate of net immigration,” concludes the CBO, which expects higher than normal levels of immigration through at least 2026.

    Of course, this isn’t exactly rocket science. More workers equals more economic output and more growth, which in turn leads to more tax revenue to help offset some of the federal government’s seemingly insatiable appetite for spending. Sometimes economics can be quite confusing, but that formula is about as straightforward as can be.

    America’s current population is trending older, which strains old-age entitlement programs and means fewer productive workers in the economy. Thankfully, that’s not true of the country’s immigrants: “A large proportion of recent and projected immigrants are expected to be 25 to 54 years old—adults in their prime working years,” the CBO reports.

    It also tracks with what other studies have repeatedly shown: More legal immigration grows the economy, helps fund government programs, and doesn’t strain entitlement or welfare programs.

    Unfortunately, the very same Congress that bears most of the responsibility for the federal government’s poor fiscal state is also a major hurdle to increasing legal immigration that could help solve some of that fiscal mess. This week’s stunningly fast collapse of a proposed immigration bill is only the latest example.

    Meanwhile, the CBO’s assessment of how immigration has boosted economic growth further underscores the problems with how the CBO assesses the economic impact of immigration proposals. As Reason reported last week, the CBO is systematically underestimating the benefits of immigration when it scores legislation because Congress does not allow it to use a more sophisticated method of projecting how immigrants contribute to the economy. This is hardly the sole reason why comprehensive immigration reform struggles to get passed, but it certainly does not help.

    Indeed, this arrangement amounts to the CBO only being able to account for economic growth created by immigrants who are already here—but then being prohibited from assuming that future immigrants will similarly help grow America’s economic pie. That’s just silly.

    With a national debt of over $34 trillion and another $20 trillion in borrowing expected over the next decade, Congress needs a plan for addressing the budget deficit that goes well beyond simply increasing immigration.

    Still, it is impossible to deny that greater levels of immigration are an economic win for the country—and for taxpayers who have to shoulder the burden of federal borrowing. Anyone saying otherwise is not being serious.





    Eric Boehm

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  • America borrowed $1 trillion since the start of football season

    America borrowed $1 trillion since the start of football season

    Here’s how fast the federal government is borrowing piles of money: when the national debt hit $33 trillion in mid-September, the current National Football League (NFL) season was already two weeks old.

    You don’t have to be a fan of sports to know that football season in America isn’t particularly long—excluding the playoffs, teams play 17 games over the span of 18 weeks. The final games of the season are scheduled to be played this upcoming weekend, a few days after the national debt officially surpassed a new threshold: $34 trillion, according to an announcement made Wednesday morning by the Treasury Department.

    In other words, don’t feel bad about how much money you’ve probably lost on sports betting and fantasy leagues this year. The federal government has run up a $1 trillion tab in less time—and the next trillion-dollar threshold isn’t far off.

    “Looking ahead, debt will continue to skyrocket as the Treasury expects to borrow nearly $1 trillion more by the end of March,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation, in a statement. “Adding trillion after trillion in debt, year after year, should be a flashing red warning sign to any policymaker who cares about the future of our country.”

    Indeed, it’s astounding how quickly the federal government is piling up new debt. Equally remarkable is how much sooner it has hit some of these thresholds compared to the expected trajectories before the COVID-19 pandemic. As the Associated Press (AP) points out, as of January 2020 the Congressional Budget Office (CBO) projected that the federal government wouldn’t be $34 trillion in debt until 2029.

    Since then, the debt has grown faster due to the unprecedented levels of fiscal stimulus unleashed during the pandemic and because baseline federal spending has failed to return to pre-pandemic levels. In the fiscal year that ended in September, the federal government spent $6.1 trillion, up from $4.4 trillion in fiscal year 2019 (the last one before the pandemic). Federal revenue has climbed in recent years as well—$4.4 trillion last year, up from $3.5 trillion in 2019—but those increases haven’t been large enough to keep up with the surge in new spending.

    In that January 2020 CBO report cited by the AP, federal spending was expected to hit $5.3 trillion by 2023. The federal government is now running about $800 billion ahead of that pace—and that doesn’t account for any of the one-time emergency COVID-related spending—and so naturally the annual budget deficits are bigger and the national debt is growing at a faster rate.

    “Though our level of debt is dangerous for both our economy and for national security, America just cannot stop borrowing,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonprofit that advocates for lower deficits, in a statement. “This is a moment of consequence and continuing to refuse to pay our own bills will not lead us to where we need to be as a nation.”

    In some ways, it seemed like 2023 was the start of a political reckoning with the government’s addiction to borrowing. In August, Fitch cut the federal government’s credit rating, and Moody’s warned in November that it might soon do the same. Against that backdrop, Congress navigated a debt ceiling increase that placed some new limits on future discretionary spending—even though so-called mandatory spending on things like Social Security and Medicare are the bigger drivers of the long-term budget problems.

    The debt is likely to become an even bigger story in the new year: “The Debt Matters Again,” proclaimed The New York Times this week, noting that economists who spent the past decade downplaying concerns about the debt are now getting more worried because of how higher interest rates have made borrowing more expensive.

    That’s a nasty feedback loop—one that Reason and others have been warning about for years—that means the federal government will have to borrow more money in future years to afford the payments on the money it has already borrowed. The Peterson Foundation estimates that the government spends about $2 billion per day just to service the cost of existing debt.

    Oh, and Congress still hasn’t passed a budget for the year. The current continuing resolution expires in two stages: one later this month and a second in early February.

    Until lawmakers make some serious changes to fiscal policy, expect these announcements to keep coming with greater frequency—at least for a little while. The United States has about 20 years until “no amount of future tax increases or spending cuts could avoid the government defaulting on its debt,” economists at the University of Pennsylvania warned in October.

    One of the things that makes professional football so compelling is the urgency that comes with each week. With so few games on the schedule, each one is seemingly the most important of the year, and even a single loss early in the season can have a significant impact on a team’s long-term aspirations.

    Congress would do well to embrace that same sense of urgency when it comes to the country’s fiscal status, which is a game no one should want to lose.

    Eric Boehm

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  • Spending Recklessly in Good Times Is a Recipe for Disaster in Bad Times

    Spending Recklessly in Good Times Is a Recipe for Disaster in Bad Times

    Some policy experts who, over the last few decades, saw little need for serious fiscal austerity because the government could borrow at low interest rates are now changing their tune. Their argument is that with rates now rising and the government’s interest payments set to become extremely expensive, it’s time to adjust. While I suppose that’s progress, they fail to see that the past calls for austerity were attempts to avoid precisely what’s happening today.

    Indeed, the need for fiscal responsibility was never based on an inability to afford extra debt back then. It was because the moment was destined to arrive when adjustments became necessary, and rising indebtedness ensured that these changes would become more painful.

    Let me explain. Consider two well-respected economists and former high-ranking government officials, Lawrence Summers and Jason Furman, who previously suggested that in the aftermath of the Great Recession, concerns expressed by “deficit fundamentalists” (like me) were excessive, and that some of the efforts we championed to reduce the debt were unnecessary.

    Despite the growing national debt, interest rates remained historically low, meaning the cost of servicing it was not particularly burdensome. This, they argued, made calls to control the debt out of touch. Better yet, those low rates were said to present an opportunity to “invest” in productive projects like infrastructure and education. This spending, in turn, would fuel productivity and raise economic growth, helping offset the future cost of the debt.

    Now, unlike some who subscribe to similar ideas, Summers and Furman aren’t extremists. They acknowledged that debt cannot accumulate indefinitely. But they mocked calls for austerity measures back in the 2010s as premature, while encouraging government investments paid for with debt accumulation.

    Undoubtedly, interest rates were low. As Summers and Furman highlighted in a 2019 paper, “in 2000, the Congressional Budget Office (CBO) forecast that by 2010, the U.S. debt-to-GDP ratio would be six percent. The same ten-year forecast in 2018 put the figure for 2028 at 105 percent. Real interest rates on ten-year government bonds, meanwhile, fell from 4.3 percent in 2000 to an average of 0.8 percent last year.”

    This thinking has problems. First, it assumes government officials have the right incentives and knowledge—in addition to a comparative advantage over the profit-driven private sector—to “invest” productively. Not all government spending qualifies as productive investment, especially when most comes in the form of transferring wealth from one group to another and the rest is driven largely by interest group politics rather than by sound cost benefit analysis.

    Second, 10-year projections are really unreliable. Later, in 2008, CBO projected that in 2018, public debt would be 22.6 percent of GDP. It turned out to be 78 percent. Then, in 2018, CBO projected that in 2028, debt would be 96 percent of GDP. It’s now projected to be 108 percent. Meanwhile, CBO projections for interest rates since the Great Recession have been higher than what they wound up being. Starting last year, that flipped, and actual rates are much higher than the projection. That gap between projected rates and actual rates is likely to continue. It could expand.

    Overestimating interest rates means the federal government pays less than projected. Yay. An underestimation, however, means higher interest payments, more borrowing, and more debt than expected. Add to this misfortune an underestimation of debt levels and you quickly see a lot of red ink.

    That’s why betting on low interest rates to argue that we should not worry about a growing debt burden is risky. Interest rates are influenced by a variety of factors and can rise fast. In fact, back in 2021, many continued to wrongfully argue that rates would not go up. Is it crazy, then, to believe we would be in a better position to face the rate hikes today if the government had better controlled its debt over the last 10 or 20 years?

    Finally, anyone looking at CBO budget forecasts could always see that the disconnect between government spending and revenue was growing. Even assuming no significant rises in interest rates, as well as no emergencies requiring more borrowing and no new congressional or presidential spending programs—all things that have come to pass—official debt projections never looked good. Why add more debt to that?

    In the end, the risks associated with high levels of debt were never about what we could afford while rates were low. It was always about understanding that when change inevitably comes, we can better address the challenge if we are not in over our heads.

    COPYRIGHT 2023 CREATORS.COM.

    Veronique de Rugy

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  • 87% of Americans want politicians to do something before Social Security runs out of money

    87% of Americans want politicians to do something before Social Security runs out of money

    Entitlement reform has long been considered a third rail of American politics, even as the insolvency of Social Security and Medicare creeps closer.

    That perception might need some reconsidering. A new poll shows that the vast majority of Americans believe policymakers should make changes as soon as possible to extend the life of America’s two old-age entitlement programs and avoid possible benefit cuts that will hit in the early 2030s if nothing is done.

    That poll, which was shared with members of Congress and staffers at a closed-door meeting on Wednesday morning and obtained by Reason, found that only 5 percent of voters say Congress and President Joe Biden should do nothing to address the looming benefit cuts that will hit Social Security when insolvency hits.

    “Our polling shows that Americans are seriously worried about the solvency of these entitlement programs,” David Williams, president of the Taxpayers Protection Alliance (TPA), a free market group that sponsored the survey (it was conducted in August and included about 1,000 likely voters). “Congress can no longer continue to ignore the facts that without action, Social Security and Medicare will face deep and automatic cuts.”

    Indeed, the poll suggests that many Americans have a better understanding of the crisis facing Social Security and Medicare than most elected officials seem to believe. In the survey, 87 percent of respondents agreed that action is needed to extend Social Security’s solvency and avoid benefit cuts, and 89 percent said the same thing about Medicare.

    According to the trustees responsible for overseeing the two programs, Medicare’s main trust fund will be depleted by 2031 and Social Security’s reserves will be gone by 2033. Though those trust funds are largely an accounting fiction, their insolvency will trigger mandatory across-the-board cuts that will affect retirees and anyone who expects to benefit from the programs in the future. The two programs are also the primary drivers of the federal government’s future budget deficits, responsible for 95 percent of long-term unfunded obligations, according to the Treasury’s recent Financial Report. Those looming problems are contributing to the federal government’s declining credit rating and threaten America’s future economic growth.

    Despite that, leading politicians on both sides of the aisle continue to promise that inaction is possible. Biden has used fictional Republican plans to cut Social Security to demagogue against the idea that reforms to the program are necessary—most notably by sparring with GOP members of Congress during this year’s State of the Union address. Meanwhile, former President Donald Trump (the leading contender to be the GOP’s presidential nominee in 2024) has repeatedly promised not to touch Social Security, and other prominent figures on the so-called “New Right” have done the same.

    Realistically, the only serious approach will require some changes to existing Social Security benefits. That could mean reducing benefits for wealthier retirees or implementing across-the-board benefit reductions that would be phased in over time, allowing younger workers to offset smaller Social Security benefits with private savings. Ideally, workers would be able to opt out of Social Security altogether, so they can save and invest for their own retirement without having to pay payroll taxes.

    But none of those options can begin to be considered if a critical mass of elected officials continue to ignore the problem.

    The TPA poll released Wednesday offers some insight into how more serious politicians might proceed. The poll found that 71 percent of Americans find means-testing for Social Security benefits—that is, limiting benefits for wealthier recipients—to be acceptable, while 60 percent would approve of cutting other government programs to fund Social Security.

    (Source: Taxpayers Protection Alliance, Public Opinion Strategies )

    When it comes to Medicare, 66 percent approve of means-testing benefits, and 84 percent are in favor of the always-popular option of reducing rampant fraud and waste within the government-run healthcare system.

    Perhaps most importantly, 90 percent of voters say presidential and congressional candidates running for office in 2024 should discuss the financial challenges facing the entitlement programs. They might take note of former South Carolina Gov. Nikki Haley’s rise in the Republican primary field, which has followed her willingness to provide some straight talk about the difficult fiscal situation that the government must face.

    (Source: Taxpayers Protection Alliance, Public Opinion Strategies )

    Finding solutions to these highly fraught issues that voters will accept is no easy task, but it can’t start until politicians recognize that ignoring the government’s entitlement-driven debt crisis is not a real option.

    Eric Boehm

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  • Biden budget aims to cut deficits nearly $3T over 10 years | Long Island Business News

    Biden budget aims to cut deficits nearly $3T over 10 years | Long Island Business News

    President Joe Biden’s upcoming budget proposal aims to cut deficits by nearly $3 trillion over the next decade, the White House said Wednesday.

    That deficit reduction goal is significantly higher than the $2 trillion that Biden had promised in his State of the Union address last month. It also is a sharp contrast with House Republicans, who have called for a path to a balanced budget but have yet to offer a blueprint.

    The White House has consistently called into question Republicans’ commitment to what it considers a sustainable federal budget. Administration officials have noted that the various tax plans and other policies previously backed by GOP lawmakers would add more than $2.7 trillion to the national debt over 10 years.

    Biden intends to discuss his budget proposal on Thursday in Philadelphia. The Associated Press reported the deficit reduction goal earlier Wednesday, citing an administration official speaking on the condition of anonymity.

    “This is something we think is important,” White House press secretary Karine Jean-Pierre said in confirming the president’s plan. “This is something that shows the American people that we take this seriously.”

    As part of the budget, the president already has said he wants to increase the Medicare payroll tax on people making more than $400,000 per year and impose a tax on the holdings of billionaires and others with extreme degrees of wealth.

    It’s a delicate time with the U.S. economy on edge because of high inflation. The government this summer is likely to exhaust its emergency measures to keep Washington running, setting up the risk of a default on payments along with cataclysmic series of job losses that could crash the economy.

    Biden’s package of spending priorities is unlikely to pass the House or Senate as proposed. Senate Minority Leader Mitch McConnell, R-Ky., said Tuesday that the plan “will not see the light of day,” a sign that it might primarily serve as a messaging document going into the 2024 elections.

    Republicans, newly in control of the House, are demanding sharp spending cuts. Biden has suggested that tax increases on the earnings and holdings of the country’s wealthiest households can bolster government finances and also improve Medicare and Social Security.

    The president contended in a Monday speech that there are 680 billionaires in the United States and that many of them pay taxes at a lower rate than do families who think of themselves as being in the middle class. Biden said not to hold him to the precise number of billionaires, but that they could afford to pay more for the good of the country.

    “No billionaire should be paying a lower tax rate than a fire fighter — nobody,” Biden said at a gathering of the International Association of Fire Fighters.

    The Associated Press

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  • California Likely To Have $25 Billion Budget Deficit, Report Says

    California Likely To Have $25 Billion Budget Deficit, Report Says

    SACRAMENTO, Calif. (AP) — California will likely have a $25 billion budget deficit next year, state officials announced Wednesday, ending a run of historic surpluses and acting as a warning to other states about a potential recession.

    Democratic-controlled California taxes rich people more than other states, meaning most of its drop in revenue is because the uber-wealthy aren’t making as much money as they used to. That’s why California is often one of the first states to have budget problems when the economy starts to falter.

    The S&P 500, a key indicator of the health of the stock market that drives the income of the superrich, has fallen more than 17% since its peak in January. State revenues are now $41 billion below expectations, according to an outlook published Wednesday by the nonpartisan Legislative Analyst’s Office. The estimated deficit is lower because some of those revenue losses were offset by lower spending in other parts of the budget.

    The shortfall won’t endanger some of California’s major expansions of government services, including free kindergarten for 4-year-olds and free health care for low-income immigrants living in the country without legal permission.

    But it will force some painful spending decisions, Democratic Gov. Gavin Newsom’s administration said.

    “While we’re in fact better prepared, that doesn’t mean that the decisions to close the coming budget gap won’t be difficult — particularly if the economic conditions that have slowed the economy continue, or get worse,” California Department of Finance spokesman H.D. Palmer said.

    Despite the gloomy outlook, California is in a better position to weather an economic downturn than it has been in the past. The state has $37.2 billion stored in its various savings accounts.

    And it has plenty of cash available to meet its obligations this year. “It’s not insignificant, but it’s also manageable,” Legislative Analyst Gabriel Petek said of the deficit. “We don’t think of this as a budget crisis.”

    California’s revenues are famous for their volatility, peaking and plummeting quickly at the whims of the stock market. Just two years ago, state officials predicted a $54 billion deficit because of the pandemic — a shortfall that never happened because the economy remained strong.

    But this latest deficit prediction is more likely to stick. Soaring inflation has made everything more expensive. The Federal Reserve has tried to rein in inflation by raising a key interest rate. A higher interest rate makes it more expensive to borrow money, which eventually causes people to spend less. Although that would control price increases, it also cuts demand for goods and services. That leads to layoffs, meaning people pay less in taxes.

    “The chances that the Federal Reserve can tame inflation without inducing a recession are narrow,” the LAO said in its report.

    Although employment in California remains strong — the 3.9% unemployment rate for September is tied for the lowest since 1976 — the high-wage tech industry has been roiled by a series of recent job cuts. Facebook parent Meta announced last week that it would layoff 11,000 people, or 13% of its workforce.

    The report did not surprise Republicans, who said they have been warning against California’s massive increase in public spending for years, with Republican Assembly member Vince Fong calling it “unsustainable.”

    “Today’s report is another wake-up call to those warnings. We must refocus on fiscal responsibility,” said Fong, who is vice chair of the Assembly Budget Committee.

    Democratic Gov. Gavin Newsom’s administration wasn’t surprised, either, calling the $25 billion deficit estimate “realistic and reasonable.”

    “The good news is that as we prepare to close a budget shortfall, the state is in its best-ever position to manage a downturn, by having built strong reserves and focusing on one-time commitments,” said Palmer, the Department of Finance spokesman.

    California lawmakers could conceivably cover all of the deficit with the money it has in its savings accounts, but the Legislative Analyst’s Office warned them not to do that. Their outlook predicts deficits not just for this year, but the next three years — although the size of the deficit decreases each year.

    Instead, the Legislative Analyst’s Office says lawmakers should delay some of the $75 billion in one-time spending they approved over the past two years. As an example, they pointed to a $500 million program to clean up homeless encampments across the state.

    “That’s a very good example of the type of pause we had in mind,” Petek said.

    Palmer said the Newsom administration will begin making budget decisions next month. A change in statewide homelessness funding appears to be unlikely, given Newsom’s commitment to addressing the issue. Newsom did pause $1 billion in homelessness spending earlier this month, but that decision wasn’t related to sinking revenues.

    Toni Atkins, the Democratic president pro tempore of the California Senate, said she is confident the state can pass a budget this year “without ongoing cuts to schools and other core programs or taxing middle class families.”

    Democratic Assembly Speaker Anthony Rendon said lawmakers “can and will protect the progress of recent years’ budgets.”

    “In particular, the Assembly will protect California’s historic school funding gains, as districts must continue to invest in retaining and recruiting staff to help kids advance and recover from the pandemic,” Rendon said.

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