Enjoy It While It Lasts

Woo hoo! Tax cuts and spending increases — it doesn’t get any better than this. The United States is about to enjoy its biggest fiscal stimulus since Barack Obama’s American Recovery and Reinvestment Act of 2009. All this spending and tax cutting is going to feel great for the next couple of years — especially here in Virginia, which could be the single biggest beneficiary in the country of the budget deal’s $165 billion boost to Pentagon spending over the next two years. Who needs Amazon when you’ve got the federal government with its limitless credit card?

Let’s enjoy the booming economy while it lasts. But let’s not fool ourselves either. When Virginia’s GDP suddenly perks up and revenues start surging, let’s not pretend that we have somehow “turned the corner” and are experiencing a “new normal.” It would be a huge mistake to see the fiscal stimulus as anything more than superficial prosperity purchased largely through the massive accumulation of federal debt. (I’ll give corporate tax restructuring and deregulation credit for being more than passing phenomena, but much of the economic euphoria will come from old-fashion deficit spending.)

Unfortunately, if something is too good to be true… it’s probably not true. Inflation, which has been quiescent for a decade, is now surpassing 2% annually. When you cut taxes, increase spending, and tighten monetary policy in the face of increasing inflation while the private-sector economy is booming, you get higher interest rates.

Higher interest rates will do two things. They will dampen the economy, acting as a regulator on growth. And they will increase the cost of borrowing for the world’s largest debtor, Uncle Sam, with $20 trillion in national debt. As new debt is financed and old debt rolls over, each 1% increase in interest rates eventually will add $200 billion a year to federal spending. We could find that a strong economy is actually worse for the deficit and national debt than a weak economy!

Since I wrote “Boomergeddon” almost eight years ago, the United States has squandered its opportunity to get its fiscal house in order. The problem, as I outlined back then, is that Democrats refuse to cut domestic spending, Republicans refuse to cut defense spending, and Republicans talk about cutting entitlements but are too scared to act because Democrats would crucify them. As we’ve seen in the latest budget deal, nothing about that political logic has changed.

Meanwhile, the Medicare Hospital trust fund is scheduled to run out be depleted in eleven years, and the Social Security trust fund is scheduled to run out in sixteen years. In 2019 when the Medicare trust fund runs out and Congress looks for ways to maintain benefits, the U.S. budget will be running annual deficits of about $1.5 trillion a year — and that’s according to a June 2017 forecast that doesn’t reflect the recent tax cuts and spending hikes, and assumes no big recessions between now and then. Faced with the prospect of putting Medicare and Social Security on a pay-as-you-go basis or dramatically raising payroll taxes, the U.S. will be facing the greatest fiscal crisis since the Great Depression. This political armageddon — or, as I call it, Boomergeddon — is only a decade away.

Oblivious to all this, the General Assembly is perilously close to agreeing to expand the Medicaid program in Virginia predicated upon federal promises to pay for 90% of the expansion — and even then the state is committing itself to adding roughly $300 million to its biennial budget. The Republicans’ insistence upon restricting the program to adults who are working or seeking work is nothing more than a face-saving device that will not alter the underlying fiscal dynamics. Ten years from now, when Uncle Sam is dealing with an exploding Medicare system, Virginia’s retired state employees, local employees, and teachers will be depleting the Virginia Retirement System. The VRS’s $20 billion in unfunded liabilities are, for reasons I have explained previously, likely to get get bigger, not smaller. At some point between now and ten years from now, we’ll also have to acknowledge that the Washington Metro isn’t the only component of the state’s transportation infrastructure facing a multibillion-dollar unfunded maintenance backlog.

Sadly, human nature being what it is, Virginia state and local governments will interpret the Trump boom as the sign of enduring prosperity, not an unsustainable spurt, and elected officials will crank up borrowing to pay for the endless list of “unmet needs,” which never seems to shrink in good times or bad.

I don’t know why I bother sounding the alarm. No one’s going to listen. Nothing’s going to change. But I can always hope, when it comes time to dissect the greatest social and economic tragedy in nearly a century, maybe someone will remember that someone saw it coming.

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13 responses to “Enjoy It While It Lasts”

  1. LarrytheG Avatar

    two things:
    1. Medicare Part A and Social Security are not funded from general revenues. The don’t “go broke” in the traditional sense of a bankrupt company when liabilities exceed assets but rather they pay out less than originally “scheduled” if no changes are made to payroll taxes.

    That’s NOT TRUE of Medicare Part B – which IS funded from General Revenues and WILL increase the deficit and debt as more and more money is spent to pay for an ever increasing pool of retired people. Medicare part B is a far BIGGER threat to the budget and deficit/debt than SS and Medicare Part A – which – by the way – work a lot like most pension plans and employer-provided retirement health insurance.. both of them are also predicated on younger employees paying into those funds to keep them solvent.

    2. – Unless I misunderstand this: ” The quiet hints about expanding Medicaid in Virginia”

    … ” The full Medicaid expansion that former Gov. Terry McAuliffe wove tightly into his proposed budget for the next two years — the document the House Appropriations and Senate Finance Committees have until next Sunday to revise — isn’t going to happen.

    Instead, the money committees are looking at smaller groups of uninsured Virginians, say House Appropriations chairman Chris Jones, R-Suffolk, and Senate Finance co-chairmen Thomas K. “Tommy” Norment Jr., R-James City County, and Emmett Hanger, R-Mount Solon.

    The idea is to bring them into the existing Medicaid program, which is jointly funded by the state and federal government.”

    The GOP is NOT talking about doing the ObamaCare MedicAid expansion but rather the basic MedicAid. program… and looking for waivers .. and more than 50-50 funding…

    go read the article…..

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  3. Steve Haner Avatar
    Steve Haner

    Jim: Odd, right now I know just how you feel. Our fellowship goes back to Cassandra. We should form a club.


  4. LarrytheG Avatar

    250 billion dollars a year is the cost of the Federal govt not taxing money spent on health insurance.

    A substantial portion of subsidies for Basic Medicare Part B go to support people with retirement incomes in excess of 85,000 a year.

    Medicare Advantage – a subsidized program to pay for the costs about the 80% that regular medicare pays – is adding even more costs:


  5. Andrew Roesell Avatar
    Andrew Roesell

    Dear Jim,

    I hope you’re wrong, but as Willie Nelson might say — https://www.youtube.com/watch?v=W8KP-z68DF4



  6. TooManyTaxes Avatar

    Come talk to me about Medicare spending when we stop spending money on illegal immigrants and tighten chain immigration. We are importing poverty.

  7. LocalGovGuy Avatar

    The difference is this: Obama’s stimulus occurred in the teeth of the worst economic meltdown since the Depression.

    Whether you’re a fan of Keynes or not, you’d have to acknowledge that, at the very least, the Obama stimulus conforms with an accepted macroeconomic school of thought (spend/cut taxes in the midst of recessions/ raise taxes and cut spending during periods of economic growth).

    No one can truly say that the current tax cuts and spending increases conform to any accepted macroeconomic school of thought (Keynes, Austrian, etc.). These policy decisions are pure madness.

  8. With the passage of the spending bill last week by a Republican-controlled government, I conclude that the government has no ability to limit itself. It is wired only to expand, never to cease nor shrink. The only offset to this can be economic growth. Rising interest rates will brake that. I see a big invoice coming…Boomergeddon, indeed.

  9. The role reversal — Democrats for fiscal responsibility, Republicans for economic stimulus — shows how far we have come. I keep on hearing from conservative friends, “the additional deficit is worth it just this once to achieve _____ [insert: corporate tax reduction, destruction of Obamacare pooling, The Wall, debt ceiling extension, . . . ].” For what?? Those are short term political achievements, easily undone. In fact they guarantee the need for follow-up — e.g., if not Obamacare/Medicaid, what? — but instead of tending to the huge legislative backlog and restraining our monstrous commander-in-chief, we see most of Congress preparing to declare victory and run home to campaign and raise money from now to November. Meanwhile, the price of this temporary reprieve, trillions of additional debt, will not go away. Speak, Cassandra.

  10. TooManyTaxes Avatar

    We need to consider making any money received from the government taxable just as Social Security benefits are; prohibiting any person who worked in a political position in the administration or for a member of Congress that is not a ministerial job from lobbying for five years after employment terminates; and strip the tax exempt status from any entity that spends any money lobbying. I don’t have details, only general concepts.

    Washington is a filthy swamp. It needs to be drained.

    As far as Obama’s stimulus is concerned, at least the broadband piece was a failure in Virginia. I was working with several colleges and school systems that had Educational Broadband radio licenses. Under FCC rules, those licenses can be leased to broadband providers for money and for free connections. I was able to attract good proposals for many of these entities, even after the 2008 downturn. But the availability of stimulus money caused the market to crash. Smaller private companies that had made agreements to lease the spectrum could not borrow money because lenders wanted to see which company would get stimulus money in which markets. As a further result, several of these companies went under or downsized radically such that they breached their agreements with the schools. And a number of people who I got to know lost their jobs and others a good portion of their investments.

  11. LarrytheG Avatar

    Social Security is only taxed if you have a lot of other income. It’s essentially means-tested. So are virtually all other deductions, tax credits and exemptions in the tax code.

    Money spent on employer-provided health insurance is not taxed whereas money spent by individuals on health insurance is taxed.

    Obamacare is not free.. it actually does cost money and how much it costs depends on your age and whether you use tobacco and your income. Many who get Obamacare – actually pay MORE for it than most seniors on MediCare pay – $134 a month.

    But the simple truth is that the Pentagon , and all the other national security agencies that DO consume more than a trillion dollars of the budget (about twice what the Pentagon (Defense) spends).. they spend spend every penny and more of what would be budgeted to them.. There is not a weapon system they’d not buy… if they could and right now we spend more on Defense than the next 10 countries combined…that includes all our major allies and all our major opposing nations.

    And the BIG cost of “Defense” is salaries and benefits….for armed forces personnel – 95% of them who never set foot outside the US much less on a battlefield somewhere… The ones that do – deserve every penny they get.. the ones they don’t – though still subject to be “called” cost dearly… everything from housing allowances, dependent health care, VA health care and VA education benefits.. etc… and not to mention the dozens and dozens of military bases the Pentagon WOULD close if it were not for Congress treating those bases as economic development for their states.

    On the other side – we have more than 60 million seniors – many of who who have significant retirement income and assets – who pay $134 a month for health insurance and a few dollars more for Medicare Advantage which pays 100% of costs.

    Keep in mind that people who get employer-provided – don’t pay taxes on the money used to buy it – and that costs the Feds (taxpayers) 250 billion a year…( that’s TWICE as much as Obamacare costs and it is not funded from the General Fund).

    We could – and should – cut BOTH – “defense” AND health care – Medicare as well as cap the amount of health insurance that is tax free – like we already do with things like 401Ks…

    The GOP could do this – they could cut BOTH and people would accept it… but cutting one and not the other is what puts them behind the eight ball – politically.

  12. LarrytheG Avatar

    re: ” prohibiting any person who worked in a political position in the administration or for a member of Congress that is not a ministerial job from lobbying for five years after employment terminates;”

    GAWD TMT – you’d deny them their Free Speech rights!

    Maybe we’re on the same track together after all, eh?

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