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Clinton and the Future U.S. Budget

Monday July 25th, 2016   •   Posted by Craig Eyermann at 6:10am PDT   •  

The Democratic National Convention is going on this week, and much like the Republican National Convention last week, I’m once again planning to avoid watching any part of it. Life is simply too short to waste valuable leisure time on the empty promises of politicians who either won’t keep their grandiose promises or worse, who will get everything they ask and still produce an ever expanding train wreck-like fiscal disaster.

What I am doing, however, is paying attention to the Committee for a Responsible Federal Budget’s analysis of what each 2016 major party presidential candidate’s budget proposals would mean for the future of the U.S. government’s fiscal situation. That situation is already not good, and with the DNC happening this week, it’s a good time to consider what the future would look like under a Hillary Clinton presidential administration.


At this point of the 2016 political campaign, we find that the amount of spending that Hillary Clinton has proposed over the next 10 years would increase significantly from 22.1% to 22.7% of GDP. At the same time, federal tax revenues increase from 18.1% to 18.6% of GDP, as candidate Clinton has also proposed hiking income taxes on high income earners by a significant margin.

If Clinton’s fiscal plans were to go forward as currently outlined, the U.S. government’s budget deficits over the next 10 years will grow from a 4.0% gap to a 4.1% gap, which would cause the size of the national debt to grow at a rate that is slightly faster than is previously being projected based on current law.

While the CFRB predicts that the U.S. government’s budget deficits over the next 10 years will grow only slightly faster than under current law, Hillary Clinton’s proposals to date would nevertheless make the nation’s fiscal outlook considerably worse.

By loading up on federal spending so that it claims an even larger share of the U.S. economy and by becoming more reliant upon taxes imposed on high income earners for revenue, Clinton is proposing making the U.S. government’s fiscal system more like the state of California’s.

That kind of system is somewhat sustainable during periods of economic growth, but because the incomes of top income earners are much more volatile than those of typical income earners, the combination of higher government spending that is funded by top-heavy income taxes will increase the probability that the U.S. government will experience a major fiscal crisis during periods of recession because of plunging income tax revenues, just like California experienced during the Great Recession.

That toxic combination is a major contributing factor to why California today ranks among the bottom 10 of all states for fiscal health, even though it has the largest economy of all states, which would rank as the eighth largest economy in the world if California were an independent nation.

Like the future of the U.S. budget under a Trump administration, the potential future of the U.S. budget under a Clinton administration at this point of time should only be considered a first take of whatever proposals will be made during this 2016 election year. Between now and the elections in November, the main thing Americans should expect are even more promises and proposals that will bear little relationship to fiscal realities.

Trump and the Future U.S. Budget

Friday July 22nd, 2016   •   Posted by Craig Eyermann at 6:47am PDT   •  

If you’re anything like me, you’re doing everything you can to keep from having to watch any part of the major party political conventions this month.

That’s because these kinds of events are far too often long on political hyperbole and short on substance. Too many promises get made that have absolutely no chance of being kept, and in far too many cases, these are promises that the politicians who make them have absolutely no intention of ever keeping.

That makes analyzing the various tax and spending proposals of the various parties’ presidential candidates something of a fool’s game, because nobody really knows how seriously committed they are to achieving them. We don’t know which proposals are serious and which ones have been proposed to buy the votes of some special interest group that is going to be jilted later, nor do we know which have been advanced as negotiating positions and what the candidates are really willing to settle for if they do become the U.S. President.

So with all that in mind, and with the Republican national party convention going on this week, we’re going to look at how different the U.S. government’s spending and tax collections would be compared to current law over a 10-year period beginning with the 2017 fiscal year under a Donald Trump presidential administration.


The chart above is based on some yeoman analysis by the Committee for a Responsible Federal Budget, which has been doing an amazing job in keeping track of the spending and tax proposals of the major party presidential candidates for the 2016 election.

So far, coming into the Republican National Convention, we find that proposed spending over the next 10 years would be slightly increased, from 22.1% to 22.5% of GDP, but that federal tax revenues would plunge from 18.1% to 13.6% of GDP, where candidate Trump has proposed some very generous tax cuts.

If Trump’s fiscal plans were to go forward as currently outlined, the U.S. government’s budget deficits will grow from a 4.0% gap to a 9.0% gap, which would cause the size of the national debt to grow at a rate that is considerably faster than it did even during the Obama administration’s record-setting early years.

Now the question is whether we should believe that Trump’s fiscal policies will go forward as initially proposed. The answer to that question is no, they will not. The Wall Street Journal reports:

An updated version of Donald Trump’s tax cut will be about one-third the size of the previous $10 trillion version, two campaign advisers said on Wednesday.

Those pending changes mean the chart we just presented is already obsolete, so we’ll need to revisit the projections again once the details of candidate Trump’s new fiscal proposals are known. Until then, consider the chart above as “Take 1” of what will prove to be a series of ever evolving proposals.

Next week, when the Democratic National Committee gets under way, we’ll check to see how the current state of where “Take 1” of candidate Hillary Clinton’s fiscal proposals stand.

But if you want to know the truth, neither candidate’s budget proposals really matter because we’re starting from the scenario where no matter what, both the federal government’s annual budget deficits and its total public debt outstanding are set to grow each and every year, as far into the future as anyone dares to look.

Covered California Misery Mounts a Surge

Thursday July 21st, 2016   •   Posted by K. Lloyd Billingsley at 4:12am PDT   •  

36050459 - concept of national healthcare system - californiaWe have been tracking Covered California, the Golden State’s wholly-owned subsidiary of Obamacare. Emily Bazar of the Center for Health Reporting has exposed glitches in the system’s $454 million computer system, problems with cancelation of policies when people turn 65, and difficulties in enrollment for others. For Bazar, these and other problems resulted in “widespread consumer misery,” and the misery index has now mounted a surge. As Claudia Buck notes in the Sacramento Bee, Covered California health care premiums will increase 13.2 percent in 2017, more than three times the 4 percent hike in 2016. Covered California boss Peter Lee explained that 2017 was a “transition year” and others blamed the increase on the cost of prescription drugs.

Californians now forced to pay more might compare the current reality with the rhetoric when Obamacare was being imposed. They might also note the spending of $1.3 million on an absurd promotional video featuring exercise guru Richard Simmons, and $184 in contracts, without competitive bidding, to firms and people with ties to Covered California bosses. As we noted, California’s state auditor Elaine Howle slammed Covered California for that kind of cronyism. Meanwhile, the highly dysfunctional system will cost consumers 13.2 percent more now, but this is not only a California problem. According to Claudia Buck, the average increase of the 36 states that have posted rates for 2017 is 22.7 percent. On the other hand, if consumers don’t like their plan, they pretty much have to keep it.

Conventional Wisdom on Education?

Wednesday July 20th, 2016   •   Posted by K. Lloyd Billingsley at 10:12am PDT   •  

Trump and Sons_MLThe Republican National Convention in Cleveland this week has showcased plenty of hoopla and boilerplate rhetoric – some of it apparently plagiarized – but provided little enlightenment on key themes such as education. On Tuesday, House Speaker Paul Ryan and New Jersey governor Chris Christie bypassed the subject completely. Not so Donald Trump Jr., son of the Republican nominee, who is not running for office.

“Our schools used to be an elevator to the middle class, now they’re stalled on the ground floor,” he told the conventioneers. “They’re like Soviet-era department stores that are run for the benefit of the clerks and not the customers.” According to the nominee’s son, the reason other countries are besting the U.S. is that in other nations, “They let parents choose where they send their own children to school. It’s called competition. It’s called the free market.” In other countries, “They let parents choose where they send their own children to school. It’s called competition. It’s called the free market.” Trump Jr. said the free market is “what the other party fears,” and “They want to run everything, top-down from Washington. They tell us they’re the experts and they know what’s best.”

As Education Week noted, despite the speech, RNC delegates were “totally in the dark about what Trump stands for when it comes to K-12 policy.” The candidate is on record that “Our public schools have grown up in a competition-free zone, surrounded by a very high union wall,” and that teacher unions “take a strong stand against school choice.” He also said last year: “I may cut Department of Education.”

Ronald Reagan and other Republicans failed to cut the department and it has grown in power, with a budget of nearly $70 billion, up $1.3 billion over 2016. The federal department also deploys an armed enforcement division. For a wider assessment of federal education policy see Vicki Alger’s Failure: The Federal Misedukation of America’s Children.

Proposition 13 Liars Exposed

Tuesday July 19th, 2016   •   Posted by K. Lloyd Billingsley at 4:53am PDT   •  

20486913 - rows of houses, orange county, caIn 1978, when Jerry Brown was governor, soaring property taxes were literally driving people from their homes. Embattled Californians responded with the People’s Initiative to Limit Property Taxation. This measure capped property tax rates for residential and commercial properties at 1 percent of the assessed value and prevented assessed value from growing more than 2 percent a year. The initiative also required a two-thirds vote of the legislature to enact any change in state taxes designed to increase revenues.

Governor Brown called it a fraud and a rip-off, but the initiative duly appeared on the June 6, 1978, ballot as Proposition 13. A full 65 percent of California voters approved the measure, a landslide victory. Governor Brown then supported the measure, proclaiming himself a born-again tax cutter. Since then Brown has spearheaded a tax counterrevolution, and Proposition 13 has come under relentless attack from people such as Nathan Gardels of the Berggruen Institute, who said it was about older “white” people who represented the past. Actually, Proposition 13 applied to all Californians and was popular among young, first-time homebuyers.

In 2010, Joe Mathews and Mark Paul’s California Crack-Up blamed Proposition 13 for the state’s fiscal woes. Subtitled, How Reform Broke the Golden State and How We Can Fix It, the book charged that the measure “unhinged California” and offered mostly statist solutions in its place.

Enter Dan Walters of the Sacramento Bee, who has noticed that California boasts more than $5.5 trillion in taxable property, which even with Prop 13 limitations will produce $55 billion in revenue this year, more than $60 billion with taxes for bonds and other debts. That is more than 12 times the $4.9 billion collected the first year after Proposition 13 was passed in 1978, and also surpasses the nine-fold increase in state government revenue from income and sales taxes. This contrast, says Walters, “makes liars out of those who contend that Proposition 13 destroyed California’s public finances.”

Proposition 13 created no new state agencies and included no mandate for new state spending. Legislators would do better to leave Proposition 13 alone and target what Mr. Gardels describes as a “bloating state.”

The Debt Scenario You Should Believe

Monday July 18th, 2016   •   Posted by Craig Eyermann at 6:38am PDT   •  

Each year the Congressional Budget Office publishes its Long Term Budget Outlook, it presents two different scenarios that project the future value of the publicly-held portion of the national debt: the Extended Baseline scenario and the Alternative Fiscal scenario. Because the two have very different assumptions behind them, the question of which scenario is more believable always comes up.

The CBO’s Extended Baseline scenario assumes that the U.S. government will follow the laws that apply to its spending and taxation exactly as they are currently written. For example, if the law for an income tax credit was written so that it would expire 10 years after it was passed, the CBO would assume that would actually happen right on schedule. Under the Extended Baseline Scenario, the CBO would project that the federal government will collect more tax revenue indefinitely into the future after the tax credit has expired.

The CBO’s Alternative Fiscal Scenario however assumes that elected officials won’t let that happen, particularly for popular programs and tax cuts that they’ve previously acted to extend beyond their original expiration dates. One example is the popular child tax credit, which was previously set to expire at the end of 2012, but which was instead extended through 2017. Under the Alternative Fiscal Scenario, the CBO assumes that politicians will act to make these kinds of programs permanent.

The question of which scenario is more believable can be answered by comparing a previous year’s projections of the future against the actual results that were recorded in the years that had been projected. Below, the projections of the publicly-held portion of the U.S. national debt from the CBO’s June 2009 Long Term Budget Outlook for the years 2009 through 2015 are compared with the actual results that the CBO reported in its July 2016 Long Term Budget Outlook.


The Alternative Fiscal Scenario is the clear winner in coming much closer to the actual results than the Extended Baseline Scenario. That result holds even though the way that GDP is calculated was changed in July 2013 as part of a major revision.

At the same time, the actual results through 2015 were much worse than what the CBO had projected for both scenarios in 2009.

The CBO provides the following chart in its July 2016 Long Term Budget Outlook to consider several different scenarios for the publicly-held portion of the national debt in the year 2046. The bars on top represent the Extended Baseline Scenario, while the set of bars on bottom represent its latest Alternative Fiscal Scenario, which actually dates back to 2015. In between are two other sets of illustrative scenarios.


In 2046, the CBO’s Extended Baseline Scenario is that the publicly-held portion of the U.S. national debt will be equal to 141% of GDP. The CBO’s Alternative Fiscal Scenario is that the ratio of the public federal debt to GDP will actually be equal to 193% in 2046.

Neither future scenario is guaranteed, because there is a lot of time between 2016 and 2046. The U.S. government could enact a combination of spending cuts and tax increases that will change those percentages, just as it did in 2013, which greatly changed the speed at which the size of the national debt was growing with respect to GDP.

The reason I’ve opted to discuss this topic today is because the CBO’s Long Term Budget Outlook for 2016 omits any update to the Alternative Fiscal Scenario, even though the Extended Baseline Scenario saw significant changes. Instead, the CBO has pointed to its 2015 Alternative Fiscal Scenario, which given other changes, is now clearly out of date.

If, like the Extended Baseline Scenario, it shows a deterioration of the nation’s fiscal situation, we Americans need to know just how much worse the Alternative Fiscal Scenario has become. It is, after all, the more believable scenario.

Bullet Train’s “Blended” Boondoggle

Thursday July 14th, 2016   •   Posted by K. Lloyd Billingsley at 5:17am PDT   •  

43626212 - seaside railwayWe have been keeping track, so to speak, of California’s high-speed rail project, the vaunted “bullet train.” In February, we noted that farmers are not eager to sell the land the project needs. The alleged cost of $68 billion was already more than double the $33 billion estimate before California voters approved $9.95 billion in bonds seven years ago. The costs will likely be much higher because the mountains north of Los Angeles will require 36 miles of tunnels, the most ambitious tunneling project in the nation’s history. High-speed rail bosses were touting a “revised version” of the route connecting the San Joaquin Valley with the San Francisco Bay Area, instead of Los Angeles as the project was sold to voters. Now the rail bosses are up to new tricks.

As Dan Walters writes in the Sacramento Bee, in the current “blended” system, the bullet train shares tracks with local commuter rail projects. This was supposedly to keep costs down but the state is planning to spend “at least $1.1 billion” on the “bookends” of the project. These commuter rail links, having been merged with the larger bullet train project, “also share its legal and financial challenges.” For one thing, an independent consultant must certify that the project passes the legal criteria of the bond issue, before approval of funding. Walters doubts the project can pull that off, “and that doubt could doom the bookends as well, since they are now part of the overall system.” Politicians have responded with a measure that would allow the bookends to get bond money by bypassing independent certification. Despite such moves, the bullet train’s larger problems remain.

Many Californians see little need for a rail project that would be slower than air travel and more expensive. If anyone believes the bullet train can be built for $68 billion, or any amount politicians claim, they might recall the new eastern span of the Bay Bridge: $5 billion over budget, ten years late, and still contending with safety issues.

CBO: Out of Control Spending Worsens U.S. Fiscal Situation

Wednesday July 13th, 2016   •   Posted by Craig Eyermann at 5:26am PDT   •  

Yesterday, the Congressional Budget Office published its 2016 Long Term Budget Outlook for the U.S. government. Investors Business Daily‘s John Merline identifies the main takeaway from this year’s edition of the CBO report.

The nation’s long-term fiscal picture has grown considerably more dire over the past year, according to the latest forecast from the nonpartisan Congressional Budget Office, driven mainly by out-of-control spending.

The CBO now expects federal debt held by the public to reach 141% of the nation’s GDP by 2046, assuming that current policies remain in place. That’s up sharply from last year’s forecast of 111%, and would be the highest level of debt in the nation’s history.

EDIT5-debts-071216 The new forecast shows that annual deficits will top 8% of GDP by 2046, up from 2.9% this year. The growing deficit is entirely the result of increased spending. While revenues are expected to hit 19.4% of GDP that year—up from this year and far higher than the post-World War II average—federal spending will consume a record 28.2% of the economy by 2046.

Merline goes on to identify the federal government’s spending on health care as being the major driver of the future spending increases.

The CBO’s 2016 Long Term Budget Outlook anticipates that economic growth in the U.S. will be considerably than both it and the White House has previously projected, which will impair the government’s revenues. When that gloomier outlook is combined with the CBO’s projections of ever higher spending and deficits, the nation’s fiscal situation has clearly worsened.

The bright spot in the CBO report is that even though the nation’s fiscal situation has become gloomier, it is benefiting from falling interest rates on the U.S. government’s $19.2 trillion national debt.

The CBO warns however that the benefit of lower interest rates on debt issued by the U.S. Treasury will only last for so long. Merline comments:

CBO also expects interest payments to shoot up from 1.4% of GDP to 5.8% of GDP.

As the report notes, if left unchanged, this future would be devastating to the nation’s economy.

“Large and growing federal debt over the coming decades would hurt the economy ... reduce national saving and income ... and increase the likelihood of a fiscal crisis,” the report says.

The U.S. already has an outsized national debt, worsening economic growth and out of control spending. The CBO’s 2016 Long Term Budget Outlook projects that without major fiscal reforms, that already dire situation will continue to get worse.

Income Equality Researchers More Equal Than Others

Tuesday July 12th, 2016   •   Posted by K. Lloyd Billingsley at 5:12am PDT   •  

MoneyScaleUnequal_MLIn recent years, income equality has become an issue, with the discussion usually generating more heat than light. As Michael McGrady writes in The College Fix, income equality research has also become a lucrative pursuit. Drawing on a recent report from the California Policy Center, McGrady notes that several UC Berkeley economics professors who support such research bag more than $300,000 a year. Prominent scholars associated with the Cal Berkeley Center for Equitable Growth are “richly compensated as professors,” even as the center seeks to research ways to create economic growth that is “fairly shared.” The Center’s director Emmanuel Saez, for example, is paid nearly $350,000 and the three economics professors on the advisory board are paid $336,367, $304,608 and $291,782, plus generous benefits typical of the UC system. McGrady finds little income equality with teaching assistants, graders, readers and others “staff at the bottom of Cal’s income distribution.”

In similar style, most workers in the private sector, even those who earn incomes in six-figures, will not receive a pension that pays them more than their highest salary level. As we noted, Michael Wiley, outgoing boss of Sacramento’s Regional Transit was paid an annual salary of $230,000, despite his poor record as a manager. He was also eligible for a pension of $278,000, a full $48,000 more than his final salary of $230,000 and $68,000 higher than the federal pension maximum of $210,000. And Regional Transit wanted to keep paying him $50,000 as a “retired annuitant.” In government circles, that kind of largesse is common, all funded by taxpayers.

California maintains a state Board of Equalization, but it does not conduct income equality research and does not equalize anything. The BOE dates from 1879 and its mandate was to ensure that property tax assessments were uniform across all California counties. The BOE now collects taxes and in 1996 attempted to tax editorial cartoons as though they were works of art purchased in an art gallery. The BOE’s ramshackle Sacramento headquarters has become known as the “bottomless money pit.”

Plunging Yields on U.S. Treasuries Benefit U.S. Government

Monday July 11th, 2016   •   Posted by Craig Eyermann at 6:36am PDT   •  

Global Financial Data is a firm that maintains a big database the records lots of economic data going as far back as the year 1168. The firm recently produced the following chart showing the interest rates that the U.S. government has paid to its creditors on 10-Year debt securities issued by the U.S. Treasury since February 1790.


While the Wall Street Journal recently published a version of this chart, this particular chart was featured on Barry Ritholtz’ The Big Picture blog, on the historic occasion that the yield, or interest rate, that the U.S. government is paying on the newest 10-Year Treasury securities that it issues has dropped to an all-time record low of 1.367%.

Forbes Steve Schaefer explores the following possibilities that might explain why this new record low was set, which are summarized below (see the article for more detailed discussion of each):

  • Bonds are just doing what they’re supposed to.
  • America is in for a nasty growth slowdown, and probably a recession.
  • The U.S. bond market is the least-bad option for fixed income investors.
  • The Fed has done its job too well.

Perhaps the most immediately relevant explanation is the third option, because of the increase in global financial instability that has occurred following the U.K.’s recent popular referendum in favor of exiting from the European Union, which was subsequently followed by much worse financial news in that large banks in the EU nations of Germany and Italy are teetering on the edge of insolvency and are at a heightened risk of failing.

The U.S. government currently benefits from that increase in financial instability as global investors are fleeing risks in a flight to safety, where their desire to avoid losses is helping to push the interest rates that the U.S. government pays on the money it borrows from them lower than it ever has been before. That flight to safety is making the U.S. government’s $19.36 trillion total public debt outstanding relatively more affordable.

That benefit can be seen in the portion of the national debt that the U.S. Treasury is effectively rolling over, replacing debt it previously issued that paid much higher interest rates with newly issued debt that pays much lower interest rates. Ten years ago, these debt securities paid the U.S. government’s creditors a yield of 5.19%. Today, the yield for the same 10-year maturity for U.S. Treasuries is 1.37%.

For every $1 million in debt that it can roll over at these lower interest rates,’s loan calculator the equivalent monthly payments that the U.S. government makes to its creditors through 10-year Treasuries securities drops from $10,699.67 to $8,921.95, a monthly savings of $1,777.72, or annual savings of $21,332.64.

According to the U.S. Treasury Department, nearly $1.2 trillion of the national debt that matures in 2016 was issued in the years from 2006 to 2009. Assuming similar savings apply, rolling over just that portion of the national debt into new 10-year Treasuries will reduce the U.S. government’s cost of borrowing by $25.6 billion per year.

Should interest rates rise however, those benefits will immediately begin shrinking and can reverse, turning the existing national debt that must be continually rolled over into a time bomb. Considering the 226 year history of the interest rates that the U.S. government has paid for the privilege of borrowing money, there is no evidence to suggest that the current trend avoiding that fate can be sustained indefinitely.

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