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Principles for Shaping President-Elect Trump’s Fiscal Policies

Monday November 14th, 2016   •   Posted by Craig Eyermann at 6:25am PST   •  

wh_2015_budget_0 What should the U.S. government’s fiscal policies look like after the election we just had?

Writing at RealClearPolicy, James Capretta tackled that question before the election, before anyone really appreciated that Donald Trump would beat Hillary Clinton in the race for the White House. And with that being the case, he begins by describing the deterioration of the U.S. government’s fiscal position during the past eight years under President Obama:

President Obama has rarely discussed the condition of the federal budget during his time in office. One likely reason he avoids the topic is that he and his aides understand that voters do not really care about government deficits and debt, even if they sometimes tell pollsters otherwise. What voters really care about is how government programs and tax policies affect their personal finances.

The president also has an additional reason to steer clear of the subject: His fiscal policy record is unlikely to be praised by historians. During his presidency (2009 to 2016), the federal government has borrowed $7.8 trillion. Total federal debt has climbed from $5.8 trillion (or 39 percent of GDP) at the end of fiscal year 2008 to about $14 trillion (or 77 percent of GDP) today.

The president is also leaving his successor a budget outlook that is inauspicious, to put it mildly. The Congressional Budget Office (CBO) projects the federal government will run a cumulative deficit of $8.6 trillion over the 10-year period from 2017 to 2026, assuming current laws and policies remain unchanged. The CBO also expects the deterioration in the government’s fiscal position to accelerate in the years following the coming decade, as population aging and rising health expenses push government spending to levels well above the historical norm. The CBO’s latest long-term forecast shows federal debt rising to over 100 percent of GDP in 2033 and over 140 percent of GDP in 2046.

Capretta goes on to describe the CBO’s outlook as “probably too optimistic.” He points to actions that elected U.S. politicians have already taken with respect to delaying unpopular tax hikes passed in the Affordable Care Act that he argues are likely to be repeated, before turning his attention to the 800 pound elephant in the U.S. budget: the “relentless growth” of autopilot entitlement spending for “mandatory” expenditures such as Social Security, Medicare, Medicaid, and the Affordable Care Act’s subsidies.

To deal with the growing gap between the federal government’s revenues and the spending to sustain these entitlement programs, Capretta points to a report that he co-authored with a number of individuals at a number of Washington DC center-right think tanks, aimed specifically at increasing the effectiveness and sustainability of these programs in the future, which should be particularly relevant in the upcoming Trump presidential administration.

The report pounds home three main principles for addressing the direct causes of the nation’s impending fiscal challenges:

Promotion of Work. Much of the federal safety net is designed to help households that have inadequate resources from earned income. But it is counterproductive when government programs discourage work and thus create unnecessary dependence on public support.

Personal Responsibility. Most working-age households with middle-class incomes (or higher) could save and provide for their own retirement without subsidization from other taxpayers. Entitlement reform should proceed on the assumption that limited public resources should provide a solid safety net against poverty in old age, but that those who can afford to save for retirement should be expected to do so.

Innovation and High Quality in Health Care. Slowing cost escalation in health care without undermining the quality of care requires higher productivity and more efficiency in how care is provided to patients. That can be achieved only with a functioning marketplace.

The report goes on to recommend a number of reforms addressing the major entitlement programs that represent the bulk of the federal government’s “mandatory” expenditures and also other welfare programs that contribute to the threat to the nation’s future fiscal outlook.

But what if nothing happens, as occurred under each presidential administration since Ronald Reagan was in office, where these problems were well known and where efforts at reform failed? Capretta offers the following final warning:

If, instead, policymakers continue to procrastinate and ignore the problem, a crisis of some sort will eventually occur, and the needed fiscal correction will be imposed abruptly. The resulting changes will be then very disruptive to large numbers of Americans and much more painful than if political leaders had acted more responsibly when they had the chance to do so.

Going back to the Reagan era, there was a rather famous television commercial for Fram oil filters, which is still alive on YouTube, and which has a very relevant message to this issue:

As a contemporary observer noted on a wholly different topic, the commercial’s punch line—“You can pay me now, or pay me later”—communicated “that the consumer had a choice of paying a small amount for an oil filter now, or a large amount for a ruined engine later.” Where reform of the nation’s costly entitlement programs are concerned, that’s one basic principle that hasn’t changed since the last time that U.S. politicians dealt seriously with reforming the biggest threat to the nation’s fiscal future.

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November 2016