On U.S. Fiscal Responsibility

President Obama is expected to make fiscal solvency the focus of his presidency in 2010, beginning with his State of the Union Address in January. This is a step in the right direction for his presidency and the country, but it is not enough. If we are honestly interested in solving our “debt problem,” then it is not enough to merely make fiscal solvency the focus of the Administration. Rather, sustainability will need to be the primary objective of the White House and Congress on every policy issue presented.

The Congressional Budget Office called the federal budget, in its current form, “unsustainable.” A working paper from the American Enterprise Institute highlights the CBO’s projections, with a concluding analysis.

According to several recent reports issued by the Congressional Budget Office (CBO), the U.S. federal budget is on an unsustainable path. In fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 44 percent of GDP at the end of fiscal year 2008 to 61 percent at the end of fiscal year 2010. The current deficit is due in part to the stimulus legislation and efforts to stabilize financial markets. CBO (2009a) projects that spending related to such economic weakness will push primary spending (defined as all spending, except interest payments on federal debt) up to 26 percent of GDP this fiscal year, the highest since World War II.

The long-term budget outlook is equally troubling. The CBO report (2009b) projects that under the Obama Administration proposals, the cumulative deficit for the period 2010-2019 will be approximately $9.1 trillion. In other words, the average deficit per year will approach $1 trillion. After 2019, the situation is expected to worsen with deficits (under certain scenarios) projected at 17 percent of GDP by 2040.

These projections raise serious concerns about the long-term sustainability of U.S. fiscal policy. If spending grows as projected and revenues do not rise at a matching rate, annual deficits will climb and federal debt will grow significantly. As debt increases, a higher and higher share of national output will be devoted to interest payments, and the level of taxation needed to sustain government becomes historically unprecedented. Large budget deficits would reduce national saving, lead to more borrowing from abroad and also lower domestic investment. If such a path is to be averted, then changing policy sooner reduces the size of the problem significantly.

Fiscal solvency is the most-pressing long-term issue faced by the Obama Administration and the current Congress. Our fiscal recklessness undermines our economic future, the position of our currency in the world and threatens our position as the world’s pre-eminent economic superpower.

The need to save our economy from the brink of collapse and create jobs is, understandably, a top-priority. Beyond that, and beyond the current economic cycle, however, policymakers need to be committed to not only balancing our yearly budgets, but also lowering our debt load. It could even be said that if the United States had maintained over the past three decades a fiscal policy even somewhat resembling that of a responsible one, short-term deficits would not be a problem. Short-term deficits are acceptable if and only if the United States has a responsible long-term fiscal policy.

As our deficits grow and as we leave them unattended, more and more of the burden for repaying our debt will be passed on to my generation and my children’s generation. It will require more resources and a larger part of their economy to make these payments. That could mean a weaker social safety net and higher taxes. It could mean reduced military spending and the sacrifice of strategic security. It could mean cuts to education, transportation and more. The sacrifices we have to make today in order to put ourselves on a path to solvency will be marginal compared to the choices and challenges of the next thirty years, if we allow our fiscal irresponsibility to continue.

President Obama in Asia – What was accomplished?

White House Photograph

Presidential trips like the one President Obama finished up this week aren’t necessarily commonplace. But they aren’t out of the ordinary either.

They offer the U.S. President the opportunity to build personal relationships with foreign heads of state, hammer out important diplomatic compromises and build goodwill around the world. Did President Obama do any of this on his swing through Asia?

An honest answer would be yes, no and maybe. President Obama has developed a working relationship with the President of South Korea, which they both acknowledged in a press conference late Wednesday. The President, however, accomplished very little in the way of details, especially regarding the presence of U.S. troops in Japan, which was taken off the agenda all together because lower-level staffers couldn’t come to terms. Lastly, President Obama was greeted with a mixed reception around the region – cheers in Singapore, censorship in China.

The fruit from a trip like this may take some time to bear out, so it’s hard to say in the end what he really accomplished.

Is the President committed to free trade with Asia?

President Obama has become a vocal supporter of a free trade deal between the United States and South Korea. In his trip to Asia, and in an interview with Fox News (*gasp*), the President said he is committed to the deal and will push for its ratification in the Senate.

U.S. President Barack Obama pledged Thursday morning to ratify a free-trade agreement with South Korea that has been stuck for two years, challenging the U.S. Congress to separate South Korea from other Asian nations enjoying vast trade surpluses with the U.S.

“In the United States, there is a misperception that the [free-trade agreement] once passed will only benefit Korea and will be detrimental to American consumers, which is not true,” Mr. Lee said.

Mr. Lee characterized as “minuscule” the trade surplus that South Korea has with the U.S., a characterization Mr. Obama agreed with. The U.S. president challenged Congress, which is run by his own party, to show more sophistication on trade issues.

“There’s a tendency to lump all of Asia together when Congress looks at trade agreements and says it appears this is a one-way street,” Mr. Obama said.

South Korea’s trade surplus with the U.S. last year was $13.3 billion out of total trade of $81.5 billion, according to U.S. figures.

The free-trade agreement, the largest the U.S. has negotiated since the North American Free Trade Agreement with Canada and Mexico in the early 1990s, is expected to boost that more than $80 billion in annual two-way trade between South Korea and the U.S. by $10 billion to $20 billion about five years after ratification.

Free trade is a good thing. A deal with South Korea will do a lot for the U.S. in a region where they are rapidly falling behind when it comes to trade liberalization.

Economic liberalization has been at the heart of U.S. foreign policy since 1918. We’ve promoted the idea of open markets across the world for almost a century because they bring prosperity and wealth to the masses. It has long been conventional wisdom that the U.S. would prosper most in a world economy where free trade is possible.

Labor unions and protectionist thought has taken over and so instead of prosperity, we’re falling behind at our own game.

Despite the rhetoric, I still question if the President is serious about trade liberalization with Asia. The tariff on Chinese tires earlier this year says a lot about who has his ear.

A Note on Financial Regulation

U.S. Rules Revamp Gains as Frank Sets Vote, Senate Bill ReadiedHealth care has overshadowed most other news out of Washington DC in the past several weeks, er, months. That means, financial regulation has slipped through the cracks.

Representative Barney Frank and Senator Chris Dodd, Democrats of Massachusetts and Connecticut, respectively, are working on massive new legislation that will serious overhaul how our financial markets are needed.

On the surface, many people won’t object, especially after the turmoil we’ve been through over the last year, but if you dig a little deeper, you’ll see what the problem is.

Essentially, we’re going to give the federal government  TARP 4 Ever. In other words, dramatic, game-changing regulation and resuscitation of financial institutions banks could become the every day norm in America.

Resources

• Bloomberg | U.S. Rules Revamp Gains as Frank Sets Vote, Senate Bill Readied
• WSJ | Clash Looms on Banks
• WSJ | Bank Crackdown Draws Criticism
• Marketwatch | Critics take Frank ‘too-big-to-fail’ bill to task

True cost of health care: $3 trillion

That’s $3,000,000,000,000.

The new number comes from Senator Judd Gregg and includes some funny math. You can read an explanation of that at HotAir.

Senator Judd Gregg (R-NH), ranking member of the Senate Budget Committee today commented on the Congressional Budget Office’s (CBO) more detailed cost estimate of the manager’s amendment to the House health reform bill.

Senator Gregg stated, “The CBO estimate released last night finally sheds light on the smoke and mirrors game the majority has been playing with the cost of their health care reform proposal. Over the first 10 years, this legislation builds in gross new spending of $1.7 trillion – and most of the new spending doesn’t even start until 2014. Once that spending is fully phased in, the House Democratic bill rings up at more than $3 trillion over ten years.

As a side note, Heritage says $2.6 trillion.

Obviously, the real answer to how much health care reform will cost is: We don’t know. Including cuts to medicare and tax increases, it’s obvious that the plan will be expensive.

This is more than a Republican Party talking point, however. Spending this much money could have serious repercussions on the fiscal solvency of the federal government. Entitlements never get smaller. Social safety net programs, like Medicare/Medicaid and Social Security and now health care, only get bigger.

With that in mind, even if health care does lower the deficit over the next ten years and even if it only costs $1.2 trillion in that decade, what about the next ten years, or twenty?