Sunday, April 24, 2011

Corker’s plan to cap federal spending is a step in the right direction

Published in The Tennessean, Sunday, April 24, 2011

by Richard J. Grant


Most of us know what Charles Dickens meant when he wrote, "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

As individuals, we are quick to see the consequences of spending beyond our incomes. But the lesson is not so obvious when the government does the spending for us.

Currently, the U.S. Government is spending about 25 percent of our Gross Domestic Product (GDP), which means that the federal government alone is spending a quarter of what we produce each year. But tax revenues won't keep up with this level of spending. Revenues have recently been below 15 percent of GDP and rarely reach 20 percent. The government is either unable or unwilling to do what is necessary to raise revenue to match its appetite for spending.

Countries with higher percentages of government spending also tend to have lower rates of long-term economic growth. This means that Americans’ private disposable incomes are not only a smaller proportion of GDP, they are smaller in absolute terms than they would have been. The only way to mitigate this effect without reducing government spending is to reduce government regulations and to strengthen and extend private property rights. But our government is getting this wrong too.

The excess of spending over revenue this year will require the U.S. Treasury to finance a budget deficit of around $1.6 trillion. The national debt will increase by more than 10 percent. And the Dickensian warning will get harder to ignore.

Higher tax rates do not necessarily result in higher tax revenues but are more likely to dampen economic growth. We have a spending problem and that is what we must learn to control.
There are two complementary ways to approach the control of excessive government spending. One is to impose specific cuts or limits on specific programs. The other is to institute clear rules that will limit the total size of the budget.

Sen. Bob Corker, with growing support from his congressional colleagues, has introduced a bill that would place an effective cap on federal spending. It is called the “Commitment to American Prosperity Act of 2011” and goes by the appropriate acronym, “CAP Act.”

The CAP Act’s goal is to reduce the ratio of government spending to GDP gradually over a 10-year period to 20.6 percent, its 40-year average. Beginning with the 2013 Budget, total spending would be capped at 25 percent of the average GDP over the previous three years. Each year thereafter, the nominal spending cap would be reduced by 0.1711 percentage points and applied to a moving average of the GDP over the previous three years.

There is always a danger that Congress will go wobbly again and exceed the spending caps. To counter this, the CAP Act requires the Office of Management and Budget (OMB) to sequester congressionally allocated funds that exceed the spending caps. OMB would then assign spending cuts evenly across all categories to be carried out by a Presidential order.

The spending cap would be applied to all government spending, including the off-budget, ostensibly freestanding programs such as Social Security and Medicare. This would force Congress not only to prioritize its spending but to pay more attention to the effects of its taxation and regulatory programs on economic growth and the tax base.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com


Copyright © Richard J Grant 2011

Sunday, April 17, 2011

The President’s speech misses the point

A shortened version was published in The Tennessean,
Sunday, April 17, 2011

The President’s speech misses the point

by Richard J. Grant


Last Wednesday, President Barack Obama delivered a televised speech that had been billed as a major policy statement on the budget. What listeners actually received was a campaign speech that played fast and loose with anything resembling fact but did reveal much about the Obama vision of America.

The president attempted to contrast two different visions of America, his own versus one “championed by Republicans in the House of Representatives.” The latter was a reference to the Republican budget plan for Fiscal Year 2012 as presented the week before by Congressman Paul Ryan (R-WI), chairman of the Budget Committee.

The Ryan plan would cut about $6 trillion (over 10 years) from the spending increases projected in the budget previously offered by the president. Even with $6 trillion of cuts, the Ryan plan would not achieve a balanced budget in 10 years. But it is the only serious plan likely to be offered by either party.

Before offering his own watery and less-detailed policy vision, the president set up a Republican strawman. The president approves of deficit reductions and addressing “the challenge of Medicare and Medicaid” in the future, but he can't seem to agree with any of the particular cuts or changes.

The president complained about cuts: “A 70% cut to clean energy. A 25% cut in education. A 30% cut in transportation. Cuts in college Pell grants to grow to more than $1000 per year.” He then asserted, “These are the kind of cuts that tell us we can't afford the America we believe in.”

It is telling that the president offers no defense of the federal government's involvement in these areas of spending in the first place. He seems to see them is self-evident truths.

Then he launches into hyperbole: “It's a vision that says if our roads crumble and our bridges collapse, we can't afford to fix them.” After a string of such wild accusations that include Medicare, Medicaid, and children with disabilities, he decries that “we can somehow afford more than $1 trillion in new tax breaks for the wealthy.” Never mind that the $1 trillion figure is a guess, it all misses the point.

When the president claims to offer two different visions, he is really offering only one. The vision that he claims for himself is only the beginning, and the one he ascribes to the Republicans is really just one version of the inevitable endgame of his own vision. This is how progressivism and its policies end: in deficit, distortion, and conflict.

For some, it all begins with good intentions. For others, complicity with big government is a way to get a leg up on the competition. For the rest of us, it is a loss of freedom and personal responsibility – a world where generosity is replaced by mandates and progressive taxation.

It is also a world where truth must be sacrificed for the cause. It is a world where all government spending is called “investment” and all such investment is assumed to “create jobs.”

It is also a world where the roles of government and citizen are reversed. The progressive sees potential tax revenue that is lost to tax deductions as “spending,” as if the government really owns the money and is being generous when it allows a citizen to keep some.

And the president wants to call that “America.”

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Monday, April 11, 2011

The Ryan plan offers a serious benchmark for deficit reduction

April 7, 2011

The Ryan plan offers a serious benchmark for deficit reduction

by Richard J. Grant


During the entirety of 2010, Democrats held majorities in both houses of Congress. Nevertheless, they failed to pass a budget for the 2011 fiscal year. Then, earlier this year, when the newly elected Republican majority in the House of Representatives tried to remedy this by passing HR1, the Democrat-controlled Senate voted the bill down.

Now we witness the spectacle of a series of continuing resolutions to keep the government funded for just a few weeks at a time, with a recurring threat of a government “shutdown.”

HR1 was intended to reduce government spending closer to 2008 levels. Instead, the continuing resolutions have been bringing down spending a few billion dollars at a time. These cuts are helpful, but are a tiny percentage of the total budget, and will have a barely perceptible effect on the projected budget deficit of $1.65 trillion.

With the FY2011 drama still playing out, House Republicans have proposed a budget for FY2012. Under the name “The Path to Prosperity,” it was presented this past week by Congressman Paul Ryan (R-WI), chairman of the Budget Committee.

This new budget plan cuts $6.2 trillion from the president's proposed budget over the next 10 years. Given that spending for the current fiscal year is expected to be “only” $3.6 trillion, the size of the proposed cuts shows the magnitude of spending increases projected in the president's budget.

The Republican plan would reduce spending on domestic government agencies below 2008 levels and hold it at pre-stimulus levels for five years. This would be good for economic growth. It would free up resources for private sector use and it would mean less money with strings attached.

More unhampered private investment is needed if we are serious about job creation. Government attempts to substitute its judgment for that of the private sector have proven disruptive and have slowed recovery from the resulting recessions. Whenever government tries to create jobs artificially through so-called “stimulus” programs that redistribute income from our successes to our failures, it ensures that the jobs we have are less productive and fewer than they would have been.

If carried out, the reduction of business subsidies and the size of the federal bureaucracy, including cuts already proposed by the defense secretary, would allow a better use of resources and rising personal incomes. The shrinking and privatization of Fannie Mae and Freddie Mac would also reduce the future burden on the federal budget; and the phase-out of government mortgage guarantees would reduce taxpayer risk and remove some of the recklessness from the housing market.

The Republican plan takes the lead on long-term reforms to head off the breakdowns in the healthcare and income-security systems. Medicaid would be funded through block grants to the states, and the states would have greater authority in how they serve the needs of Medicaid patients.

Anyone who enters the Medicare system before 2022 would be covered by the current program. But anyone who enters the system after 2022 would be able to choose their own plan from a list, and the premium for that plan would be subsidized by Medicare.

Tax reform proposals would reduce the top marginal personal and corporate tax rates to 25 percent but also remove some of the complex deductions that distort economic activity.

We have a serious spending problem; and now we have a serious plan to deal with it.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, April 03, 2011

Speculators provide a service

A shortened version was published in The Tennessean,
Sunday, April 3, 2011

Speculators provide a service

by Richard J. Grant


French consumers import significantly more Libyan oil than do American consumers. Knowing this, many Americans believe that a disruption of Libyan oil production would not have much effect on our price of oil. It would appear that the French would bear the brunt of the sudden scarcity and the consequential price increases.

That might be true in the very short term, but then what? As French consumers quickly bid up the price for remaining supplies of oil, their willingness to pay higher prices would attract supplies that might otherwise have gone to other parts of the world. That includes oil that might have come to us, whether produced in the US or abroad.

A characteristic that oil shares with money is that both are fungible. This means that one barrel of a given grade of oil is a substitute for any other -- just as one dollar bill seems the same as any other. With a sudden increase in scarcity, remaining supplies would be directed to their most-valued uses, as signaled by the rising prices. There would also be a tendency to conserve oil.

Higher prices encourage other suppliers to produce more. Each barrel sold brings in more revenue than before, but there are also political considerations. Saudi Arabia has already demonstrated a willingness to produce more oil to dampen the recent price rises. The Saudi government needs more revenue to buy domestic social peace, and its dampening of price rises will also dampen the ire of its customers and strategic allies.

Such ire that remains is often directed toward “speculators.” It is widely imagined that there is no good reason for the oil price to be over $100, given current supply and demand conditions. But business is not a prisoner of the moment. We must always look forward, and that is what speculators do.

Each of us plans for the future. Whatever supplies we expect to need, we buy before we need them. In so doing, we do our small part to keep the prices of the goods we buy higher than they would have been. We are acting as speculators, and in so doing we encourage suppliers to put more resources into the production of those goods that we expect to need.

Countries in the Middle East and North Africa face considerable political uncertainty at this time. It is unlikely that this will result in a long-term disruption of oil supplies. Business is business. But the new regimes could surprise us.

This is the reality that speculators face. When they bid up the price of oil, whether in the spot market or the futures market, they are acting on their belief that market conditions are likely to cause prices to be higher in some future period. If they are correct, they will profit, and in the process will have helped to conserve oil and to encourage future production.

If they are wrong, they will lose. And anyone who believes that they are wrong is free to speculate against them by taking an opposite position in the market.

Speculators serve society by thinking about the future and acting on their thoughts. In that sense, we are all speculators. The opportunity to create a profit encourages us to think harder about how best to employ our resources. And we let government interfere with this at our peril.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011