federal deficit

A Peek Inside a Percolating Infrastructure Package

With the tax bill passed and despite looming spending decisions, the next big thing in Congress could be the long-promised, but still percolating Trump infrastructure package.

With the tax bill passed and despite looming spending decisions, the next big thing in Congress could be the long-promised, but still percolating Trump infrastructure package.

With the tax bill in the rear-view mirror, the next big thing for Congress could be the long-promised $1 trillion Trump infrastructure package.

Based on conversations with Hill committee staff members and leaked reports, details of the package, which President Trump says he will unveil in January, are coming into view. Here is a sneak preview:

One of the four funding pots in the Trump package would invest in innovative transportation projects such as Elon Musk’s proposed hyperloop subsonic train.

One of the four funding pots in the Trump package would invest in innovative transportation projects such as Elon Musk’s proposed hyperloop subsonic train.

  • There is a 70-page outline of the package under review in the bowels of the Office of Management and Budget.
  • Four pots of money will be created, backed by $200 billion in direct federal spending.
  • Half of the $200 billion would be distributed to states to use as financial incentives for road, transit, broadband, water and housing projects that can attract at least 80 percent of non-federal funding. This would theoretically attract $500 billion in new infrastructure investment from public and private sources.
  • A separate pot would be established for rural projects, using the more tradition 80 percent federal/20 percent non-federal funding split.
  • The third pot would be assigned to innovative projects such as Elon Musk’s hyperloop initiative or other technological advances that revolutionize transportation systems.
  • The fourth pot would add financial incentives to the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Water Infrastructure Finance and Innovation Act (WIFIA), which provide federal credit assistance in the form of loans, guarantees or lines of credit.
  • All projects receiving funding from the $200 billion would be exempt from federal requirements such as NEPA (environmental review), Davis-Bacon (prevailing wages) and Buy America.

The Trump plan would face a rough road to passage, especially in the Senate where the Republican majority has been trimmed to just 51-49. GOP congressional leaders are reportedly working on their own infrastructure proposal, with an eye on what it would take to attract at least some Democratic support.

While there will be vigorous debate over how to invest billions of dollars, the main political stumbling block will be resistance of GOP conservatives to spend more money and drive up the federal deficit even further. That stumbling block is already in the path of Congress finding a way to avoid a partial federal government shutdown by a self-imposed deadline of December 22.

Congress may skirt by the December 22 deadline by agreeing to another short-term spending resolution until January 19. Sooner or later, Congress will have to face the larger spending and deficit picture, which includes GOP demands for a major increase in defense spending, $200 billion for hurricane and wildfire relief, another $2.4 billion for the Veteran’s Choice Fund, $50 billion extension of the Children’s Health Insurance Program and continued funding for health insurance stabilization.

The spending splurge in Washington has already prompted GOP leadership to talk openly about mandatory spending cuts for SNAP, Social Security, Medicare and Medicaid. Trump’s decision to postpone signing the $1.5 trillion tax-cut bill until January is an attempt to push off mandatory cuts until 2019, after the 2018 mid-term election. GOP Senate Majority Leader Mitch McConnell has announced the Senate won’t look at what Republicans refer to as “entitlement reform” in 2018.

There also could be pushback from economists who warn that adding a major transportation bill on top of huge tax cuts intended to stimulate the economy could resurrect the sleeping bear of inflation.

Despite all that, Trump is expected to push for his infrastructure package and McConnell appears to be a willing ally. The package might be the best shot for a major bipartisan legislative effort during 2018.

 

The Federal Fiscal Sudoku Game

Keeping up with a pending federal budget, a growing federal deficit, a looming massive federal tax cut and a surging stock market is a lot like playing fiscal Sudoku.

Keeping up with a pending federal budget, a growing federal deficit, a looming massive federal tax cut and a surging stock market is a lot like playing fiscal Sudoku.

For fiscal junkies, these are the best of times. The GOP-controlled House and Senate passed versions of a $4 trillion Fiscal Year 2018 budget, the United States logged last year the sixth largest budget deficit in history and the stock market reached record highs last week in anticipation of a major corporate tax cut, which the budget makes easier to pass.

In many ways, the fiscal news is like a jig-saw puzzle with pieces that don’t exactly fit together:

  • The Senate-passed FY 2018 budget measure leaves federal spending at current levels and provides for a major tax cut, which Republicans concede will increase the federal deficit in the short-term.
  • US Treasury announced the federal government finished FY 2017 with a $666 billion budget deficit, $80 billion more than the previous year, as spending grew by 3 percent, but revenues only increased by 1 percent.
  • Even though tax legislation hasn’t been finalized, Wall Street became giddy over a congressional budget with a reconciliation process that makes it politically easier to pass a tax cut without any Democratic support. The Dow Jones industrial average on Friday surged more than 165 points to a record 23,328. Shares of JP Morgan Chase hit an all-time high.

Republicans have campaigned for decades on fiscal discipline and shrinking the federal government. The recent news about tax cuts and budget deficits run contrary to that ideology, though House Speaker Paul Ryan assured in a media interview that deficits were still concerning to his political party.

Not concerning enough to blunt the drive to enact a tax cut by the end of the year that no one denies will increase the federal deficit. GOP supporters say tax cuts will stimulate the economy and eventually economic growth will erase the red ink. Democrats disagree, claiming supply-side, trickle-down economics hasn’t produced the bonanza of benefits promised by its supporters, just widened income inequality at the expense of the US middle class.

The FY 2018 budget, which retiring GOP Senator Bob Corker of Tennessee called a “hoax,” seems designed to enact a tax cut, not implement a spending strategy. The tax cut is viewed by GOP leaders – and their wealthier supporters – as must-pass legislation to overshadow congressional failure to repeal Obamacare before the 2018 mid-term elections.

In addition to the impact of a tax cut, there will be pressure on the federal budget over the next year as Congress approves substantial funding to pay for severe hurricane and wildfire relief. Trump administration efforts to undermine Obamacare may have unpredictable negative economic consequences. The prospect of military conflict with North Korea along with accelerated modernization of the US nuclear arsenal also could dramatically push up spending levels.

To counter higher deficits, the FY 2018 budget points to $1.5 trillion in spending cuts on Medicare and Medicaid over the next decade. Higher outlays for Social Security, Medicare, Medicaid and payments on the national debt were blamed for pushing up the deficit last year, which now equals 3.5 percent of US gross domestic product. The national debt now exceeds $20 trillion. The Congressional Budget Office has estimated the national debt will rise to 91 percent of the US economy as early as 2027 absent any fiscal policy changes.

Keeping up with all this US fiscal activity is a little like playing a 3D Sudoku puzzle:

  • The House and Senate still need to agree on a final budget, which might come as early as this week if the House decides to accept the Senate version and skip a conference committee to iron out differences.
  • President Trump has dangled some tantalizing numbers about his dream tax-cut legislation, but there isn’t an official tax bill to review.
  • The budget reconciliation process might make it theoretically easier to pass tax legislation, but only three Senate Republican defections could doom the plan, a la Obamacare repeal. Given Trump’s testy relationships with a number of senators, a political roadblock isn’t inconceivable.
  • The budget reconciliation process isn’t a free ride. There are limits on how much the tax cut can raise the deficit, which could stoke a ferocious intra-GOP debate over what taxes cut.
  • While Democrats haven’t been consulted so far, they have been courted to support the tax cut. There are a lot of side issues that could come into play in the attempt to earn some level of bipartisan support.
  • Ryan has threatened to keep House members in session through Christmas to pass a tax bill. It may not be an idle threat.

Tax Day 2015: Where Your Money Goes

It's a common misconception the federal government spends a significant portion of its budget on foreign aid. According to a recent Pew poll, a majority of Americans believe 28 percent of the federal budget is spent on foreign aid. This number is way off. It's so far off that most people don't believe me when I tell them the actual percentage is 1 percent of a $2.3 trillion budget.

So what the heck is our government doing with our money?
 
For tax day, the Committee for a Responsible Debt put together three useful charts outlining where our tax money goes, who pays the most and maps out the history of our deficit spending ways. 

Federal entitlement programs far and away take the cake in terms of percentage of federal spending. Social Security, Medicare, Medicaid, Unemployment Insurance and interest on the debt make up more than 55 percent of our annual spending. Once defense is added to the shopping list, 76 percent of the budget percent already been spent. Thus, all other domestic programs make up less than 24 percent of the government's budget. You'll see foreign aid at the bottom, barely making the list.

According to the report, we have a pretty progressive tax code. The top 20 percent of households pays almost 70 percent of the nation's taxes, while the bottom 20 percent pays .6 percent. The tax rates were made more progressive in recent years due to the fiscal cliff deal and the Affordable Care Act that raised taxes on the wealthy.

Finally, the chart above shows that we have made some progress since 2010 when our annual deficit was $1.5 trillion. Between the increase in taxes and budget sequestration, our annual deficit has dropped by $1 trillion (although our overall debt is still $18 trillion).
We certainly have more work to do. This leaves us with the question, how are we going to balance our books? Well one answer is obvious, we can't do it by simply eliminating foreign aid. 
 

Rhyming History Without Reason

Mark Twain said history doesn't repeat itself, but it does rhyme. Could we be repeating steps that led to the recession following the Great Depression?All the attention on the federal debt ceiling, deficits and debt may be a mistimed priority as some commentators and historians argue U.S. policymakers should focus instead on stimulating consumer demand to get economic recovery into full gear.

"Most people realize that a failure to raise the debt ceiling could be catastrophic," says Millsaps College historian Robert McElvaine, who is author of The Great Depression: America, 1929-1941. "But the drastic cuts in federal spending that some Republicans are demanding in exchange for an increase in the debt ceiling would be a repeat of the mistakes that prevented a full recovery in the 1930s and then caused a secondary collapse in 1937. Enacting these cuts is the most likely scenario in which the current recession could become a new depression."

What If the Sky Falls?

"Average Americans wonder what would happen if Congress fails to raise the federal debt ceiling. It nearly happened once before."You don't have to be a political junkie to be aware of the clash on Capitol Hill over the federal deficit, national debt and the debt ceiling. Some say doomsday is just around the corner. Others claim it is a political hoax to cow Congress into raising more revenue.

Whether doomsday or hoax, a lot of average Americans are beginning to wonder what exactly would happen come August 2 if U.S. deficit spending exceeds the current debt limit. Opinions run the gamut, but there has been a relatively recent incident that foreshadows what might happen.

The Washington Post recalls a similar game of political chicken occurred in 1979, when the debt limit was raised eventually to $830 billion, a pittance to today's $14.3 trillion debt ceiling.

Congress managed to avert a major disaster by approving a debt ceiling increase at the last minute, but not before "a flood of investor demand" for payments of U.S. Treasury bills, The Post reports. "A series of technical glitches in processing the backlog of paperwork resulted in thousands of late payments to holders of Treasury bills that were maturing."