by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The Congressional Budget Office expects the national debt to quickly climb above $20 trillion, with no process in place to slow the buildup. The so-called debt limit, which was suspended in late 2015 to avoid election-year embarrassment, will resume in March 2017, but it doesn’t control spending or debt. Mandatory spending (in which appropriations grow automatically, without requiring congressional approval) is already surging, with the peak of the Baby Boom and the necessary rebuilding of our depleted military still ahead.
Low growth has already been holding down animal spirits, causing low business investment. Bad policies and weak official growth forecasts would further discourage risk-taking and growth. The Federal Reserve has lowered its medium-term growth forecast to 1.8%, and the CBO thinks U.S. growth will be only 2% annually through 2026. It expects the labor participation rate–already low at 63%–to fall to 60.2%, as millions more drop out of the labor force.
In the final presidential debate candidate Clinton blamed the weak economic performance of the current recovery on the 2008 crisis, though research by Robert Barro has shown that deeper crises tend to have faster recoveries. In an Oct. 17 speech Federal Reserve Vice Chairman Stanley Fischer rationalized slow growth, citing aging demographics, weak productivity growth, a dearth of major technological innovation and weak business investment–though not the Fed’s misallocation of capital to issuers of ultralow-yielding bonds.
This column has urged three major reforms to break out of the malaise.
– Strengthen the debt limit so that it requires the President and Congress to restrain spending when debt goes above the debt limit. Federal restraint is critical to private-sector confidence on future taxation. And rebuilding checks and balances is necessary to comply with the Tenth Amendment and improve the allocation of federal spending.
– Simplify the tax system and reduce tax rates, especially the 35% corporate rate. This would improve U.S. competitiveness, encourage economic growth and create a more attractive investment climate. An added benefit: Corporate earnings held abroad could be brought home, and fewer U.S. companies and jobs would leave.
– Urge the Federal Reserve to wind down its manipulation of interest rates and bond yields. While the Fed needs independence from politicians, it should not be oblivious to its poor economic performance nor should it synchronize its interest-rate decisions with the political cycle.