March 3, 2014

Economic Experts on FY 2015 Budget

Charles Blahous

J. Fish and Lillian F. Smith Chair

Keith Hall

Senior Research Fellow

Jason J. Fichtner

Former Senior Research Fellow

Robert Graboyes

Senior Research Fellow

Veronique de Rugy

Senior Research Fellow
Summary

Below, scholars with the Mercatus Center at George Mason University—the world’s premier university source for market-oriented ideas—look ahead to key policy areas the president will likely focus on in his 2015 budget submission.

Below, scholars with the Mercatus Center at George Mason University—the world’s premier university source for market-oriented ideas—look ahead to key policy areas the president will likely focus on in his FY 2015 budget submission.

ON FISCAL HEALTH:

Charles Blahous, senior research fellow and public trustee for Social Security and Medicare

If President Obama’s upcoming budget were solely about achieving sustainable federal finances, it would contain concrete recommendations to slow the spending growth of the Big Four (Social Security, Medicare, Medicaid, the Affordable Care Act) entitlements. These politically sensitive programs will generate all of the projected spending growth that is expected to drive future federal deficits. The extent to which the president’s budget diverges from this blueprint is the extent to which other agendas are diverting us from urgently needed fiscal repairs.

See also:

Reform Entitlements or Go BustWashington Examiner
Why We Have Federal Deficits: The Policy Decisions That Created Them

ON JOB GROWTH:

Keith Hall, senior research fellow and former Bureau of Labor Statistics commissioner

Many politicians argue that more public sector intervention is necessary to reduce poverty and boost wages—and the president’s upcoming budget submission will likely include several measures geared at wage and salary growth. But history has shown that only job gains from a stronger economy can solve these systemic problems. If we want to improve worker pay and the labor market as a whole, we need to focus on policies that encourage private sector growth.

Everybody wants to see sustained wage and salary growth, but raising the minimum wage will not achieve this goal. It could prompt businesses to hire fewer workers or cut employee hours. Low-skilled workers are more easily replaced either with technology or fewer—but more productive—higher-skilled workers. While a proposed increase has been touted as a way to assist millions of working families, most of the people making at or near the minimum wage are under the age of 25 and nearly a third are teenagers. This age group is already struggling during this historically slow economic recovery, with only 46 percent of the population under 25 years old currently employed. Furthermore, since 2007 the number of hourly workers making $8.25 an hour or less has fallen by nearly 6 million.

See also: 
More Government Spending Won’t Reduce Poverty – US News & World Report 
The Employment Costs of Regulation

ON TAX REFORM:

Jason Fichtner, senior research fellow

If the president is serious about getting the United States on a path to fiscal health, his proposed budget must find ways to reduce the staggering compliance costs of the federal government’s overly complex tax code. Reform must significantly reduce or eliminate special tax provisions and lower rates. A simplified tax code will yield a more equitable, higher-performance economy with more federal revenues while reducing economic and accounting burdens.

Americans spend nearly $1 trillion annually attempting to comply with the tax code. Americans also spent more than 6 billion hours (2011) complying with the code. This represents an annual workforce of 3.4 million—a population that could be the third largest city in the United States, surpassing Chicago (2,707,120), Houston (2,145,146), and Philadelphia (1,536,471), and larger than the population of 21 states. A workforce equivalent to that employed by the four largest US companies—Walmart, IBM, McDonald’s and Target—combined.

The impact of taxes on the economy extends beyond the revenue taken by the government: the compliance burden also results in foregone economic growth estimated at up to more than $600 billion annually.

See also:

The Hidden Costs of Tax Compliance
Reducing Debt and Other Measures for Improving U.S. Competitiveness

ON HEALTH CARE:

Robert Graboyes, senior research fellow

How will the president’s budget affect the Affordable Care Act? That’s like asking, “How will your house affect that oncoming tornado?”

The ACA will wreak havoc on the federal budget. How much will insurance subsidies cost the federal government? How many new faces will enroll in Medicaid? How severely will the ACA diminish employment (and, hence, wage- and profit-based taxes)? When, if ever, will the IRS collect individual and employer mandate taxes? The questions are endless, but the answers are few.

The White House can write whatever assumptions it likes into the budget, but the size of those subsidies and enrollments and taxes and transfers depend on individual decisions by millions of individuals, employers, and health care providers. The president has little discretion other than to delay revenue-generating provisions like the employer mandate; this means the ACA mostly offers the White House some tools for increasing the deficit.

The ACA can splinter the budget, but the budget will barely ruffle the ACA.

See also: 
The American Health Care System: Principles for Successful Reform 
The Affordable Care Act Will Enrich Insurers at Taxpayers’ Expense – Investor's Business Daily

ON SPENDING REFORM:

Veronique de Rugy, senior research fellow

Let us hope that President Obama’s budget submission honestly deals with the nation’s long-term spending and debt crises. Academic research overwhelmingly finds that governments that fail to control spending, and instead raise taxes, struggle economically. It also finds the most successful way to deal with our huge amount of debt without damaging the economy is to cut spending, not to raise taxes. Most important, we need to reform the drivers of our future debt: Social Security, Medicare, Medicaid and Obamacare.

In their last budget deal, the president and legislators on both sides of the aisle sent a clear message: they can’t be trusted to follow through on promised spending cuts—even tiny spending cuts. So regrettably, I am not optimistic about the government’s ability to tackle genuine spending reform—entitlement or otherwise—in the upcoming budget.

See also: 
Defense Spending and the Economy 
Austerity: The Relative Effects of Tax Increases Versus Spending Cuts