CBO Outlook FY 2023

HBUD: Congressional Budget Office's Budget and Economic Outlook, May 26, 2022

These comments will address problems in the CBO projections and, more importantly, suggest alternate policies that will be necessary to deal with inflation, a likely mortgage security crisis and ways for the nation to increase economic well-being while also saving costs.

CBO themes

I will start by addressing the main points in the CBO executive summary. The main rubric, debt as a percentage of GDP, is meaningless. The more salient measure is debt as a multiple of income taxes paid. Using this standard shows exactly how unsustainable our current fiscal course is. The first attachment regarding Debt Ownership  as Class Warfare addresses it. The key findings of our research is that the top 10% own the majority of public debt assets and owe the  majority of debt obligations.  The top 1% owe over a third and own more than 40%.

CBO remarks on how revenues are at their highest point in 20 years as a percentage of GDP. The problem is that, over the last 20 years, revenues have been entirely too low - largely because the top marginal rates on income taxes (essentially on wages) and the capital gains and dividend rates have been set too low by statute. 

CBO (and most others) have no real idea on why inflation is essentially out of control. This will cause the Federal Reserve to overcorrect. More importantly, unless tax increases on the wealthy are perceived as inevitable, thus reducing wildly inflated asset prices slowly, a more catastrophic recession is inevitable. See the second attachment for why this is the case. 

In preparation for these comments, I have updated the Center’s model for predicting economic growth based on the prior year’s deficits less net interest as a percentage of GDP. Please see the third attachment for more details. Assuming that the current year results in a net deficit of 3%, the GDP growth rate for FY 2023 will be 3.8%. This prediction assumes that the bottom does not fall out of the economy - which I regard as a heroic assumption.

Inflation and Cryptocurrency

I addressed these topics in my FY 2023 Financial Services Appropriations testimony in items 1 and 2. The video is here. "The world has plenty of available oil...The Department of Labor should also have a part in this investigation and should receive reimbursable funding to do so."

Housing and Commercial Bonds

The inevitable crash has not yet occurred. Again, if there is no oil price crash, mortgage backed securities may not crash in the same way as in 2008. If they do, however, the recovery will be anemic until taxes on the wealthy return to pre-Tax Cut and Jobs Act levels. Failure to let tax rates on the wealthy go up in 2010 slowed the recovery until the 2013 rate increases.  

The other reason the recovery was anemic is that nothing was done for homeowners with underwater mortgages. Waiting for incomes to increase, debt to be paid down or homes to be foreclosed upon (which happened all too frequently - including to my family) broke the promise made in October 2008 when Wall Street was bailed out - but no one else was.

In both of my FY 2022 and FY 2023 Financial Services Appropriations testimony, I addressed this issue. The video is here. See item 3, starting with "When the Fed marks bonds to market...Let us act truthfully this time around." 

Nutrition and Health Care for Seniors and Disabled

Please see testimony and video from the Agriculture Appropriation Testimony for my Food Stamp Story. The video is here.

Please see testimony and video from the Labor, HHS Appropriation testimony for my Dual Eligible story. The video is here.

When Social Security was established, one of its goals was to avoid the perception that receiving benefits was not “going on the dole.” It was expected that individuals would still save for their retirements and would receive pensions as well.

As unions were broken and pension plans for both workers and professionals were replaced with defined contribution plans, this assumption became a joke. Likewise, because most workers and their families cannot make ends meet, the vast majority of retirees have no or little savings to rely on. Those who do have savings, especially those with tax advantages, likely did not need such advantages to begin with. For them, Social Security is simply a backstop. For the rest of us, it is a necessity.

The myth that the Social Security Trust Fund must be solvent is no longer appropriate. The program has been accepted in all sectors as necessary. Now it needs to be made adequate. There are those who resist doing so because providing more support fear idleness among the elderly and the disabled. 

These are the same conservatives who believe (without evidence) that leaving minimum wages and the child tax credit low will encourage workers to seek higher paid jobs. The reality is that such workers have no means to prepare themselves for such advancement. It is almost as if there is a desire by some to guarantee a ready supply of low wage workers for certain industries who employ people who do not look like them (to speak delicately).

America Needs a Raise

Benefits need to go up, with or without higher revenues. As fortune would have it, increasing the minimum wage will allow for higher benefits and will increase long term revenues. In previous comments to the Budget Committee, I addressed how increasing both the minimum wage and the child tax credit at the same time allows setting a minimum wage below $15 per hour, but doing so at a high enough level so that no one will, as Senator Manchin fears, support their families on the child tax credit alone.

Raising the minimum wage, as well as paying it to participants in training and education programs from ESL, to GED, to technical training to working for an associates degree, will increase wages for every worker under the “middle management” level. This is the vast majority of households - or about 80% of those who file income taxes - as well as the many who do not (again, including retirees).

There are many theories on why workers have fallen behind while investors and managers have continued to gain income at the rates occurring before 1971. Many assert that the end of the gold standard was the cause and that going back will fix all things. This is a great theory if one holds gold. 

The reality is that the gold standard was not working. The only alternative, and it is one that could be used today, is to forego currency arbitrage and adopt a worldwide system based on Production Power Parity (a common market basket of goods produced in each national economy).

Many point to tax cuts on the wealthy as the reason workers have fallen behind. Many time series data show that things started to get bad when the Kennedy/Johnson income tax cuts took effect in 1965, with the Reagan tax cuts of 1981 sealing the deal. The 1986 Tax reform set the 1981 cuts in stone. We still use the same basic structure, with changes at the margins.

Many blame the information revolution and the rise of automation for the loss of labor power, along with gutting of union rights (which is now being addressed by the Biden Administration).

All three of these reasons are somewhat true and are certainly interrelated. For example, tax cuts on investors and managers provide an incentive to cut labor costs (and inflation with it). There is one more reason, however, that no one talks about. Math. To wit, when compensation began to diverge, annual raises in both the public and private sector were adjusted by the same percentage. The problem is that price levels overall chase the median income level - which is not uniform.

There is a way out of this, and it can start with government workers, the military and government contractors. End the practice of percentage increases based on current wage and salary levels. Instead, increase wages on an equal dollar basis. Instead of giving everyone a 4% wage increase, give them the same dollar per hour increase. 

Base the wage increase on the percentage change of the median wage in the economy. In time, equality will be restored. To make sure it is, increase tax rates on higher salaries and dividends so that the incentive to cut wages to meet bonus targets goes away. 

One last comment on inflation and taxation. Capital gains can never be indexed to inflation because all changes to asset values, especially among liquid assets, are more dollars chasing the same goods or shares. In other words, if capital gains were adjusted by the rate of inflation, there would be no gains to tax. Doing that is OUT OF THE QUESTION!

Attachment: Debt Ownership as Class Warfare  Video

Attachment: Depression 2022 Video

Attachment: GDP Estimate FY 2023