The Fiscal Times Newsletter - August 28, 2017

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The Fiscal Times Newsletter - August 28, 2017

By The Fiscal Times Staff
August 29, 2017

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How Hurricane Harvey Could Transform the Budget Battle in Washington

The costs of Hurricane Harvey could climb as high as $100 billion, according to at least one estimate. While it will still take weeks for the full extent of the damage to become clear, the catastrophic flooding — and a recovery effort that is likely to take years — will almost certainly have an impact on some critical upcoming deadlines for lawmakers in D.C.

White House and congressional GOP officials told The Washington Post on Sunday that they expected to begin discussing emergency funding for disaster relief soon. Those discussions could present challenges for other items on President Trump’s agenda, from tax reform to a border wall with Mexico.

President Trump had threatened to shutdown the government if any funding bill failed to include money for the border wall with Mexico. But the need for disaster relief funding — and the political risk of failing to deliver such funding — could force the president and Congress to act more quickly to fund the government and avoid a partial federal shutdown. “That is because a government shutdown could sideline agencies involved in a rescue and relief effort that officials are predicting will last years,” Mike DeBonis and Damian Paletta of The Washington Post report.

The balance of the Federal Emergency Management Agency’s disaster relief fund stood at just $3.8 billion at the end of July — with $1.6 billion of that money set to be spent elsewhere. The funds needed for Harvey recovery alone may well exceed the total disaster relief budget for the current and upcoming fiscal years, The Post noted. Also, Congress must reauthorize the National Flood Insurance Program, which is more than $24 billion in debt, by the end of September and ensure that its legal borrowing limit, now around $30 billion, is sufficient to cover expected claims from Harvey victims.

William Hoagland of the Bipartisan Policy Center, who served as a former GOP staff director for the Senate Budget Committee, said the hurricane could also lead to the debt ceiling being raised faster than it otherwise might have been so as to ensure that the Treasury can provide emergency cash to storm-hit areas.

That’s not to say the disaster relief funding won’t devolve into a congressional fight. Both Hurricane Katrina in 2005 and Superstorm Sandy in 2012 led to budget fights in Congress in which Republicans resisted disaster funding that wasn’t offset by other spending cuts.
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#Harvey in perspective. So much rain has fallen, we've had to update the color charts on our graphics in order to effectively map it.
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Top Budget Expert Thinks We’re Headed for a Government Shutdown

Noted budget expert Stan Collender – who is sometimes referred to as “Mr. Budget” and who tweets under the name, @TheBudgetGuy – says that odds are better than even that the federal government will shut down this fall. Disputes over raising the debt ceiling are also in the cards, though with slightly less probability of a chaotic ending.

Collender says in Forbes that the problem lies with the current internal dynamics of the Republicans in Congress. In any other year, single-party control would mean less chaos in budget matters, not more. But the GOP is unusually divided right now. Collender argues there are seven contentious factions that are making it hard to get things done. In the House, there’s the conservative Freedom Caucus and the more moderate Tuesday Group. The Senate is similarly divided, but there is no real alignment between the Senate and House versions of each group. Then there’s the leadership of each chamber, which have their own interests and responsibilities that sometimes clash with the others. Last but not least, there’s President Trump, who is becoming something of a party unto himself.

These seven factions could make it very difficult to solve the two pressing fiscal problems – raising the debt ceiling to avoid a potential default on U.S. debt and funding the government to avoid a shutdown – that loom before October 1.

On the debt ceiling, the Trump administration has called for a “clean” debt ceiling hike, unencumbered by any other policy changes. But the Freedom Caucus has sent mixed signals on the subject, and there’s a good chance that the hardline conservatives won’t play along with the moderates to raise the ceiling, forcing House Speaker Paul Ryan (R-WI) to turn to Democrats for help – in which case, the Freedom Caucus could push for Ryan’s ouster, as they did with former speaker John Boehner in 2015.

On funding the government, a short-term spending bill, called a continuing resolution, seems like a relatively easy solution, even if it only puts off the budget fight temporarily. But President Trump, the ultimate wild card, has altered the game by threatening to veto any such funding if it fails to include money for a border wall. It’s all too easy to imagine that showdown ending with a shutdown.
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The High Cost of Debt Ceiling Brinksmanship

Every time Congress dithers on raising the debt ceiling, the Treasury Department is forced to take “extraordinary measures” to make sure it has enough cash to pay the country’s bills in full and on time without hitting the ceiling. Kellie Mejdrich at Roll Call reminds us that these measures come with a considerable cost, even without a default on the debt.

The Treasury began employing extraordinary measures last March, when the suspension of the debt limit brokered in a budget deal in November 2016 expired. With the debt ceiling back in force, the Treasury had to look for ways to avoid hitting the limit, currently $19.8 trillion. Treasury has several options — it defines four of them here — which involve not spending all of the money is it legally authorized to spend. For example, the Treasury may avoid making full investments in pension and savings accounts of government employees, delaying payments until a later date.

These measures tend to make the financial markets nervous, especially over time as the threat of default grows, which can move interest rates higher than they otherwise would be. The Bipartisan Policy Center points out that the current debt ceiling impasse sent short-term Treasury bill rates higher in July, raising the costs of issuing debt for the U.S. government.

Looking back at the debt ceiling brinksmanship of 2011-2012, the Government Accountability Office concluded that delaying the increase in the debt limit cost the Treasury at least $1.3 billion:

“Delays in raising the debt limit can create uncertainty in the Treasury market and lead to higher Treasury borrowing costs. GAO estimated that delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011. However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011. Further, according to Treasury officials, the increased focus on debt limit-related operations as such delays occurred required more time and Treasury resources and diverted Treasury’s staff away from other important cash and debt management responsibilities.”
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Robert Samuelson: Why Trump’s Tax Reform Won’t Work

It’s hard to imagine that tax reform is No. 1 on the Republicans’ to-do list when they still don’t have a 2018 budget. Worse, they still haven’t agreed to raise the debt ceiling, as the federal government continues to draw down what was $350 billion in cash reserves in January to $50.6 billion as of last Thursday, according to The Washington Post.

Maybe that’s why the Post’s economics columnist, Robert J. Samuelson, was inspired to challenge the GOP’s idea that cutting taxes is “tax reform,” which implies an improvement over the old system.

Samuelson is clearly disturbed about Trump’s tax plan, which primarily benefits the rich at the expense of the poor and adds an additional $3.5 trillion in deficits over a decade, according to the Tax Policy Center. It’s not clear how that’s an improvement.

Samuelson says, “If tax cuts were initially financed by more deficit spending, the costs of today’s lower taxes would be transferred to future generations.” That now includes the largest generation in America — the Millennials — as Baby Boomers die off.

The key argument against tax cuts, Samuelson says, is that contrary to Republican claims, they don’t stimulate significantly faster growth. “Tax cuts may cushion a recession and improve the business climate, but they don’t automatically raise long-term growth. A 2014 study by the Congressional Research Service put it this way: ‘A review of statistical evidence suggests that both labor supply and savings and investment are relatively insensitive to tax rates.’”

For Samuelson, the facts point in a different direction: “The truth is that we need higher, not lower, taxes. … We are undertaxed. Government spending, led by the cost of retirees, regularly exceeds our tax intake.”

But will Republicans raise taxes? That’s not a likely outcome given the current budget debate, which would need a dose of honesty that is sorely missing.
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US Companies Push Back on One Idea for Taxing Their Foreign Profits

The corporate lobbying push on tax reform is on in full force. If you watch cable news, you’ve likely seen ads from the Business Roundtable and other groups that are already spending millions of dollars to promote tax reform on television and radio. But not all the efforts are so public.

In a piece in Sunday’s Wall Street Journal, Richard Rubin offers details on one behind-the-scenes campaign by corporations to shape tax reform. Rubin reports that a group of large U.S. companies called the Alliance for Competitive Taxation issued a policy paper earlier this month warning against the “unintended and adverse consequences” of introducing a minimum tax for foreign earnings.

Such a minimum tax is reportedly one option under consideration as part of a shift to a territorial tax system, with a lower corporate rate for domestic profits, intended to incentivize companies to bring back some of the profits they have stashed in foreign countries to avoid paying a high tax rate on those earnings at home.

The minimum rate would be below the new statutory corporate rate and act to reduce the incentive to keep foreign profits in other countries.

But the companies in the alliance, including Eli Lilly, United Technologies and UPS, warned that a minimum tax would put American corporations at a disadvantage to their global competitors.

Kyle Pomerleau of the conservative-leaning Tax Foundation wrote recently that a broad minimum tax on foreign earnings would still give companies incentive to move their headquarters out of the U.S. to avoid the tax.

But Chye-Ching Huang, deputy director of federal tax policy at the left-leaning Center on Budget and Policy Priorities, tweeted Monday that multinational corporations want a “cartoon” version of the territorial tax system — one that would bring “0% US tax on their foreign profits. Giant incentive to shift profits offshore. Weak guardrails to stop it.”
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For Most Seniors, Social Security Is Their Biggest Source of Income

iStockphoto
By Eric Pianin
August 19, 2015

The 80-year-old Social Security program has long been known as the third rail of American politics -- touch it and you die.

Last year alone, more than 59 million Americans received retirement, disability and survivor’s benefits totaling $863 billion. While some lawmakers and policy experts warn that the system will begin to run short of cash beginning in 2035, seniors’ advocacy groups have vigorously fought major changes and cuts.

Related:  Battle Lines Form in the Fight Over Social Security Payment Reductions

Some nine out of ten people who are 65 or older receive Social Security benefits, according to the Social Security Administration, with an average monthly benefit of $1,294 average for retirees. Overall, Social Security benefits constitute about 38 percent of the income of the elderly, but that number varies greatly from individual to individual.

For the majority of seniors, Social Security makes up the majority of their income. Sixty-five percent of beneficiaries age 65 and older get more than half of their income from the program. Nearly a third (28%) rely on Social Security for 90 percent or more of their income.

Related: 4 Ways to Fix Social Security

The pie chart below, prepared by the staff of the congressional Joint Economic Committee, illustrates the range of seniors’ dependence on Social Security benefits:

Fund Managers Making Millions from University Endowments

iStockphoto
By Beth Braverman
August 19, 2015

The soaring endowments at America’s top universities are doing more to line the pockets of the millionaire private equity fund managers who run them than they are for the schools’ students, argues a New York Times op-ed published today.

At Yale University last year, for example, fund managers received $480 million in compensation for managing a third of Yale’s $24 billion endowment. Meanwhile, the school spent just $170 million of that endowment on tuition assistance, fellowships and prizes, according to an analysis by Victor Fleischer, a law professor at the University of San Diego.

He found a similar at Harvard, the University of Texas, Stanford and Princeton. “We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment,” Fleischer writes. “The private-equity folks get cash; students take out loans.”

Related: Harvard’s In-House Fund Managers Get 70 Percent Pay Hike

It’s worth noting that all the schools Fleischer cites do have relatively generous tuition assistance programs, and they often spend their endowments on capital improvements and other projects that indirectly benefit students.  Their endowments have also enjoyed record returns under private equity management.

Fleischer argues that college endowments should be required to spend a percentage of their assets each year, much like other private endowments. That would lead to lower overall endowments but might put a damper on tuition increases and would lead to improved research facilities, he claims.

Last year American universities invested about 11 percent of their portfolios in private equity and saw a 16.5 percent return on them, according to the National Association for College and University Business Officers.

Top Reads from the Fiscal Times:

John Kasich’s Latest Endorsement Could Be a Game-Changer

File photo: Ohio Governor John Kasich laughs as he speaks to withdraw as a U.S. Republican presidential candidate in Columbus, Ohio, U.S., May 4, 2016. REUTERS/Aaron Josefczyk
Aaron Josefczyk
By Martin Matishak
August 17, 2015

Ohio’s Republican Gov. John Kasich on Monday sought to enshrine his status as a top-tier presidential candidate when he rolled out the endorsement of Alabama Gov. Robert Bentley.

“John Kasich is a leader whose readiness to lead our nation on his first day in the Oval Office is unmatched,” Bentley said during a joint appearance at the Alabama Sports Hall of Fame. “America needs John Kasich, and I am going to do everything I can to help make sure he is our next president.”

Related: 10 Things You Need to Know About John Kasich

On paper, the Republican governor of a deep-red Southern state endorsing a GOP presidential candidate months before the first primary votes are cast may not come as much of a surprise, but it could ultimately mean a great deal for Kasich’s White House bid.

The Ohio Republican, with his compassionate conservative message, has touted himself as a moderate in the crowded GOP field; winning the support of the executive of one of the most conservative states in the nation could help him broaden his appeal in the party.

Alabama is set to play a major role in the GOP’s 2016 nomination process. The state is one of eight in the South that will hold a vote on March 1 in the so-called “SEC primary.”

Sen. Ted Cruz (R-TX), another White House hopeful, has called the cluster of states the “firewall” for his candidacy and wrapped up a southern bus tour last week, drawing large crowds in Tennessee, Mississippi and Arkansas.

Related: Did Kasich Just Do an About-Face on Climate Change?

By making hay of Bentley’s endorsement, Kasich also aims to stay in the spotlight and secure his place on the main stage when Republicans meet again next month for their second debate.

Kasich announced his candidacy just a few weeks before the first debate in Cleveland earlier this month in the hope that his initial splash in the polls would be enough for him to make the cut-off for the prime time event. The strategy paid off; Kasich received standing ovations and thunderous applause whenever he answered a question before the home state crowd.

But surveys taken since the debate show former Hewlett-Packard CEO Carly Fiorina surging in the polls, meaning another contender is likely to get bumped off stage.

After Bentley’s announcement, Kasich, who has bet his candidacy on winning the New Hampshire primary and watched his numbers steadily rise there, will make a campaign swing through the Granite State, Iowa and South Carolina.

Top Reads from The Fiscal Times

Here’s How Much It Would Cost the Military to Provide Transition Care to Transgender Troops

Ashton Carter, U.S. President Barack Obama's nominee to be secretary of defense, testifies before a Senate Armed Services Committee confirmation hearing on Capitol Hill in Washington, February 4, 2015. REUTERS/Gary Cameron
© Gary Cameron / Reuters
By Millie Dent
August 14, 2015

As the U.S. military studies the implications of lifting a ban on transgender people serving in the armed forces, a new study says that the cost of providing transition-related health care to those service members would be about $5.6 million a year, or “little more than a rounding error in the military's $47.8 billion annual health care budget.”

After U.S. Defense Secretary Ashton Carter announced in mid-July that that Department of Defense would look into lifting the ban, opponents expressed concern about the potential high costs of providing care to transgender individuals. In last week’s debate among Republican presidential candidates, former Arkansas Gov. Mike Huckabee said he wasn’t sure “how paying for transgender surgery for soldiers, sailors, airmen, Marines makes our country safer.” 

Related: The Surprising Way the Military Could Save Millions

The new study published in The New England Journal of Medicine estimated that 12,800 transgender troops currently serve and are eligible for health care in the U.S., but only 188 transgender service members would require transition-related care annually. Aaron Belkin, the San Francisco State University researcher who conducted the survey, checked for accuracy using data from the Australian military, which already covers transition-related care, and compared costs with insurance plans offered to University of California employees and their dependents. 

Belkin emphasized that costs could be lower than expected for several reasons. Among those, transition-related care would mitigate other serious and potentially costly conditions, such as suicidal thoughts, and might improve job performance. 

Acknowledging that the costs might be higher than he estimates, Belkin still says they would be too low to matter and shouldn’t be a factor in deciding whether the ban is lifted or not.

In June, the American Medical Association said there is “no medically valid reason” to prohibit transgender individuals from serving in the military.

Top Reads From The Fiscal Times

4 Ways to Fix Social Security

iStockphoto/The Fiscal Times
By Beth Braverman
August 14, 2015

Social Security celebrates its 80th birthday today, and the popular program that provides paychecks for 44 million elderly Americans is in need of a safety net of its own.

As the amount claimed by recipients continues to outpace the amount of money contributed by workers, the system will need to dip into its reserves to keep up with its obligations by 2020. Within 15 years after that (if nothing changes), those reserves will be gone and the system will only be able to pay 77 cents on every dollar owed, an amount that will continue to decrease with time.

The problem is even more acute given that future retirees won’t have the same access to pensions that many current retirees use to fund their retirement, and younger workers haven’t saved nearly enough to cover the costs they’ll face when they stop working.

To close the projected gap, the country needs to raise revenue, reduce benefits or some combination of the two. Here are four of the most commonly proposed solutions:

1. Raise the retirement age. For most Americans, the full retirement age (at which you can get full benefits) ranges from 65 through 67. Advocates of this solution would reduce the amount the government pays in Social Security by gradually pushing back the age at which you’re eligible for full benefits.

The drawback: Many Americans are already forced into retirement before they reach age 65. If they claim early and receive reduced benefits they may not have enough money to meet their basic needs. Also, workers in physically demanding jobs many not be able to work those extra years.

2. Raise the payroll cap. Social Security is funded via payroll taxes, which currently are only levied on the first $118,500 of income. That means that high earners effectively pay a much lower rate toward Social Security than others. Hiking or eliminating that cap, advocates say, would create a fairer system and increase revenue.

The drawback: Critics of this solution claim that increasing taxes on middle- and upper-income earners would reduce their income and stifle the country’s economic growth.

Related: 6 Popular Social Security Myths Busted

3. Institute a means test. While the vast majority of recipients (80 percent, per AARP) rely on Social Security as an integral part of funding their retirement, extremely high net worth individuals don’t need the additional income. This solution would create a net worth or retirement income threshold over which eligibility for social security phases out.

The drawbacks: It could be politically difficult to settle on a threshold, which might vary depending on the geography of a recipient. Plus, this would require people to pay into a system from which they get no benefits.

4. Freeze the cost of living adjustment. Social Security payments have historically been adjusted based on inflation as measured by the Consumer Price Index. This has been minimal in recent years, but the long-term, compounding effect of inflation makes this provision incredibly expensive.The drawbacks: For many people, Social Security is the only inflation-linked retirement income stream that they have. Limiting it could push some retirees over the financial edge as prices rise.