Month: April 2023

2024 Insights: Trump will not be the Republican nominee

Early national polls of Republican voters mean zilch. Some states have open primaries and a smaller field that narrows quickly can quickly settle on someone other than Trump.

The national media believes that Trump is the clear favorite for the Republican nomination.  My view is that the likelihood of Trump winning this nomination is around 25 percent.  

Some observations supporting the emergence of an alternative to Trump:

People always assume the previous race will look like the last one.  In the 2016 Republican contest there were 17 major candidates and the field narrowed slowly.  This time around there may be a total of 6 candidates with field narrowing to 3 after New Hampshire. 

Many states have open primaries, which allow voters to enter the primary of their choice. Most independents have an unfavorable view of Trump.  Many independents will participate in an open Republican contest and vote against Trump If Biden is not challenged in the Democratic contest.  Three of the early crucial contests, Iowa, New Hampshire, and South Carolina are open contests.

Iowa, the first caucus, is likely to be a muddle.  The Iowa Republican caucus often goes to a candidate with regional ties or fervent anti-abortion views.  The Democrats have moved Iowa to a later date, a change that will likely cause more independent voters to caucus with Republicans.

Two key early states, New Hampshire and South Carolina have open primaries.  It is conceivable that Trump loses both primaries and gets knocked down early.  Chris Sununu, the governor of New Hampshire, would win the New Hampshire contest if he enters.  Whether Trump could rebound in South Carolina depends on how quickly the field winnows.

Concluding Thought:  Biden fares poorly in a general election race against Sununu.  Whitmer would be a much stronger candidate. Future election posts will examine the contest or lack of contest in the Democratic party and factors impacting the general election.

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An analysis of fiscal policy under a debt limit

The economic consequences of a default on the national debt would be catastrophic to the nation and the world economy. The debt-limit dispute has forestalled discussion of rational budget changes and entitlement reform. President Biden has the legal authority to ignore the debt limit and pay the nations bills. House Republicans have many other ways to pursue their agenda.


Introduction:  

The current standoff over the debt limit between House Speaker McCarthy and President Biden reminds me of the line in the movie Cool Hand Luke “What we have here is a failure to communicate.”

The Speaker’s position is that there will be no increase in the debt limit without substantial reductions in spending.

The President has refused to negotiate over the debt limit and would deal with Congressional efforts to trim the budget through the normal appropriation process.

This post evaluates the debt limit conflict.

The status of debt-limit proposals:

The Speaker of the House has taken the position that he will not support an increase in the debt limit unless it is accompanied by substantial reductions in spending.  House Republicans differ on the type of spending cuts they support.  Many of the cuts in a House bill would not pass the Senate.

The current House Republican proposal discussed here contains the following items:

  • An increase in the debt limit by $1.5 trillion or until March 2024, whichever comes first,
  • Cancellation of the Biden Administration student debt discharge proposal,
  • The reinstatement of student loan payments, halted by executive order during the COVID pandemic,
  • Prevention of the enactment of changes to Income Driven Loan plans,
  • Rescission of newly appropriated IRS funds,
  • Creation of a work requirement for federal assistance programs including SNAP and Medicaid,
  • Elimination of tax credits for electric vehicles and other solar and wind projects enacted in the Inflation Reduction Act,
  • Reduction in funding from 2024 levels to 2022 levels and a limitation of annual funding increases to 1.0 percent.

Several aspects of the debt-limit dispute are examined here in more detail.

Concern One: Economic Issues

 A debt default by the United State is an existential threat to the national and world economy

  • Federal benefits including Social Security and Medicare and Medicaid payments would be disrupted.
  • Substantial amount of world trade, which is denominated in dollars would be disrupted.
  • Investors would dump Treasury securities and interest rates would rise.  
  • The stock market would fall drastically.
  • The duration of the stock market decline and interest rate spike would depend on duration of default.
  • The dollar would likely lose its status as world’s reserve currency.
  • Recession and stagflation would likely ensue.
  • Assistance to Ukraine would be disrupted.

Concern Two:  Legal and Constitutional Issues

Legal experts differ on the ability of the President to pay bills, maintain benefits, and raise new funds should Congress fail to increase the debt limit.

  • The founders of our nation did not envision a situation where one part of a divided Congress could dictate massive policy changes to the other part of Congress and the Executive.
  • Many legal scholars believe the President has the authority to ignore the debt limit when congressional actions create unconstitutional doubt about the validity of the public debt.  See this note.
  • Congressional Republicans have many levers including the normal appropriation process, court action, government closure to reduce spending.
  • Supreme Court should stay out of this dispute between Congress and the President.  Congressional Republicans have an impeachment option if they believe the President’s actions are illegal.

Concern Three:  Fiscal and Budgetary Issues

Many items in the Republican agenda are severe and have little support in the Senate.  However, some items have merit and could be enacted in a different political environment.

  • The simultaneous enactment of the Republican fiscal agenda with Federal Reserve monetary tightening would result in a severe recession.
  • Fiscal policy is already becoming more stringent because of the end of COVID relief programs and automatic phaseouts of some programs.
  • The COVID-era Medicaid expansion has lapsed.  Go here for a discussion of the impact of the end of this benefit.  Additional Medicaid work requirements would further increase the number of uninsured.
  • The current proposal does not appear to target the ACA.  However, the elimination of the ACA subsidy cliff automatically phases out in 2025.
  • A strong case could be made for modification of the EV tax credits, which I have argued  here are regressive and a costly way to motivate more rapid introduction of EVs.
  • The Biden Administration student discharge proposal is not clearly connected to the COVID pandemic and could be eliminated by litigation currently before the Supreme Court.  The Biden Administration and Congress should consider revisions to student debt programs described here.
  • The reduction of SNAP programs would substantially increase hunger in America.
  • The limitation of future expenditures to an annual increase of 1.0 percent is problematic given that inflation remains above 5.0 percent.
  • The proposed recission of funds for the IRS would increase budget deficits.
  • The proposed reinstatement of the debt limit prior to the election is a political non-starter.
  • The debt-limit threat has caused the Administration to delay replenishment of the strategic petroleum reserve.

Concern Four:  The Role of Entitlements

The current budget debate ignores key issues pertaining to the future of Social Security and Medicare.  This is a huge mistake.

  • The trustees of the Social Security Trust fund project that declines in Trust fund assets will trigger automatic Medicare benefit cuts in 2028 and automatic cuts to Social Security in 2033.  Go here for part of this discussion.
  • The existence of a debt-limit dispute in a year where the Trust Fund balance dictates automatic reductions in either Medicare or Social Security benefits ncreases the likelihood of benefit reductions.
  • The delay in the entitlement discussion could result in abrupt entitlement benefits in the future.  Go herefor a discussion of why changes to Social Security need to be phased in slowly and coupled with improvements to private retirement savings.

The decision by both the Republicans and the Democrats to delay discussion of entitlement reforms increases the likelihood that the reform process will result in a less than optimal outcome.

Concluding Remarks:  Down-to-the-wire disputes over the debt limit are never good for the economy, for the markets and are not an effective way to deal with increased debt levels or wasteful spending.  Government closures also aren’t good for the country, but the economic consequences of a government closure are infinitely less drastic than a default on the debt.  

President Biden must make clear that the debt default is not going to happen.  The only way for the President to remove the uncertainty of a debt default is to announce that he will ignore the debt limit and pay the nation’s bills, an action supported by many legal scholars.

An evaluation of efforts to expand use of electric vehicles

Biden administration efforts to speed the adoption of electric vehicles (EVs) while well intended, are expensive and will likly prove ineffective. A better result could be achieved through a revenue neutral tax reform, which raises the relative cost of conventional vehicles to EVs.

Introduction:  The Biden Administration has placed a high priority on the more rapid introduction of electric vehicles. Policy initiatives include a first round of grants for states and communities to build EV charging stations,  extended tax credits for the purchase of EVs enacted in the Inflation Adjustment Act, and substantial increases in emission standards, like rules adopted in California, to boost EV sales.

These policies, while well intended, comes at a high economic cost and result in adverse environmental consequences.

Some problems with efforts to spur the growth of Electric Vehicles:

Budgetary impacts: The official forecasts of the cost of the EV tax credit to the Treasury does not correspond with forecasted EV sales growth.  A forecast used by the Joint Committee on Tax assumes the sale of 4.1 million plug-in vehicles over a decade.  By contrast, the new emissions standards proposed by the Biden Administration would result in EVs becoming two thirds of all new car sales, around 11 million annually.  Hence, the loss in tax revenue from the EV credit in a single year could be substantially larger than the projected loss for a decade.

A tax credit for the sale of a used EVs is more cost-effective than the tax credit for new EVs.  However, all direct consumer subsidies are expensive and difficult to justify given budget deficits and competing needs for funds.

A regressive subsidy:  EVs are currently an expensive luxury item sold primarily to affluent people.  In 2022, the average price of an EV, around $61k was around 25 percent higher than the average price of a conventional car.  Around 57 percent of EV buyers had income greater than $100k.  Even though the tax code prevents people with high income from claiming the EV credit, most recipients of the credit are affluent and the subsidy itself is a regressive policy. 

Issues associated with lithium:  The supply and cost of EVs will be impacted by the scarcity of lithium, the key ingredient in EV batteries.  China controls 70 percent of global lithium production.  Currently, lithium prices have fallen because of lack of demand in China but that will reverse when production in China resumes.  A new lithium mine being created in Nevada may reduce prices but lithium mining results in adverse environmental impacts including damage to soil, water and air.

Is EV growth inflationary? A shift in demand from conventional cars to EVs will increase the cost of living because EVs are more expensive than conventional cars.  The shift will be inflationary even if the price of EVs falls somewhat.  The BLS could claim EVs are an improved product and part of the price differential could be excluded from the official Consumer Price Index calculation.  However, EVs have a smaller driving range than conventional vehicles; hence, any adjustment to the CPI because of product improvement will be small.  Go here for a discussion on how the BLS adjusts prices in the CPI for changes in quality.

The cost of fueling an EV is substantially smaller than the cost of fueling a conventional vehicle a clear cost reduction.

The cost of insurance on an EV is higher than the cost of insurance on a conventional vehicle since insurance costs are tied to the value of the vehicle.  The savings in fuel costs will likely be smaller than the additional insurance costs.

The EV tax credit was included in the Inflation Adjustment Act, in my mind a misnomer.  A more accurate description of the law might be the Inflation Mitigation Act.

Impact on Traditional Hybrid Vehicles:  Traditional hybrid vehicles, which rely on an internal combustion engine and do not use a plug to charge, do not receive a tax credit.  The Prius gets over 50 mpg, both in the city and on the highway while non-hybrid vehicles like the Corolla get around 30 mpg.  The starting MSRP for a Corolla is around $21k compared to the starting MSRP of a Prius of around $28k.  A small tax incentive designed to motivates purchases of traditional hybrids over non-hybrids would substantially reduce carbon emissions in a cost-effect manner.  Furthermore, if the EV tax credit causes some consumers to choose an EV over a Prius, the environmental gains from this proposal will be small.  The EV tax credit is a slap in the face to Prius owners.

Uncertain consumer demand and the emissions standard:  The proposed emission standards set a target for the emissions of the entire fleet sold by a manufacturer in the year. However, the demand for EVs may be less than anticipated leaving the manufacturer short of the emissions target or in a position where the automobile firm must sell EVs at a loss to meet the target.  

Impact of new small inexpensive hybrids:  This article on the proposed emission standard indicates most growth in the EV market will be among small vehicles.  Automakers are now introducing a $25k EV, substantially lower than the average new-care price.  However, a bare-bones small EV costing $25k could be substantially more expensive than a bare-bones small conventional vehicle.  The substitution of a bare-bones EV for a bare-bones conventional vehicle may increase costs for the consumer and have a relatively small environmental benefit.

Impact on the used-car market: Despite the tax credit and the regulations, many people, especially older consumers will resist switching to EVs.  This will cause them to hold onto their vehicles longer and will result in higher used-car prices.  The increase in the lifespan of existing conventional vehicles will reduce improvements in fuel efficiency and carbon emissions, at least temporarily offsetting environmental benefits of the new EVs.

An Alternative Approach:

The most troubling problem with the use of the EV tax incentive is the potentially large impact on the Treasury.  The most cost-effective way to achieve an environmental objective involves the use of the tax code to favor the item that pollutes less over the item that pollutes more.  In my view, it is difficult to justify direct expenditures subsidizing the purchase of personal vehicles when there are large funding needs for other priorities including, improvements in health insurance and expanded private retirement savings.

The EV market could be promoted without a loss of tax revenue through a revenue neutral tax change designed to alter the relative cost of owning EVs and conventional vehicles.  

One approach would involve combining an annual fee for the use of conventional vehicles with an increase in the standard deduction or more generous tax credits for funding a health savings account or an Individual Retirement Account.

The case for modifying Biden’s Student Debt Discharge Proposal

President Biden’s student debt discharge proposal is not the most effective way to mitigate student debt problems associated with COVID. This post examines issues associated with the Biden Administration student debt discharge proposal and proposes an alternative executive order.


Introduction:  The student debt discharge proposal crafted by the Biden Administration is in trouble.  

It is currently being challenged before the Supreme Court and in Congress.  

The connection of the student debt discharge proposal with the COVID pandemic is tenuous at best. The conservative court is likely to rule that the President does not have the authority to provide debt relief in this form.   A ruling against the Administration on this proposal could expand the type of federal regulations subject to challenges.

The GAO has ruled that the Biden Administration’s student debt discharge proposal is subject to the Congressional Review Act, which allows Congress to overturn government agency rules by majority vote.  A bill currently in Congress could eliminate the student debt discharge program; although President Biden will likely veto this bill if it passes Congress.

The additional debt stemming from failure to reinstate some payments on student loans will also increase the national debt and exacerbate issues related to the debt limit dispute.  Congressional Republicans may link the student debt discharge proposal to the debt limit debate.  

The Biden Administration will find itself in the uncomfortable situation of having to defend an executive order that reduces revenue when Congress is refusing to increase the debt limit, an action that could lead to a catastrophic default. 

Clearly, Congress is responsible for all debt incurred from past spending and tax decisions.  However, the Biden Administration student debt discharge plan was not explicitly approved by Congress.  

These economic, legal and political problems can be resolved by replacing the current student debt discharge proposal with a modified program that is more closely linked to payment problems caused by the COVID pandemic.

Background on the Biden Student Debt Discharge Proposal:

The Biden Administration is proposing a one-time discharge of federal student debt.  Borrowers with a Pell grant can have up to $20,000 discharged.  Borrowers without a Pell grant can receive a discharge up to $10,000.

Taxpayers with income less than $125,000 (single filers) or $250,000 (married filers) are eligible for the one-time debt discharge.

Student loans taken out after June 20, 2022, are not eligible for the loan discharge program.

Six states have brought litigation to stop the Biden Administration student discharge program on grounds that the Biden Administration exceeded their legal authority and that the law damages institutions in their state.  The Biden Administration claims their authority to provide student loan debt relief due to COVID stems from the 2003 Heroes Act which allows for relief under a national emergency and that the plaintiffs do not have standing to litigate this issue. 

Many people question the connection between the proposed student debt discharge and the COVID emergency which created the rationale for the proposed discharge.  Some people will have all of their debt discharged, far more than is necessary to deal with problems caused by the COVID pandemic and the payment shock from the reinstatement of payment obligations.

The COVID pandemic has largely ended in the United States and most program designed to assist people because of COVID, including additional food stamps, housing assistance, expanded access to Medicaid, and free vaccines, have ended or are ending.  

Motivating student debt relief because of the COVID emergency: 

The COVID emergency has exacerbated two problems associated with student debt.

First, the restart of loan payments creates payment shock for many households at a time when interest rates are rising, and many prognosticators believe the economy is heading towards a recession.  A limited temporary revision to student loan contracts could address problems to the economy caused by the payment shock.

Second, most borrowers have a higher outstanding student loan balance because of the student debt payment freeze.  A non-trivial portion of these borrowers are older and either nearing their last decade in the workforce or nearing retirement.  The growth of the number of older Americans with retired student loans is a growing problem, which appears to have been exacerbated by the payment freeze.  A limited temporary revision to student loan contracts could address problems caused by the higher outstanding loan balances stemming from the student loan payment freeze.

Any emergency student debt relief proposal that is consistent with efforts to mitigate problems associated with the COVID pandemic should be tailored to address those problems in a cost-effective manner.  A one-time debt discharge of up to $20,000 is not a cost-effective solution to these COVID era problems.

An alternative student debt relief plan:

The alternative student debt relief plan presented here offers a 0 percent interest rate on federal student debt up to a balance of $30,000 for a period of five years. 

The alternative student debt relief plan could also include a loan discharge of 10 percent of each on-time monthly payment.

A new executive order replacing the current debt discharge proposal with these modifications to the student loan contract would address the problems caused by payment shock and the the increase in borrowers nearing retirement with large outstanding student loan balances.

This interest rate reduction is a cost-effective way to reduce payment shock from the return of student debt payment obligations.

The reduction of the interest rate from 5.0 percent to 0.0 percent on a 10-year $30,000 student loan would reduce monthly payments from $318 to $250, approximately a 21 percent decrease in monthly payments. The reduced payments over five years add up to $4,092.

The additional 10 percent discharge applied only when payments were made on time could reduce debt by an additional $409 dollars.

The 10 percent discharge and a late fee when payments are not made on time would incentivize student borrowers to make payments on time, even though the interest rate on the loan was set to zero.

Concluding Remarks:  The interest rate reduction and partial debt discharge described here incentivizes student borrowers to repay their loans.  The receipt of loan payment by the Treasury will reduce the national debt over time compared to the Biden Administration discharge proposal and compared to the current freeze on payments.