CBO Budget Report: Debt Disaster

The Congressional Budget Office (CBO) released new projections showing the debt disaster being manufactured in Washington. Federal borrowing from global capital markets is expected to soar from an outstanding $14 trillion this year to $24 trillion by 2026 under the baseline.

Every dollar of debt is an added burden on future taxpayers. Debt-fueled spending is both unfair and damaging. Members of Congress know how credit cards work, so either they are in denial or they lack the guts to make tough decisions. Either way, they are failing the nation.

The situation is actually worse that the baseline shows, and members should know that too. The baseline assumes that the economy chugs along with modest growth and avoids a recession, but we’ve had a recession every five and a half years, on average, since World War II. Deficits soar during recessions, pushing up debt and debt as a share of gross domestic product (GDP).

Also, the CBO baseline assumes that Congress sticks to current discretionary budget caps. Discretionary spending is projected to fall from 6.5 percent of GDP this year to 5.2 percent by 2026. But what if Congress continues its spendthrift ways, keeps breaking the budget caps, and spending remains at 6.5 percent? That change alone would push up 2026 debt by roughly $2.7 trillion, including added interest costs.

Berniecare Outline Leaves Important Questions Unanswered and Would Add Trillions to the Debt Even After Massive Tax Increases

Just before last weekend’s Democratic debate, Bernie Sanders finally released the long-awaited plan for his health care proposal, which would fundamentally transform the health care sector by replacing all health insurance with a single program administered by the federal government. Michael Cannon has ably explained how Obamacare was really the big loser of the back and forth at the debate, but it’s worth looking further into Sanders’ outline of a plan. At just seven pages of text, it leaves most of the major questions unanswered. It does list a bevy of tax increases that it say will finance the needed $1.38 trillion in new federal spending each year, although even this is a significant underestimate. Bernie’s plan promises universal coverage and savings for families and businesses without delving into of the necessary, and often messy, trade-offs. 

While he calls the plan ‘Medicare for all,’ the plan would actually cover even more services than Medicare and do away with the program’s cost-sharing components like co-payments, deductibles, and premiums. Giving people comprehensive coverage of “the entire continuum” at little cost to themselves would seem to significantly increase utilization, which would strain the system’s capacity while also rendering it unaffordable. The plan makes no effort to answer fundamentally important questions: How would the new system determine payment rates for health care providers? What, if anything, would it do to try to rein in the growth of health care costs?

The “Getting Health Care Spending Under Control” section of the plan is one paragraph long and offers little beyond assurances that “creating a single public insurance system will go a long way towards getting health care spending under control” and under Berniecare “government will finally be able to stand up to drug companies.” That this is hardly a comprehensive plan and gives the impression that in this system, cost control measures would somehow be painless.

Campbell-Ewald: SCOTUS (Still) Doesn’t Resolve Class Action “Pick-Offs”

In this morning’s 6-3 ruling in Campbell-Ewald v. Gomez, the Supreme Court, with Justice Ruth Bader Ginsburg writing for the majority, ruled that a defendant’s offer to settle in full the claim of a named plaintiff did not in itself avail to moot the claim and thus (its goal) knock-out the associated class action. The case, which John Elwood and Conor McEvily previewed in their contribution to the latest Cato Supreme Court Review, is the latest in a series–notably Genesis Healthcare Corp. v. Symczyk three years ago–raising the question of when and whether defendants can end a group action by “picking off” named plaintiffs. While this case on its face is a win for the liberal side and embraces the analysis argued previously by Justice Elena Kagan in her Genesis dissent, it still leaves important elements of the wider question unresolved, while giving Justice Clarence Thomas the chance to write an interesting concurrence asking whether either camp of justices is asking the right questions. 

Dissenting Chief Justice John Roberts (joined by justices Antonin Scalia and Samuel Alito) argues that an individual lawsuit that has been met with a fully adequate offer of settlement has ceased to be a “case or controversy,” the only sorts of disputes our courts may adjudicate. (Because the federal law that underlies the suit – the Telephone Consumer Protection Act, or TCPA – has a statutory maximum for damages, it is reasonably knowable what constitutes full relief for plaintiff Gomez.) By contrast, the majority points out with some force that a valid claim countered with a full offer of settlement is not in quite the same posture as a grievance that never became a valid claim in the first place. Ginsburg, Kagan, et al. would apply principles of contract to an offer of judgment made under federal Rule 68 and, under such principles, a contract offer–handsome or otherwise–need not be accepted. 

Justice Clarence Thomas, concurring separately, disagrees with both sides’ approach. He is not satisfied with the conservatives’ somewhat Legal Realist approach (if one may call it that) as to when a case or controversy has ceased, but is equally wary of the liberals’ resort to contract principles (laying a legal controversy to rest is not quite the same thing as contract-making, even if they have much in common.) Instead, he would look to the early common law of tenders, which preceded (and led up to) what is now Federal Rule 68 on offers of settlement. Thomas concludes that in this particular case common law analysis would lead to the same destination as reached by the majority. 

While this morning’s outcome is being hailed in some quarters as a huge victory for class actions, note well the narrowing language on pages 11 and 12 of Justice Ginsburg’s opinion, which suggests a concern to keep courts rather than the parties or their lawyers in final control: 

We need not, and do not, now decide whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount. That question is appropriately reserved for a case in which it is not hypothetical. 

The TPP Is All About the Details

Australian Prime Minister Malcolm Turnbull is in DC, and one of the things he is talking about is the Trans-Pacific Partnership (TPP).  Addressing the U.S. Chamber of Commerce, he said this:

So, when I’m speaking to some of your legislators later today I‘ll be encouraging them to support the TPP. Not to lose sight of the wood for the trees, not to get lost in this detail or that detail or that compromise, because the big picture is: the rules-based international order, which America has underwritten for generations, which has underwritten the prosperity and the economic growth from which we have all benefitted, the TPP is a key element in that.

Along the same lines, this is from a conversation he had with President Obama:

… And can I say, as I’ve just said to the U.S. Chamber of Commerce, encouraging them to encourage their congressmen and senators to support it, that the TPP is much more than a trade deal.  The prosperity of the world, the security of the world has been founded on the peace and order in the Asia Pacific, which has been delivered underwritten by the United States and its allies, including Australia.  

And what we’ve been able to do there is deliver a period of peace, a long period of peace from which everybody has benefited.  And America’s case – its proposition – is more than simply security.  It is standing up for, as you said, the rules-based international order, an order where might is not right, where the law must prevail, where there is real transparency, where people can invest with confidence.  

And the TPP is lifting those standards.  And so it is much more than a trade deal.  And I think when people try to analyze it in terms of what it adds to this amount of GDP or that, that’s important.  But the critical thing is the way it promotes the continued integration of those economies, because that is as important an element in our security in the maintenance of the values which both our countries share as all of our other efforts – whether they are in defense or whether they are in traditional diplomacy.

There’s lots of vague talk here, with the specifics glossed over.  He says we should not “get lost in this detail or that detail,” but for me, the TPP is all about the details. As he notes, the TPP is “more than a trade deal.”  So what else is it?  In terms of its economic impact, that’s what we in Cato’s trade policy center are looking at right now, and we will offer our assessment in the coming months.

On the other hand, when you start hearing about “security,” and “peace,” and “order,” and how the TPP might contribute, I would be a little skeptical about what exactly the TPP can deliver here. That’s not to say it can offer nothing; but this kind of benefit is very hard to measure.

Taking (Tax) Credit for Education

One of the most promising recent developments in education policy has been the widespread interest in education savings accounts (ESAs). Five states have already enacted ESA laws, and several states are considering ESA legislation this year. Whereas traditional school vouchers empower families to choose among numerous private schools, ESAs give parents the flexibility to customize their child’s education using a variety of educational expenditures, including private school tuition, tutoring, textbooks, online courses, educational therapies, and more.

Today the Cato Institute released a new report, “Taking Credit for Education: How to Fund Education Savings Accounts through Tax Credits.” The report, which I coauthored with Jonathan Butcher of the Goldwater Institute and Clint Bolick (then of Goldwater, now an Arizona Supreme Court justice), draws from the experiences of educational choice policies in three states and offers suggestions to policymakers for how to design a tax-credit-funded ESA. Tax-credit ESAs combine the best aspects of existing ESA policies with the best aspects of scholarship tax credit (STC) policies. Like other ESA policies, tax-credit ESAs empower families to customize their child’s education. And like STC policies, tax-credit ESAs rely on voluntary, private contributions for funding, making them more resistant to legal challenges and expanding liberty for donors.

Here’s how it would work: individuals and corporations would receive tax credits in return for donations to nonprofit scholarship organizations that would set up, fund, and oversee the education savings accounts. There’s already precedent for this sort of arrangement. In Florida, the very same nonprofit organizations that grant scholarships under the state’s STC law also administer the state’s publicly funded ESA. Moreover, New Hampshire’s STC law allows scholarship organizations to help homeschoolers cover a variety of educational expenses, similar to ESA policies in other states. 

For more details on how to design tax-credit ESAs, how they would work, and the constitutional issues involved, you can read the full report here. You can also find a summary of the report at Education Next.

The Politics of Non-Political Money

An early trope about Bitcoin was that it was ‘non-political’ money. That’s a tantalizing notion, given the ugliness of politics. But a monetary system is a social system, technology is people, and open source software development requires intensive collaboration—particularly around a protocol with strong network effects. When the group is large enough and the subject matter important enough, human relations become politics. I think that is true even when it’s not governmental (read: coercive) power at stake.

Bitcoin’s politics burst into public consciousness last week with the “whiny ragequit” of developer Mike Hearn. In a Medium post published ahead of a New York Times article on his disillusionment and departure from the Bitcon scene, Mike said Bitcoin has “failed,” and he discussed some of the reasons he thinks that.

As do most people responding to the news, I like Mike and I think he’s right to be frustrated. But he’s not right on the merits of Bitcoin, and his exit says more about one smart, impatient man than it does about this fascinating protocol.

But there is much to discover about how governance of a project like Bitcoin will proceed so that politics (in the derogatory sense) can be minimized. Stable governance will help Bitcoin compete with governmental monetary and record-keeping systems. Chaotic governance will retard it. We just need to figure out what “stable governance” is.

Portugal-Style Bail-ins: The New Norm under Dodd-Frank?

As 2015 came to an end, so perhaps did a central tenet of resolving failed companies, the notion that “similarly situated” creditors ought to be treated equally, or, as the lawyers like to say “pari passu” (Latin for “on the same footing”).*  The turning point was Portugal’s treatment of creditors of Novo Banco SA.

Until its failure in August of 2014, Banco Espirito Santo SA had been Portugal’s second largest bank.  When it failed, the Banco de Portugal, acting as receiver, divided the failed bank into  “good” and “bad” components, as the FDIC commonly does in the event of a large U.S. bank failure.  Banco Espirito Santo SA continued as the “bad bank,” which was to be liquidated in an orderly process.  The “good bank” became Novo Banco SA, which would stay in business.

In such “good bank-bad bank” resolutions, all equity holders usually remain with the bad bank, while more senior creditors are transferred to the good bank.  In any event all creditors of the same class are treated alike.  Creditors assigned to the good bank are much more likely to recover some part of their investment.