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By John Ubaldi
Contributor, In Homeland Security
Without much fanfare, the Congressional Budget Office (CBO) released its annual long-term budget forecast last month. The forecast looked at revenue and federal spending over the course of the next three decades.
The CBO’s findings are nothing new. However, they are still alarming because they forecast that spending will dramatically rise as entitlements programs and interest on the federal debt will lead to a dramatic increase in the federal budget deficit.
Currently, the federal debt is 78 percent of gross domestic product (GDP). That number is projected to reach 152 percent of GDP by 2048.
The CBO numbers were based on the fact that some of the tax cuts enacted in December 2017 will expire in 2025 unless Congress extends them. In the future, the CBO will more than likely release a separate report on the long-term forecast, which will assume that the tax cuts become permanent and what their full impact will be on the federal debt.
Decade of Lost Revenue for the Federal Government
The past decade has been a disaster for federal finances. The fiscal crisis of 2008-2009 increased the federal debt in large part because of business failures and high unemployment, as well as the economic policies of the Obama administration.
The two tools governments use to “prime the pump” during a recession are low interest rates, which in this case were near zero for almost all of Obama’s presidency, and massive federal spending. Each tool failed to revive the U.S. economy.
That made Obama the first modern president to never reach 3 percent annual economic growth. In fact, the nation hasn’t seen 3 percent growth in 12 years.
Much of the federal debt debate has centered on how the tax cuts will increase the debt, but the CBO only factors in the data that it has. The nonpartisan CBO does not surmise how a reformed tax code might affect the economy.
CBO Reports Growth in Federal Debt
At the beginning of the Trump presidency, the CBO reported that the federal debt will rise precipitously if current laws remain unchanged. The CBO stated, “If current laws remained generally unchanged, budget deficits would eventually follow an upward trajectory — the result of strong growth in spending for retirement and healthcare programs targeted to older people and rising interest payments on the government’s debt, accompanied by only modest growth in revenue collections.”
Entitlements spending accounts for almost 70 percent of the federal budget.
Both political parties have focused on different aspects of what they believe has contributed to the national debt. But no one has mentioned how to grow the economy and bring in more revenue to the U.S. treasury.
Raising taxes is not the only answer. Employing more Americans and creating a viable entrepreneurial class would also spur economic growth.
The focus has traditionally been on corporate America, which has been Washington’s motivating force through its legions of lobbyists, lawyers and accountants. However, little attention has been paid to small businesses and entrepreneurs.
The Decline of Small Businesses
According to the U.S. Census Bureau, the start-up rate for new businesses — which account for upward to over 60 percent of all jobs in America — remains at a historical low.
This start-up slump has far-reaching implications. Small businesses are often the economic engine most responsible for job creation and innovation. Small businesses are where less-educated workers and immigrants begin their upward mobility.
Start-ups play an essential function in the economy by making everyone more productive. They also invent new products, which forces other companies to be more competitive.
As Arnobio Morelix, an economist at the nonprofit Kauffman Foundation, told The New York Times: “Across the decades, young companies are really the heavy hitters and the consistent hitters in terms of job creation.”
Federal Policy Hurts Small Businesses
There are many reasons why start-up companies fail to gain traction. Some economists blame start-up failures on the decline of community banks, which often provide these companies with seed money.
As the result of the financial crisis of 2008-09, the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted to regulate the big banks. But the unintended consequences of Dodd-Frank was to curtail the operations of smaller, regional banks, the prime lenders to small businesses.
Federal and state regulations have also hampered small businesses, because these businesses usually don’t have well-staffed compliance departments and they lack available capital for growth. At the same time, healthcare costs keep many would-be entrepreneurs from quitting jobs that include employer-provided health insurance.
Higher Education Fails to Adjust to New Economy
Another under-examined reason for low start-up rates is the U.S. higher education system, which has never modernized to reflect a changing economy.
The National Center for Education Statistics (NCES) reported that of the 1.9 million bachelor degrees awarded in 2016, most were in the fields of the humanities, psychology, communications or languages. These fields of studies typically do not include any instruction on entrepreneurship. Today’s liberal arts students would be better prepared for the 21st-century economy if courses on entrepreneurship and business were integrated into their general curriculum, s
College Costs Rising Faster than Inflation
One of the biggest impediments to the start-up rate is the extremely sharp rise in college costs. The NCES reports the cost for a four-year degree has increased 64 percent over the past 20 years as adjusted for inflation.
In addition, the U.S. student loan debt is $1.5 trillion. That’s an average of $30,000 per borrower.
This extreme indebtedness not only hampers the growth of small businesses by reducing the number of new entrepreneurs. Extreme indebtedness also raises the national debt and curtails economic growth, because the obligation to pay off student loans prevents many graduates from making big purchases such as a home or new automobile.
One area that both Democrats and Republicans never discuss is how to control federal spending. The CBO reported that the biggest driver of the national debt is entitlements spending, but no serious effort has even been proposed to address this issue.
The tax cuts in the post-World War II era — President Kennedy’s tax cuts in 1964, President Reagan’s in 1981 and 1986, and President Bush’s in the early 2000s — have never been followed by reducing or overhauling how the federal government spends taxpayer money. Unfortunately, the federal government still operates a bloated and inefficient government.
If the nation is ever going to tackle its $21 trillion debt, it needs to bring in more revenue by empowering small business and entrepreneurs to grow, by re-shaping high education for the 21st century and finally by controlling and modernizing the federal government to make it more efficient. Otherwise we are heading for a fiscal Pearl Harbor.