Search the archive.

I am writing to congratulate the Republican Study Committee (RSC) on the Fiscal Year 2024 budget proposal. Following up on the largest deficit reduction bill passed in over a decade, the Fiscal Responsibility Act, the RSC should be proud of this accomplishment.

If implemented, the RSC budget proposal would make significant progress toward improving our nation’s fiscal health by putting debt on a downward path as a share of GDP, reducing it from 98 percent today to 68 percent by FY 2033 –- instead of letting it rise to 115 percent as the Congressional Budget Office projects under current law.

Indirectly, just raising the debt ceiling will require the Treasury to replenish its accounts that were nearly exhausted by issuing hundreds of billions of dollars in debt. According to a Politico report, this could further constrict bank lending by increasing competition for bank deposits and limiting the amount of bank reserves at the Fed. Then there's the Supreme Court that could do some fiscal heavy lifting. There will soon be a decision on Biden's executive action on forgiving tens of thousands in student loans. A recent CBO score on a congressional disapproval resolution trying to overturn this measure estimated direct spending would decrease by $320 billion this year, well above the direct impact from the FRA.

(Rudolph, Phd in economics from the Johns Hopkins University, Institute fellow at the Urban Institute, frmr assistant director for economic policy at the Office of Management and Budget, “A U.S. FISCAL CRISIS?,” pg online @ https://www.urban.org/sites/default/files/publication/99224/a_u.s._fiscal_crisis.pdf //um-ef)

It will be impossible to dig ourselves out of our fiscal hole without some tax increases. Solving the entire budget problem on the spending side would require politically implausible restraints on the growth of benefits for the elderly. On the other side, solving the entire budget problem with tax increases is equally implausible. It would take frequent, substantial tax increases to keep up with the financial demands of the elderly programs. In 2018, 49 percent of total revenues are expected to come from the individual income tax and 34 percent from the payroll tax. The left often proposes increasing tax burdens on upper income groups by raising marginal rates toward the top of the personal income tax rate schedule and by raising the payroll tax base, now at $128,400. But there is a real question as to how much revenue this could raise without significantly increasing tax avoidance, evasion and reducing incentives to work and to save. It is my judgement that if we face a fiscal crisis we shall have to resort to a new broad-based tax such as a VAT or a carbon tax. In Ireland and in Greece the budget crisis was partially solved with the help of numerous increases in VAT tax rates and in Ireland with a new carbon tax.

Economic recovery efforts since the 2008-2009 global financial crisis have mainly depended on unconventional monetary policies. As fears rise of yet another international financial crisis, there are growing concerns about the increased possibility of large-scale military conflict.

More worryingly, in the current political landscape, prolonged economic crisis, combined with rising economic inequality, chauvinistic ethno-populism as well as aggressive jingoist rhetoric, including threats, could easily spin out of control and ‘morph’ into military conflict, and worse, world war.

(Rudolph, Phd in economics from the Johns Hopkins University, Institute fellow at the Urban Institute, frmr assistant director for economic policy at the Office of Management and Budget, “A U.S. FISCAL CRISIS?,” pg online @ https://www.urban.org/sites/default/files/publication/99224/a_u.s._fiscal_crisis.pdf //um-ef)

A fiscal crisis occurs when financial markets first recognize that a country may no longer be able repay its debts. At that point financial markets become extremely unstable and interest rates rise quickly by substantial amounts. If that happens in the United States, the turmoil is likely to spread around the world because of the relative importance of American financial markets. The definition of a crisis used in this paper includes instances in which no default occurs, but in which countries experience sudden major increases in interest rates and/or plunging exchange rates because financial markets expect a default to be imminent. The resulting financial instability may induce a country to undertake dramatic budget reforms quickly to stave off actual default. Since World War II, actual defaults have been frequent in emerging markets, but developed countries on the verge of default have typically been able to enact reforms that enabled them to step back from the brink. Sweden in the early 1990s, Canada in the mid1990s, and Ireland early this century are examples where defaults were prevented just in time. A fiscal crisis does not have to be combined with an actual default to be extremely painful. Severe cuts in programs and tax increases are likely to be necessary whenever a country has been fiscally irresponsible. Reinhardt and Rogoff note that the decision to default is a political decision. It generally occurs at debtGDP ratios considerably lower than now experienced in the United States. Politicians recognize that the shock resulting from an actual default grows with the size of the debt. Moreover, every day’s delay means that corrective actions become ever more painful. Auerbach, Gale, and Krupkin (2018) have made an estimate of something called the fiscal gap for the United States. It is the size of the tax increase or noninterest spending cut relative to GDP necessary to ensure that the debt-GDP ratio at some future date hits some prudent target. In one scenario, they estimated the immediate change in spending or tax burdens necessary to achieve a debt-GDP ratio in 2048 equal to today’s. The estimated fiscal gap is 4 percent of GDP. That is equivalent to a 21 percent cut in noninterest spending or a 24 percent increase in tax burdens. If the adjustment is put off to 2021 the fiscal gap rises to almost 4-1/2 percent and if the adjustment is delayed to 2025 the gap becomes 5.2 percent.

(Congressional Budget Office, “The Economic Effects of Waiting to Stabilize Federal Debt,” pg online @ https://www.cbo.gov/publication/58055 //um-ef)

The likelihood of a fiscal crisis increases as federal debt continues to rise in relation to GDP, because mounting federal debt could erode investors’ confidence in the government’s fiscal position and result in a sharp reduction in their valuation of Treasury securities. In turn, investors would demand higher yields to purchase Treasury securities and thus drive up interest rates on federal debt. Additionally, concerns about the U.S. government’s fiscal position could lead to a sudden increase in inflation expectations, fear of a large decrease in the value of the U.S. dollar, or a loss of confidence in the federal government’s ability to repay its debt in full, all of which would make a fiscal crisis more likely. If a fiscal crisis occurred, it would result from multiple factors, and no clear basis exists for identifying the level of debt that might lead to such a crisis in the United States. Several characteristics of the U.S. financial system make a fiscal crisis less likely in the United States than in other countries, and financial markets do not currently reflect any notable concern about the risk of such a crisis in the United States. But given the persistently large budget deficits that are projected under current law and the already high debt-to-GDP ratio, the risk of a fiscal crisis is likely to be higher in the future if steps are not taken to stabilize the debt.

(Maya MacGuineas, president of the Committee for a Responsible Federal Budget, “The Fiscal Responsibility Act Builds Momentum on Needed Deficit Reduction,” pg online @ https://www.crfb.org/press-releases/fiscal-responsibility-act-builds-momentum-needed-deficit-reduction //um-ef)

The President signed the Fiscal Responsibility Act on June 3rd, legislation to suspend the debt ceiling, limit discretionary spending, and generate $1 to $2 trillion of deficit reduction. The bill passed with the support of 314 members of the House and 63 members of the Senate – gaining more total votes than any major deficit reduction bill in the last quarter century. The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget: The Committee for Responsible Federal Budget applauds enactment of the Fiscal Responsibility Act, and encourages Congress to build on the momentum of the deal to address the root causes of our unsustainable debt. The FRA will both avoid default and generate desperately-needed budget savings. And importantly, it did so through bipartisan compromise, demonstrating that the parties can work together for the common good. The FRA is the largest deficit reduction bill in well over a decade, and it passed with support from both parties. Given the huge fiscal hole we are in, it isn’t likely that any one package would be able to fix the situation entirely. It would take $8 trillion in savings merely to stabilize the debt relative to the economy over the next decade. The FRA is likely to generate at least $1 trillion in savings, and could save as much as twice that if appropriators take its targets seriously. That’s a very good starting point; now more work will be needed.

Global Challenges – Twelve risks that threaten human civilisation – The case for a new category of risks 89

3.1 Current risks

(Diane, Chief Economist, Grant Thornton, “A Fork in the Road ECONOMIC CURRENTS” August 10, 2018 pg online @ https://www.grantthornton.com/content/dam/grantthornton/website/assets/content-page-files/economic-analysis/economic-update/economic-update-aug-2018/economic-currents-aug-v3-1/economic-currents-aug-v3-1.pdf.coredownload.inline.pdf //um-ef)

The White House has said tariffs will increase revenues and lower the deficit. The difficulty with that statement is the impact tariffs have on the economy. Tariffs raise costs, dampen growth and, in the worst-case scenario, trigger a recession. Even if long-term rates do not rise, increased government spending will eventually crowd out other spending, notably investment in infrastructure by both the public and private sectors.

Recently, analysts have argued that emerging technologies with military applications may undermine nuclear stability (see here, here, and here), but the logic of these arguments is debatable and overlooks a more straightforward reason why new technology might cause nuclear conflict: by upending the existing balance of power among nuclear-armed states. This latter concern is more probable and dangerous and demands an immediate policy response.

For more than 70 years, the world has avoided major power conflict, and many attribute this era of peace to nuclear weapons. In situations of mutually assured destruction (MAD), neither side has an incentive to start a conflict because doing so will only result in its own annihilation. The key to this model of deterrence is the maintenance of secure second-strike capabilities—the ability to absorb an enemy nuclear attack and respond with a devastating counterattack.

In contrast to the military competition of the Cold War, which was a truly global struggle, the dangers for Washington and Beijing are likely to be confined to the Indo-Pacific. Even so, the region features at least four potential hot spots: the South China Sea, the East China Sea, the Taiwan Strait, and the Korean Peninsula. Neither side wishes for conflict, but tensions are rising as both invest in offensive capabilities, boost their military presence in the region, and operate in ever-closer proximity. Washington fears that China is trying to push U.S. forces out of the western Pacific, and Beijing fears that the United States is trying to hem it in. Given China’s harassment of U.S. aircraft and naval vessels, minor incidents risk escalating into major military confrontations; Admiral Wu Shengli, the former naval commander of the People’s Liberation Army, has warned that any such incident “could spark war.”

But coexistence in the Indo-Pacific by both militaries should not be dismissed as impossible. The United States must accept that military primacy will be difficult to restore, given the reach of China’s weapons, and instead focus on deterring China from interfering with its freedom of maneuver and from physically coercing U.S. allies and partners. Beijing will have to accept that the United States will remain a resident power in the region, with a major military presence, naval operations in its major waterways, and a network of alliances and partnerships.

Yet another pathway to escalation could arise from a cascading series of cyberstrikes and counterstrikes against vital national infrastructure rather than on military targets. All major powers, along with Iran and North Korea, have developed and deployed cyberweapons designed to disrupt and destroy major elements of an adversary’s key economic systems, such as power grids, financial systems, and transportation networks. As noted, Russia has infiltrated the U.S. electrical grid, and it is widely believed that the United States has done the same in Russia. The Pentagon has also devised a plan known as “Nitro Zeus,” intended to immobilize the entire Iranian economy and so force it to capitulate to U.S. demands or, if that approach failed, to pave the way for a crippling air and missile attack.

The danger here is that economic attacks of this sort, if undertaken during a period of tension and crisis, could lead to an escalating series of tit-for-tat attacks against ever more vital elements of an adversary’s critical infrastructure, producing widespread chaos and harm and eventually leading one side to initiate kinetic attacks on critical military targets, risking the slippery slope to nuclear conflict. For example, a Russian cyberattack on the U.S. power grid could trigger U.S. attacks on Russian energy and financial systems, causing widespread disorder in both countries and generating an impulse for even more devastating attacks. At some point, such attacks “could lead to major conflict and possibly nuclear war.”

(SOFREP is the world’s leading military news site, “China’s Stealthy Takeover: The Battle for US Tech Startups,” pg online @ https://sofrep.com/news/chinas-stealthy-takeover-the-battle-for-us-tech-startups/ //um-ef)

In today’s highly interconnected world, the battlefield is not just physical but digital. And as Uncle Sam gears up to counter potential threats, a new player has been flying under the radar: China. As they continue to expand their reach, they’re targeting US tech startups, using them as pawns in their game of global espionage. For those unfamiliar with this new-age warfare, let’s dive into the nitty-gritty of this cyber showdown. China’s modus operandi is simple: Invest in or acquire US tech startups. Gain access to cutting-edge technologies. Exploit them for their advantage. This strategy has allowed them to infiltrate sensitive sectors like AI, biotech, and telecommunications – areas critical to our national security. Consider the case of Alon Raphael, who cofounded a tech startup, Femtometrix. “It’s the bleeding edge of the most advanced chips that are coming out that we are applicable to,” he said. “One of the requests for the investment was to know the details of the patent portfolio.” Only until it was too late that he found out what the real agenda was. Another prime example is the Chinese acquisition of AOptix Technologies, a California-based startup specializing in iris recognition technology. This tech has precise applications in both civilian and military contexts, including border control and secure access to military installations. China could compromise US security measures and sabotage our strategic operations by getting its hands on this advanced biometric tech. Then we have another instance of Chinese influence in US startups in their investment in Neurala, a Boston-based company developing AI-powered drone technology. With its potential applications in surveillance and reconnaissance missions, this tech could be a game-changer on the battlefield. However, China’s involvement raises concerns about the possibility of reverse engineering and replicating these advanced systems, ultimately undermining our military edge. But what’s the big deal, you ask? These examples highlight a broader trend of China’s encroachment on US tech startups, posing a significant risk to our national security. As they gain access to sensitive technologies and intellectual property, China could potentially use this knowledge to advance their military capabilities, disrupt our intelligence-gathering efforts, and launch devastating cyber-attacks on our critical infrastructure.

Today's macro-economic environment has changed significantly and we see the signs everywhere. There's an obvious economic slowdown, the stock market has declined, and recent reports of layoffs – especially in the tech sector – point to a looming recession. Despite the negative elements of such an economy, it also presents an opportunity for smart startup founders and savvy investors to thrive.

The impact of venture capital

(Ruchith Dissanayake Queensland University of Technology - School of Economics and Finance Yanhui Wu Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN) Huizhong Zhang Queensland University of Technology - School of Economics and Finance, “Military Spending Shocks and Private Sector Innovation,” pg online @ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3082217 //um-ef)

The literature shows that increases in government expenditure could be paid off by public debt, which can adversely affect corporate investment and debt financing policies (McDonald 1983; Benninga & Talmor 1988; Krishnamurthy & Vissing-Jorgensen 2012; Graham et al. 2014; Graham et al. 2015). Graham et al. (2015), for example, report that government borrowing “crowds out” corporate debt financing through competition for investor funds. To the extent that different securities are imperfect substitutes in an investor's portfolio, increases in the supply of government debt reduce the demand for competing securities such as corporate bonds, pushing up the relative cost of corporate debt capital. Consequently, it could be the case that, following an increase in government spending, firms cut back on investment in innovation because of a rise in the cost of corporate debt financing rather than a decrease in demand.

(Robert, Ph.D. in city and regional planning from the University of North Carolina, Chapel Hill, where he was awarded the prestigious Joseph E. Pogue Fellowship. He earned his master’s degree in urban and regional planning from the University of Oregon, He is an internationally recognized scholar and a widely published author whom The New Republic has named one of the “three most important thinkers about innovation, John Wu was an economic analyst at the Information Technology and Innovation Foundation. His research interests include green technologies, labor economics, and time use., “How Technology-Based Start-Ups Support U.S. Economic Growth,” pg online @ https://itif.org/publications/2017/11/28/how-technology-based-start-ups-support-us-economic-growth/ //um-ef)

Technology-based start-ups have long been an important driver of America’s economic growth and competitiveness. But while these firms provide outsized contributions to employment, innovation, exports, and productivity growth, many policymakers focus more broadly on helping all business start-ups without regard to type. Such a broad-based focus risks reducing overall economic growth for three key reasons. First, most owners of new non-tech-based firms have no intention of growing beyond just a few employees. Second, small, non-tech-based firms on average have much lower productivity and wage levels than technology-based start-ups. And third, most non-tech start-ups are in local-serving industries (e.g., retail) and as such create few or no net new jobs. As such, the focus of entrepreneurship policy should be squarely on spurring more technology-based start-ups. Over the last few years a common narrative has emerged that new business formation is down and that this has been a significant contributing factor to the recent underperformance of the U.S. economy. There is a parallel narrative which holds that large technology firms are crushing technology-based start-ups, using their power to enter markets that start-ups otherwise would occupy. Therefore, a critical question for the future of the U.S. economy is the current state of technology-based start-ups. ITIF attempted to answer this question by examining data on more than 5 million firms in 10 technology-based industries from 2007 to 2016. As it turns out, neither claim is true. While it is true that fewer “mom and pop” start-ups are forming—a trend policymakers should be largely indifferent to—technology-based start-ups have increased. But policymakers should not accept the recent increases in technology-based start-up activity as justification for inaction. Instead, they should promote policies that will help current and future technology-based start-ups emerge and scale into larger firms that will generate long-lasting, high-paying jobs, increase innovation and productivity, and improve the global competitiveness of the U.S. economy.

(Chen Yeh is an economist in the Research Department at the Federal Reserve Bank of Richmond, “Why Are Startups Important for the Economy?,” pg online @ https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-06 //um-ef)

Effects of the Fall in the Startup Rate How significant is the fall in the startup rate for aggregate outcomes such as employment and productivity? Early evidence from the 2001 book chapter "Aggregate Productivity Growth: Lessons From Microeconomic Evidence" indicates that the consequences of a fall in the startup rate could be large. The authors find that more than 25 percent of aggregate productivity growth in the U.S. manufacturing sector is due to the net entry margin, or the role of entering net of exiting firms. While these numbers are a good indicator for the importance of startups, they do not provide quantitative evaluations for the secular decline in the startup rate. Two studies have filled this gap, however. First, the 2016 paper "Older and Slower: The Startup Deficit's Lasting Effects on Aggregate Productivity Growth (PDF)" shows that the fall in the startup rate has sizable effects on aggregate productivity. In their counterfactual exercise (holding the economy's startup rate and firm age distribution constant at their 1980 values), the paper's authors find that aggregate productivity over the period 1980 to 2014 could have been 3.1 percent higher. To put this "startup deficit" in perspective, real income for a median family would have been $1,600 higher in 2014 alone. Second, the 2019 paper "Grown-Up Business Cycles" finds that the observed secular decline in the startup rate has a significant impact on aggregate employment. If the startup rate had remained constant between 1987 and 2012, aggregate employment would have been, for example, 11.4 percent higher in 2008. Furthermore, there are important implications for the economy at business cycle frequencies. In one of their examples, the authors show that aggregate employment would have recovered almost a full year earlier after the Great Recession if the startup rate decline would not have occurred. All in all, several studies have indicated that startups' dynamics are important for understanding aggregate outcomes. Given the observed secular decline in startups, does this imply that we should subsidize entrepreneurs to promote new business entry? This is not a straightforward question since startups show up-or-out dynamics: Untargeted subsidies could fall in the hands of entrepreneurs who lead failing businesses. Obviously, one would want to subsidize gazelles instead.

Andrew, 4/3. “Bloomberg New Economy: Biden’s Infrastructure Plan May Reshape U.S.-China Competition.” https://www.bloomberg.com/news/newsletters/2021-04-03/bloomberg-new-economy-biden-s-infrastructure-plan-may-reshape-u-s-china-competition

Starting with the Peloponnesian War (431-404 BC), military conflict generally resulted when a rising power challenged an established one. Three out of every four times, to be precise.

A recent US Census/Kauffman study found that startups create three million net new jobs per year in the US, while existing companies destroy 1 million jobs per year. Startups are clearly critical to our economy. So why are we letting them get fleeced? Startups are being waylaid on the path to success by “patent trolls.” Trolls buy up disused patents and then sue real companies for alleged infringement. Usually the patents themselves would be held invalid if properly scrutinized and/or there is no actual infringement. But companies are forced to pay “licensing fees” because they can’t afford the legal battle. It’s highway robbery worthy of a Clint Eastwood film. This is not a small problem. More than half of all patent litigation today is brought by trolls. At a recent gathering at the Cambridge Innnovation Center, a home for startups in Cambridge, the patent troll problem was voted the number one public policy issue facing entrepreneurs. It’s a scourge on society. It’s time for our senators and congressmen to act. Our patent system was created with very good intentions. For most of our history it worked well. One of the key ways our country supports startups is to allow innovators to obtain protection for their ideas by filing a patent. This is a good thing. Such protection allows them to make money pursuing their idea, and helps convince investors to financially support them. Once in awhile, a very broad, poorly worded patent makes its way through the system. These are purchased by trolls, with the intent of extracting payments from real businesses. It doesn’t much matter if the patent is valid, or really covers what these other businesses do, because it’s cheaper to pay them off than to incur the years of high legal expenses needed to fight them. This is what keeps trolls in business. This happened to my friend and Boston entrepreneur David Rose, who invented and patented photo-sharing, uploading a photo to the web and inviting your friends, way back in 1996. It was pre- camera phones and too early, so he sold the company. The patent was transferred to the acquirer, who become a patent troll. The troll then waited, as trolls do, almost a decade, for someone else to create another business that came up with some of the same ideas. As soon as the victim came along, the troll pounced, suing that company, demanding large licensing fees, nearly driving it out of business. Instead of promoting innovation, today’s patent laws are actually preventing innovation. Washington is beginning to pay attention. President Obama, the FTC and some Capitol Hill leaders have made mention of this problem. Several pending pieces of bipartisan legislation in both chambers have been introduced. Some of the most promising fixes include: creating a program that lets startups challenge the most abused patents in the Patent Office instead of court; and making patent trolls explain their case up front and pay discovery expenses so that they cannot use the high cost of litigation as a weapon. This is the right time and the right opportunity for federal legislative action that will allow defendants to fairly question the validity of broad patents. Greater Boston is one of the most important places in the country for innovative businesses. Biotech firms, clean energy developers and internet companies call Boston home and provide the biggest source of job growth in the area. To protect what we have, Massachusetts leaders should be in the forefront of legislation to fix the patent troll problem. Startups make the world better and we can’t let these businesses, as they work through their fragile first few years, be drowned out because current patent policy allows a select group of bad apples to misuse our laws for personal gain.

Data on investment trends do not offer a decisive answer but generally seem consistent with the story told by surveyed investors. Venture capital funding as a whole appears to be booming: In 2018, the total annual venture capital invested surpassed $100 billion for the first time since the dot-com period.192 The number of angel and seed investments, meanwhile, has been declining since 2015, signaling that it has become harder for startups to secure an initial round of financing.193 Indeed, it is late-stage deals with mature companies that account for an “outsized proportion” of total capital today,194 while startups see fewer first financings, even as the deal value for startups has increased.195 In other words, venture capital markets seem to be following a winner-takemost model: Fewer firms receive funding, but those that do are raising more capital.196 These trends come against a backdrop of falling entrepreneurship: Startup formation is at a thirty-year low, contributing to a loss of business dynamism.197