Debt Digest | A BRAC-like Fiscal Commission is a Political Solution to a Political Problem
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Explore CBO’s new tool to see how economic changes impact the budget outlook. The Congressional Budget Office (CBO) has released an interactive Excel spreadsheet that allows users to estimate how changes in economic conditions may affect the federal budget in the 2024-2034 period. See how changes in economic variables such as productivity growth, labor force growth, interest rates, and inflation – relative to the CBO baseline – affect revenues, outlays, and deficits. This spreadsheet is a useful tool to see how minor changes in CBO’s economic projections can exacerbate the already grave CBO outlook. For example, an increase of 0.1 percentage points in projected interest rates each year over the 2024-2034 period would raise total deficits by $324 billion. Such a deviation from CBO's current projections is not out of the question. According to a recent Bloomberg analysis, “Market participants aren’t buying the benign rates outlook, with forward markets pointing to borrowing costs markedly higher than the CBO assumes.” Congress should rein in deficits and debt growth which will reduce rate pressures and restore confidence in US fiscal policy and governance. See my Cato policy report, Bankruptcy–Gradually, Then Suddenly, for what’s in store if Congress fails to act.
A BRAC-like fiscal commission is a political solution to a political problem. The American Enterprise Institute’s Philip Wallach highlights several problems with the current budget process that hinder addressing the United States’ unsustainable federal debt. Among other issues Wallach identifies (some of which we covered here), he emphasizes the significance of political obstacles, saying, “[...] political problems are real problems. They demand political solutions, which are precisely what the political system is failing to deliver. Indeed, by stigmatizing entitlement reform as the province of the heartless, American politics is every day making the political problems more difficult to solve.” I’ve suggested that a BRAC-like fiscal commission could be the political solution that Congress has failed to deliver. A commission of independent experts could overcome political gridlock and implement effective fiscal reforms to stabilize the debt. For more on how a BRAC-like fiscal commission could work, see here and here.
Reduce Social Security benefits for high income earners. John Manganaro’s ThinkAdvisor article outlines five possible ways to address the looming Social Security insolvency. John includes my proposal to reduce benefits for wealthier beneficiaries instead of raising taxes on workers: “She [Boccia] argues that reducing benefits for higher income earners is a better way to keep program costs in check — especially if such a move is included as part of a “more fundamental rethinking” of the proper purpose of an old-age-income support program [...] Wealthy people in the U.S. get far more back from Social Security than their European peers, Boccia notes, and while a reduction in benefits for higher earners would be painful, it is also one of few viable solutions.” A “more fundamental rethinking” would shift the program from an earnings-related benefit to a flat benefit that provides protection from poverty in old age. For more on this, see here.
Reforms that can bring transparency and accountability to the budget process. Rep. Jodey Arrington (R-TX), in his recent op-ed for Daily Caller, proposes reforms to improve the existing budget process. He explains, “Our reforms will, for the first time, cap outlays, or total spending, in addition to just budget authority. We will better define real emergencies, so that the floodgates only open for real floods. And we will ban the practice of using gimmicks that boost spending without producing any real budgetary savings [referring to CHIMPs].” These proposals align with my previous recommendations, to account for interest costs in budget estimates, clearly define emergency spending and hold Congress accountable for mislabeling spending, and prohibit the use of CHIMPs that provide no real outlay savings, among other fixes to commonly abused budget loopholes. See my briefing paper, How a Better Budget Control Act Would Limit Spending and Control Debt, for more details.
Strengthen budget data sharing. The Congressional Budget Office (CBO) plays a critical role in informing Congress about the fiscal state of the nation as well as in providing forward-looking guidance for how policy changes will affect the budgetary picture. At times, CBO has encountered difficulties accessing necessary data from other government agencies which complicates the production of objective, impartial, and timely analyses of legislative proposals. The Congressional Budget Office Data Sharing Act (H.R. 7032) empowers CBO to get the data it needs to get the job done, ensuring legislators can make informed budgetary decisions. Improving fiscal reporting should be a nonpartisan priority and it’s encouraging to see that this be the case for H.R. 7032, which was reported out of the House Budget Committee with unanimous support.
Education subsidies inflate college prices, exacerbating student debt. File this under unintended consequences: In 2010, the federal government transitioned from guaranteeing student loans through the Federal Family Education Loan (FFEL) program to direct lending, a move that was expected to produce significant budgetary savings but ultimately did not (see the figure below). According to the Peterson Foundation, the switch “did create access to more favorable terms for borrowers and expanded loan forgiveness and repayment programs, which may have incentivized individuals to borrow, or to borrow more, than they otherwise would have.” As Cato’s Adam Michel has written, the government also subsidizes education through the tax code. According to Michel, “From an education policy perspective, the accumulation of all this federal spending has a distorting effect. Over time, the subsidies have likely contributed to the high price of college as subsidies increase demand, which drives up prices. This cycle then drives significant student debt burdens and demand for additional government subsidies.” As Cato’s Jeff Miron recommends: “Rather than forgiving federal student debt, therefore, the right policy is to phase out such programs going forward.”