Debt Digest | BITCOIN Act Hocus Pocus Would Fuel Deficits
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Hidden costs of the BITCOIN Act. Cato’s George Selgin criticizes Senator Cynthia Lummis’s (R-WY) BITCOIN Act, arguing that a Bitcoin reserve wouldn’t protect dollar dominance and would add to the national debt. To see why a federal Bitcoin reserve wouldn’t strengthen the dollar’s global role, see this edition of the Debt Digest. As for the Act’s costs, Selgin explains that the Treasury’s Bitcoin purchases would be financed by the Federal Reserve borrowing from banks, requiring the Fed to pay the interest rate it pays on bank reserves, currently higher than Treasury bill rates. He estimates that if purchasing one million Bitcoins costs $100 billion, the Fed would pay $153.5 billion over 20 years in interest. However, because this purchase isn’t financed through the Treasury issuing new securities, it won’t “officially” add to the national debt. “[I]t is precisely in order to avoid having the debt go up, to skip past the ordinary appropriations process, and to otherwise pull the wool over Americans’ eyes, that the BITCOIN Act relies on so much gold-plated hocus pocus,” concludes Selgin.
Rising interest rates underscore the urgency of reducing deficits now. Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget (CRFB), highlights a sharp rise in yields on 10-year Treasury notes, increasing from 3.8 percent in August to 4.7 percent (see figure below). “We’re headed toward R>G. And if we do something foolish like increase deficits by another $400 billion per year, we’re gonna get there faster,” warns Goldwein in an X thread. R refers to the average interest rate on government debt, while G represents economic growth. As the Peterson Foundation explains, when R>G, the debt-to-GDP ratio increases even if the federal budget is in a primary balance. However, currently, we are far from achieving primary balance. As Dominik Lett and I have explained in our new paper, we are on an unsustainable fiscal trajectory that is rapidly accelerating. Congress should act decisively on 2025 fiscal deadlines, reducing the growth in spending and committing to a path to primary balance at the debt limit.
End corporate welfare. Fareed Zakaria, speaking on Freakonomics Radio, noted: “[W]e have politicized the economy in America. All this industrial policy, these tariffs, these bans. What that does is it suddenly makes Washington a very crucial arbiter to the success of business.” To reduce Washington’s influence over businesses, Congress should end corporate welfare and eliminate costly subsidies to politically favored companies. In 2017, alongside Cato’s Chris Edwards and Citizens Against Government Waste’s president Tom Schatz, I proposed pairing President Trump’s corporate tax cuts with cuts in corporate welfare, including farm and renewable energy subsidies. The same principles apply today. Among other spending cuts, Congress should pair the extensions of pro-growth tax cuts with cuts in business tax subsidies, which cost $252 billion annually, according to Cato’s Adam Michel. This includes repealing more recent legislation like the energy and climate provisions of the 2022 Inflation Reduction Act, which could cost over $1 trillion by 2032.
The National Desk’s Cory Smith quotes me on the urgent need for fiscal reforms. In a recent article, the National Desk’s Cory Smith quotes my warning about the consequences of unaddressed debt and deficits: “[M]issteps by President-elect Donald Trump or the new Congress could be ‘a recipe for further inflation,’ high interest rates and more federal budget deficits.” He further highlights my concerns about the economic effects of rising debt: “[O]ur debt is already crowding out private investment, because the government is sucking up so much of the capital in the market.” Smith also includes my argument for a fiscal commission of independent experts to reform entitlements: “Without political cover, they are going to make tweaks around the edges, maybe reform some welfare programs, etcetera. But they are not going to, in any big way, touch Medicare and Social Security.”
DOGE should retain its ambitious targets. CNN’s Tami Luhby reports that Elon Musk has reduced the Department of Government Efficiency’s (DOGE) budget cut target from $2 trillion to $1 trillion, quoting him saying, “If we try for $2 trillion, we’ve got a good shot at getting one,” in an interview on X. DOGE, which is a promising initiative, shouldn’t scale back ambitions this early. As Argentina’s President Javier Millei recommended to Musk and Ramaswamy: “[G]o all the way, […] push it to the very limit.” As Luhby notes, DOGE has no legislative power to cut spending. This is one of the key obstacles to DOGE advancing meaningful reforms. What DOGE brings to the table is public visibility and the drive of two hard-charging entrepreneurs, something sorely lacking in government. Congress could authorize DOGE to have more powers, for example enabling its recommendations to take effect automatically unless explicitly rejected by Congress. This could allow DOGE to pursue bigger reforms, including reorganizing the government and pursuing needed entitlement program changes.
