Here are this week’s reading links and fiscal facts:
Creating USAs would encourage more savings among young and low-income workers. Cato’s Adam Michel reviews the Universal Savings Account Act (HR 9010), a bill recently introduced by Representative Diana Harshbarger (R‑TN). This bill aims to create universal savings accounts (USAs) with an annual contribution limit of $10,000. Michel explains: “These qualified accounts remove taxes on capital gains, dividends, and interest, which function as a double tax on savers, discouraging investment (and encouraging current consumption). [...] A USA would function similarly to a Roth IRA—accepting after-tax contributions that can be withdrawn at any time tax-free—without the restrictions and penalties on using gains before retirement.” He continues: “Complexity and tax penalties discourage the use of existing savings accounts, especially among young and low-income savers for whom liquidity (easy access to funds) is most important.” For more on USAs, read this blog from Michel. For insights into how similar accounts have succeeded in the UK and Canada, see this bulletin from Ryan Bourne and Chris Edwards.
Health care and Social Security have driven spending growth for the past 20 years. Eugene Steuerle, Richard B. Fisher Chair at the Urban Institute, writes: “What has caused the vast growth in deficits since the turn of the century, a brief period when the federal government ran surpluses? The answer: They were largely built in through mandatory spending legislation, mainly Social Security and healthcare, enacted before this century began. [...] Two-thirds of the growth in spending has come from health care and Social Security [see the figure below].” Moreover, as we have previously written, Social Security and Medicare not only account for a significant part of past deficits but are also responsible for 100 percent of unfunded obligations over the next 75 years. These programs, growing on autopilot, are the main drivers of the unsustainable federal debt. For more on Medicare and Social Security’s role in driving the US into a debt crisis, read here.
Central bank managers worry about global debt levels. According to the Financial Times, a UBS survey found that central bank managers are increasingly worried about global sovereign debt levels, noting that “Global debt as a proportion of GDP is soon poised to tip back over 100 per cent for the first time since the depths of the coronavirus pandemic.” Max Castelli, a UBS representative, argues, “Higher debt is seen as leading to higher borrowing costs . . . and there is a risk of crowding out private investment, which will weigh on growth.” Additionally, as Dominik Lett and I’ve written, “as debt grows unabated, there is the risk of a sudden loss of confidence in bond markets, with investors demanding much higher interest rates that could trigger a debt doom loop and broader fiscal crisis [e.g., the 2009 Greek debt crisis and the UK’s 2022 bond market turmoil].” To address these concerns in the US, as we emphasize in our blog, “Congress and the Biden administration should cut spending now while the economy is growing and conditions are favorable for deficit reduction[.]”
Discretionary savings are unreliable and easy to reverse. The American Enterprise Institute’s James Capretta argues that the new Congressional Budget Office (CBO) long-term budget outlook will project a higher debt level at the end of thirty years than the previous forecast. According to Capretta, the previous forecast assumed compliance with the Fiscal Responsibility Act (FRA) caps that were circumvented after passing two omnibus appropriations bills and emergency foreign aid funding. “The divergence in these debt forecasts highlights differing views on how realistic it is to expect major long-term savings from cuts to appropriations. [...] It is understandable that elected leaders want to avoid unpopular tax and entitlement changes. But that is not going to get the job done. More likely than not, appropriations in future years will be much higher than current forecasts indicate due to proliferating global security threats,” writes Capretta. To overcome the political hurdles that limit politicians to making savings only through unreliable discretionary spending cuts, Congress should consider establishing a BRAC-like fiscal commission of independent experts to tackle the unchecked growth in entitlement programs, the main drivers of US fiscal problems.
Why don’t American voters punish politicians for fiscal irresponsibility? Kevin Kosar, a senior fellow at the American Enterprise Institute, discusses why American voters, despite their concerns about deficits, have re-elected most sitting presidents since 1960, a period of persistent budget deficits (he argues that those presidents who weren’t re-elected were not penalized for deficits). Kosar claims that “[...] U.S. voters cannot comfortably place much blame on presidents for fiscal performance. [...] [A] Republican might be president, but Democrats ran Congress, or vice versa. Divided government means neither party can credibly claim responsibility for the state of the budget. It also incentivizes blame-shifting by politicians.” He also notes that the existing budget process obscures responsibility for fiscal mismanagement. Kosar concludes by questioning whether aspects of governmental institutions fail to translate voters’ concerns into policy or if American voters are not genuinely committed to responsible budgeting. He asks, “If the latter is the case, what is a responsible legislator to do?”