Debt Digest | Fiscal Deterioration
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Stopgap spending bill extends deadlines into March. Congressional leaders are considering a short-term funding measure to continue current spending rates through March 1 and March 8 reports David Lerman of Roll Call. Appropriators simply have not had enough time to divide up spending between the dozen subcommittees since topline spending levels were agreed to. As we wrote in response to the Johnson-Schumer deal, “[N]either Democrats nor Republicans are ready to face the US government’s rapidly deteriorating fiscal situation. This is a deal to avoid a government shutdown during an election year, but not much else.”
Causes of the fiscal deterioration since 2001. In a new paper, the Committee for a Responsible Budget (CRFB) writes, “Between 2001 and 2023, annual deficits expanded by 7.5 percent of GDP – from a 1.2 percent of GDP surplus to a 6.3 percent of GDP deficit. Two-thirds of this deficit growth can be explained by rising spending as a share of the economy, while one-third of the deficit growth is from declining revenue as a share of GDP.” Most of the growth in the deficit can be attributed to growing entitlement spending, as the CRFB graphic below illustrates.
Ban earmarks! “Rep. Katie Porter [D-CA], one of three House Democrats seeking to replace Feinstein, is calling for an end to earmarks,” reports Daniela Altimari of Rollcall. “[W]e know from the data and from the research that earmarks disproportionately flow to wealthier and whiter and more Republican communities,’’ Porter said. “They do not, in fact, flow to low-income communities, communities of color and to indigenous communities.” Democrats and Republicans alike should have reason to dislike earmarks. They are a disservice to the public interest and inevitably invite fraud, waste, and abuse. Congress should stop greasing lobbyists’ wheels and ban earmarks.
The true role of the central bank. Arnold Kling argues, “[C]entral banks’ top priority is always going to be enabling the government to borrow money. The supposed priorities of dealing with inflation and unemployment will always be secondary in practice. The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal.” “[M]yopic politicians have long been tempted to exploit a central bank’s lending powers even when doing so ultimately sponsors unwanted inflation,” warns Cato’s George Selgin. Fed officials would be wise to heed his warning.
Bankruptcy—gradually, then suddenly. Economist James Carter criticized misguided fiscal beliefs he argues threaten America’s future. One belief he spotlights: there’s plenty of time to clean up this mess. Carter writes, “Having accumulated a debt of $33.9 trillion and trillions more in unfunded liabilities, the federal government faces a rapidly deteriorating fiscal outlook…net interest payments on the federal debt are exploding—up by $176 billion last year alone—and have become the single fastest-growing element of federal spending.” The time for deficit reduction is now. The longer we delay, the more the inevitable fiscal consolidation will hurt.
Waltzing towards gerontocracy. Richard Hannania writes, “A country where young people are struggling and ultimately remain childless so old people can hang out in Margaritaville on permanent spring break is the dystopia we’re all headed towards. What is important to remember is that refusing to cut entitlements does not simply transfer a bigger share of the pie to the elderly. It also decreases the size of the pie, and makes the country worse off in the aggregate.” A wide range of commonsense entitlement reforms are already available to legislators. Mustering the political will to act decisively is another question. A BRAC-like fiscal commission, as explained here, has the potential to overcome the political gridlock that pervades entitlement reform.
Beneficiaries face a $17,400 cut as Social Security approaches insolvency. CRFB writes, “[I]naction on the retirement fund will lead to insolvency in just ten years [2033], and upon insolvency, beneficiaries will see a 23 percent across-the-board benefit cut.” The graph below shows projected benefit cuts across different demographic groups. Simple reforms, such as slowing initial benefit growth to match inflation, could help avoid indiscriminate benefit cuts without relying on economically harmful tax cuts.
