Debt Digest | Fiscal Reform Grows the Economy
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Fiscal reform grows the economy. “When you have substantial reduction in deficit spending—whether by raising taxes substantially or cutting spending—there’s an excellent chance you help precipitate a recession […] It becomes a vicious cycle,” says Hartford Funds’ Amar Reganti. That’s a mischaracterization. Any short-term dip in economic growth that could be caused by deficit reduction will be more than offset by stronger growth over the long term. According to Penn Wharton’s Budget Model, a plausible entitlement reform scenario produces a less than 1 percent reduction of the Gross Domestic Product (GDP) baseline in the first ten years. By year 30, the same scenario results in a 4.4 percent change growth in GDP. Given that debt is already a significant long-term threat to economic growth, deficit reduction now will yield significant future economic benefits. For more on how spending cuts grow the economy, see here.
Building a sustainable future. Investor Stanley Druckenmiller spoke at USC Marshall on the risks that rising debt poses to our collective future (see the YouTube video below). As he explains in his keynote, “Further delay in addressing the fiscal gap threatens a future of us not “riding high” but rather sinking into malaise, decay, and the end of the American Dream. It will embolden autocracies in places like China and Russia. And tragically risks a lack of wealth to make sufficient investments to address existential crises like climate change; and a lack of growth to afford programs for the least well‐off among us.” At the heart of the budget problem is the unsustainable growth in Social Security and Medicare spending. A well-designed fiscal commission offers the greatest chance of overcoming the decades of political gridlock that has plagued entitlement reform.
Want to know the interest costs of a new bill? The Congressional Budget Office (CBO) released an interactive Excel spreadsheet that allows users to easily estimate how spending and revenue changes affect debt and deficits. The tool also estimates debt-service costs of new spending; something that is not (but should be) included in CBO’s official cost estimates. Accounting for interest costs would improve scorekeeping accuracy and reduce reliance on budget gimmicks. Take the stated cost of the $95 billion foreign supplemental bill recently passed by the Senate. Including interest adds an estimated $41 billion, for a $136 billion final price tag over 10 years. Congress should limit emergency spending, including interest.
Delaying Social Security reforms hits the young the hardest. A recent Congressional Research Service (CRS) report highlights the significant impact of Social Security solvency measures, particularly on younger cohorts born in 2000 and 2020, based on the Board of Trustees' estimates. These cohorts potentially face steeper increases in their effective tax rates (total taxes paid over total projected earnings) or sharper reductions in their effective benefit rates (total benefits received over total earnings) compared to those born in 1960 and 1980. These disparities become more pronounced the later those policy reforms are adopted. Importantly, the report focuses exclusively on payroll tax increases and direct benefit cuts as ways to address Social Security insolvency. For solutions beyond these approaches, see here and here.
Comparing discretionary spending options. EPIC’s Matthew Dickerson writes, “Congress has yet to agree on FY 2024 appropriations levels and policies. Legislative options under discussion include: 1) a package written to the Johnson-Schumer levels that adds tens of billions to the Fiscal Responsibility Act non-defense levels; or 2) a full year continuing resolution (CR). Also under consideration is a large supplemental foreign aid package.” See EPIC’s chart below. As we argued last month, the Johnson-Schumer deal falls short of objective measures of fiscal restraint. It fails to return to pre-pandemic levels of spending and boosts topline spending (excluding supplementals) above 2023 levels. “This is deal to avoid a government shutdown during an election year, but not much else.”
