Debt Digest | Inflation (And Modern Monetary Theory) Lost Democrats the Election

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• Interest costs have quadrupled over the past decade. The Committee for a Responsible Federal Budget (CRFB) reports that interest costs reached $882 billion in FY2024, nearly triple the amount in 2020 and quadruple that of 2015 (see figure below). The government is now spending more on debt servicing than on defense, Medicare, or any other program except Social Security. This is an alarming trend, heightening the threat of a sudden bond crisis, where bondholders demand higher yields as they deem holding the US debt riskier. As Dominik Lett and I’ve written: “Higher bond yields can then create a feedback loop by increasing the cost of servicing the national debt, which then leads to more borrowing just to pay the additional interest on the debt. Should a bond yield surge be sudden, large, and unmitigated, this self-perpetuating cycle can quickly escalate into a fiscal crisis.”

  

• Inflation (and modern monetary theory) lost Democrats the election. Phillip Magness and Alexander William Salter argue that the Biden administration's adoption of modern monetary theory (MMT)-inspired thinking fueled inflation and resulted in voter dissatisfaction, helping Donald Trump win the presidency and Republicans secure Congress. Over the last four years, excessive deficit spending increased government indebtedness while loose monetary policy flooded financial markets with liquidity. The result was too much money chasing too few goods—the perfect recipe for a higher cost of living. As fiscal deadlines loom, Trump and Congress face a critical choice: stabilize America’s finances or risk repeating the Biden administration’s mistakes.

• My work on Social Security in the News. Last week, La Grada highlighted my recent Social Security paper exposing the trust fund myth: “Boccia believes that if there is any hope to return Social Security to long-term solvency, ‘policymakers should focus on reducing the growing costs of benefits’, which would ‘leave room for benefit reforms that uphold Social Security’s original promise to keep seniors out of poverty.’” In The National News Desk, Cory Smith quoted my suggestion on how to achieve slower growth in benefits: ”Index initial benefits to prices instead of wages, she said. And that change alone would close about 80% of the current funding shortfall.” Moreover, Newsweek’s Martha McHardy referenced my remarks to CNBC on the Social Security Fairness Act, which would repeal the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) at a cost of nearly $200 billion over ten years: “‘We should reform Social Security so that it provides basic income security to the most vulnerable Americans in old age without adding to the debt or tax burden that younger workers face. This is not the right policy. It's what special interests were pushing, and politicians are responsive to their demands.’” Read more about the Social Security Fairness Act, which passed the House, here.

• Eliminate federal programs to tackle government inefficiency. Cato’s Chris Edwards argues that the federal government has grown so much that it’s impossible to make it function efficiently. “Even if federal workers were highly industrious, and even if politicians were laser-focused on the public interest, the government’s vast size would still create failure after failure,” writes Edwards. He proposes eliminating certain federal programs and returning many federal government activities to the states to improve governance and efficiency. “[W]e really need a DOGEE, with the elimination part coming first,” he concludes. We’ve also emphasized that DOGE should tackle unsustainable entitlement programs to reduce redistributive bloat in the federal government.

• The tax exclusion for employer-provided health insurance is costly and distorts the health care market. Alex Durante of the Tax Foundation notes that eliminating the tax exclusion for employer-provided health insurance would generate $5 trillion in additional tax revenue over the next ten years, including $1.4 trillion in payroll taxes. This expansion of the payroll tax base would help Social Security’s finances, which face a $3.5 trillion shortfall over the same period (excluding interest costs). Cato Institute’s Adam Michel has highlighted Michael Cannon’s proposal to repeal health care exclusions and create universal health accounts instead. He writes: “The Cato Institute’s director of health policy studies, Michael Cannon, describes the exclusion of employer-provided health insurance as the ‘original sin’ of US health policy. The exclusion inflates health care costs and discriminates against the most vulnerable by allowing employers and insurance companies to control more than $1 trillion in annual employee compensation.” Whether Congress claims the revenue for itself, or better yet, returns the money to the workers who earned it to buy the health insurance plan of their own choice, the tax exclusion for employer-provided health insurance must go.