Debt Digest | Lessons from the Canadians
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts. There will be no Debt Digest next week. We’ll be back after Labor Day!
Sensible defense cuts. Brooking’s Michael O’Hanlon writes, “By adopting the attitude of a ‘cheap hawk,’ defense policymakers can improve America’s defense capabilities without large increases in spending.” He suggests capping defense budgets at 1% per year in real terms. While foreign policy scholars and military planners disagree on the scale of necessary cuts and new investments, most can at least recognize the linkage between debt and national security. Rising debt, driven by entitlement spending, threatens the economic foundations of military power. “These considerations call for some degree of shared sacrifice across the whole government, including the Pentagon.”
Postal Service faces budget troubles. “According to the Government Accountability Office, the USPS has roughly $200 billion worth of unfunded liabilities and debt, a total equal to roughly 250 percent of the agency’s annual revenues,” explains the Taxpayers Protection Alliance. “Even though USPS is supposed to operate as a self-sustaining entity, lawmakers have politicized USPS rather than allowing it to manage itself,” Boccia writes. “The success of postal reform hinges on phasing out the universal service obligation and granting USPS flexibility to streamline its services to reduce costs.”
Trillion-dollar green tax provisions. Historically, targeted subsidies and industrial policy have bad track records. The same goes for the Inflation Reduction Act (IRA). “The IRA reveals Congress’ preference for the heavier hand of industry‐specific subsidies over the proven incentives of neutral policy changes that encourage investment of all types,” explains Cato’s Adam Michel. Goldman Sachs and Brookings put the 10-year cost of IRA green tax credits at $1 trillion. “In its first year, the IRA has accomplished nothing but to shovel hundreds of billions of taxpayer dollars to large corporations and affluent Americans. Nobody’s health care is cheaper. Nobody’s environment is cleaner. Yippee Ki-Yay,” writes Action Forum’s President and former CBO Director Doug Holtz-Eakin.
Risks of high inflation. Arnold Kling writes, “if inflation averages more than, say, 8 percent over the next ten years, then long-term government bonds that you buy today will have effectively defaulted. So if you are going to rate long-term government bonds as being investment grade, you have to assign a very low probability to such a high-inflation scenario [...] I think that the chances of [an inflation spiral] are high enough that if it were up to me, I would rate long-term U.S. bonds as junk bonds.” An inflation spiral is a core risk associated with a spending-driven debt crisis as Boccia explains here.
Debt lessons north of the border. Cato’s Chris Edwards writes, “Facing a debt crisis in the 1990s, Canada cut its federal spending from 23 percent of GDP in 1993 to just 15 percent by 2006. The government cut entitlements, business subsidies, defense, aid to the provinces, and many other things. It privatized assets such as airports and the air traffic control system. As the government was cut, the Canadian economy boomed for 15 years. America needs similarly large spending cuts.”
Social Security benefit cuts. This month, Social Security turned 88. Over the years, Social Security has transformed from an old-age poverty program to a politically convenient entitlement. Spending on the program–the single largest in the federal government–is set to double over the next 10 years. According to the Committee for a Responsible Federal Budget, unsustainable spending will cause a Social Security benefit cut of $17,400 by 2033 for a typical newly retired dual-income couple. Boccia highlights commonsense reforms that can avoid severe, indiscriminate benefit cuts in favor of a more targeted approach, here.
Medicare’s looming financing crisis. Mercatus’ Charles Blahous writes, “Excess health price inflation, which is exacerbated by a wide range of US government policies, inevitably limits the quantity and quality of care that Americans can receive for every dollar they spend. Rising health costs place American households under worsening financial stress…The increasing share of federal spending absorbed by health programs gradually stifles government’s ability to meet other national needs and to serve the public in other ways.” Tough choices will be necessary to address Medicare’s growing financial burden as the graph below shows.
