Debt Digest | New York’s Tesla Boondoggle
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
New York Tesla plant illustrates failures of industrial policy. N.Y. spent $1 billion in subsidies over the past decade on what was supposed to be the largest solar-panel factory in the Western Hemisphere, according to the Wall Street Journal. To date, the project has generated just 54 cents for every dollar spent. As Cato’s Scott Lincicome explains, “All too often, the subsidies’ seen benefits are swamped by their unseen costs—especially after you consider alternative policies that could have achieved the same objectives with fewer taxpayer dollars and lower economic or geopolitical risks.”
Exchanging Medicaid insurance for cash. The Mercatus Center’s Markus Bjoerkheim and Liam Sigaud write, “Medicaid beneficiaries value their Medicaid coverage at between 20 and 40 cents (or even less) per $1 of cost to taxpayers…[that] means there are millions of Americans for whom we could provide a more robust safety net, at lower cost to taxpayers.” One proposal: allowing states to experiment with 1115 waivers that give beneficiaries the option of monthly cash payments in exchange for coverage with more cost-sharing. Cato’s Michael Cannon similarly advocates turning Medicare into a “Social Security–like cash‐transfer program.”
High-income nations experience inflation and financial instability following pandemic spending spree. The Annual Economic Report by the Bank for International Settlements (BIS) reports widespread inflation, reduced real wages, and heightened financial instability. “[F]iscal and monetary policy support [during the pandemic] was too large, too broad-based and too long-lasting.” According to Institute of International Finance data, the ratio of global debt to GDP (which includes household, corporate, and government debt) increased 17 percent since the 2008 recession. For comparison, advanced economies added about 30 percentage points to their general government debt-to-GDP ratio since 2008 based on International Monetary Fund data. The U.S. debt-to-GDP ratio grew by 50 percentage points since the Great Recession.
The limitations of using monetary policy to address deficit-driven inflation. “[A]s the Federal Reserve raises rates, federal interest expense increases, and the federal deficit widens ironically at a time when deficits were the primary cause of inflation in the first place. It risks being akin to trying to put out a kitchen grease fire with water, which makes intuitive sense but doesn’t work as expected,” writes investment researcher Lyn Alden. Smart fiscal policy, including reducing government spending and eliminating barriers to competition, can help reduce inflation by tempering demand, boosting labor force participation, and lowering prices.
Raising taxes won’t fix unsustainable spending. Cato’s Adam Michel writes, “The growth rate of health and retirement spending is not a problem that can be fixed with higher taxes.” The chart below shows projected federal deficits if tax revenue increased permanently to 20 percent of GDP, the 50-year high revenue mark from the early 2000s. “The only slightly larger deficits under CBO’s current law projections show that even significant tax increases cannot compensate for fundamentally unsustainable spending growth.” As Jeff Miron wrote in U.S. Fiscal Imbalance over Time: This Time Is Different, “If higher taxes have even a modest negative impact on growth, tax increases have no capacity for restoring fiscal balance. That finding leaves expenditure cuts—especially to Medicare, Medicaid, and ACA subsidies—as the only viable avenues for significant reductions in fiscal imbalance.”
