Debt Digest | Reject New Emergency Spending
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Reject new emergency spending. Biden has requested $40 billion in emergency supplemental funding, including $24 billion for Ukraine and foreign assistance. The R Street Institute, National Taxpayers Union, Americans for Prosperity, and more urge “members to oppose proposals for a defense supplemental or other emergency spending that would breach spending caps in the wake of the just-passed Fiscal Responsibility Act of 2023.” As Jordan Cohen and Eric Gomez explain, funding an ongoing military conflict in Ukraine through emergency aid creates an undemocratic slush fund, worsening accountability and increasing the risks of escalation.
Medicare Improvement Fund is a budget gimmick. “While the name suggests the fund plays an important supporting role in updating the program, it has never been used this way. Instead, it exists only to give the relevant House and Senate committees additional budgetary flexibility,” explains the American Enterprise Institute’s James Capretta. Budgetary accounting tricks like the Medicare Improvement Fund incentivize irresponsible spending and hide the true size of federal spending.
This time is different. Bond yields rose following Fitch’s downgrade. As Greg Ip of the Wall Street Journal explains, “[T]he real Treasury yield—what investors expect to earn on a 10-year note after inflation[—]…was around zero in August 2011, soon to go negative. Today, it is 1.7%, near the highest since 2009. One takeaway is that the global saving glut—the wall of money in search of safe assets that kept yields down a decade ago—is no more.”
Opportunities for fiscal reform. According to Paul Winfree, CEO of the newly launched Economic Policy Innovation Center (EPIC), “[Y]ou have a series of fiscal events that are on the horizon that all are meaningful for the fiscal trajectory of this country but also create opportunities for economic policy reforms that are larger than the scale of those cliffs themselves.” EPIC will focus on more long-term economic questions, including doing behind-the-scenes work on Capitol Hill. The Committee for a Responsible Federal Budget highlights several upcoming Congressional fiscal policy deadlines here.
Deficit spending and reckless fiscal policy. Matthew Yglesias is on point when he argues that the “evidence indicates [deficit reduction] is not an intractable problem but a new one…the era of cheap debt and free lunch economics is over…crowding out is a real concern, and addressing the debt should be a real issue…Pressuring the central bank to keep interest rates low because the government can’t cover the debt service payments is how you end up with an inflationary spiral.” However, his policy prescription of raising taxes on the rich is off-base. As Cato’s Adam Michel argues, funding a European-style social welfare state through additional taxes on the rich is neither sustainable nor mathematically feasible. High debt and rising deficits are the result of an entitlement-driven spending crisis. See Brian Riedl’s graph below illustrating major changes in key budget categories from 2000 to 2022.
