Debt Digest | Self-Defeating Politics

Links & Fiscal Facts

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

• Self-defeating politics surround Social Security. Charles Blahous explains, “Americans today express opposition to ‘benefit cuts’ of a type no elected leaders are proposing. At the same time, politicians cite public opposition as an excuse for their failure to do something quite different: namely, to simply moderate future cost growth. If this dynamic continues much longer, it will ultimately force the abandonment of Social Security’s current design, replacing it with another framework in which benefits actually would be on the chopping block each year. The tragic irony is that by resisting cuts that aren’t really cuts until it’s too late, political advocates are putting Social Security participants at risk of exactly the type of benefit cuts they most oppose and fear.” Political gridlock is precisely why legislators should consider a well-designed fiscal commission to reform entitlements.

• Fiscal decline threatens dollar dominance, not China. “The dollar is finished as the world’s reserve currency,” says newly retired financial analyst Dick Bove. Analysts who deny this are “monks praying to money.” Such pessimism is probably overstated. As Cato’s Norbert Michel explains, the US dollar remains the dominant reserve asset by a significant margin (see Figure 1). The fall of America’s reserve currency status will more likely stem from internal factors, such as a fiscal crisis damaging the United States’ reputation as a stable and reliable borrower, rather than a foreign challenger such as China.

• Earmark hypocrisy. Jacob Bogage of the Washington Post writes, “[A] bloc of conservatives in the House — who have loudly opposed several measures to fund the government since the fall — are on track to direct a total of $371.8 million back to their home districts through individual requests. They stand to take credit for federal funding for projects important to their constituents even if they vote against the legislation that includes the money.” Fiscal hawks should be against wasteful spending no matter the circumstances. That includes rejecting an earmark process that invites waste, fraud, and abuse.

• Fiscal trajectory worsens. “The U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don’t think that’s at all controversial,” says Federal Reserve Chair Jerome Powell. Powell is right. Debt growth is unsustainable, with negative implications for economic growth and national security. To prevent a dire fiscal crisis, Congress must tackle excessive spending, starting with entitlements.

• Improving CBO projections. According to CBO projections, the debt-to-GDP ratio will grow to unsustainable levels over the next 30 years while macroeconomic levels settle in at comfortable levels (see Figure 2). Two interpretations come to mind explains economist Eric Leeper: “The first interpretation, which may be the message the CBO intends to send, is that even if over the next 30 years the economy functions smoothly with no crises that raise fiscal needs, government debt as a share of the economy grows ever higher. […] A second interpretation, far more sanguine, is that even though debt is growing exponentially to unprecedented levels, nothing bad happens to the economy.” Congress should require CBO to produce a realistic alternative baseline scenario based on historical experience, enhancing the usefulness of CBO’s projections and reducing appropriators’ tendency to use gimmicky budget tricks.

Figure 2: Actual and projected economic variables (left scale) and privately held federal debt as a percentage of GDP (right scale)

Source: Congressional Budget Office, The 2023 Long-Term Budget Outlook, June 2023.