Debt Digest | Shrinking Economy Should Be a Wake-Up Call To Halt Tariffs and Runaway Spending
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
A shrinking economy should be Congress’s wake-up call to halt tariffs and runaway spending. US real gross domestic product (GDP) contracted by 0.3 percent in the first quarter of 2025, per the Bureau of Economic Analysis (BEA). The trade deficit expanded to record highs (see figure below), largely a result of companies stocking up on imported goods before tariffs kicked in. However, Joseph Politano explains that it’s not the import surge that shrunk the economy but the costs and uncertainty that followed President Trump’s trade policy decisions. The New York Times reports that Trump advisers view extending tax cuts as a way to calm the markets. However, Congress must not add to the already unsustainable, economy-crushing debt by advancing tax cut extensions or new tax cuts without reducing spending first. Spending reductions that slow the projected growth in federal Medicaid and Medicare costs will improve the fiscal and economic outlook and alleviate inflationary pressures. Importantly, Congress shouldn’t rely on the false promise of tariff revenues to offset the deficit increase from tax cut extensions. Now is the time to step up to rein in executive tariff powers and keep taxes low by reducing excessive spending. If Congress tries to kick the can on responsible spending reforms again as tariffs continue to wreak economic havoc, it will mostly have itself to blame for a likely recession and the prospect of damaging stagflation—a period of low growth and high unemployment during which inflation takes off like Americans haven’t seen since the 1970s.
Americans want fiscal responsibility. The Hoover Institution recently polled 1,775 Americans to analyze their knowledge of the federal budget and the Tax Cuts and Jobs Act (TCJA). The good news is that 75 percent of respondents correctly believe the federal debt is on an unsustainable path, and the same share thinks Congress should prioritize deficit reduction. Similarly, 71 percent believe the debt will be larger in ten years. However, public knowledge of government spending priorities is lacking: only 17 percent correctly identified Social Security as the largest federal program, while 27 percent mistakenly chose defense. Ironically, more young Americans (24 percent)—who fund Social Security—knew the correct answer than seniors (12 percent)—who receive benefits. Furthermore, only 11 percent were able to answer 7 out of 10 factual questions on the TCJA correctly. Still, widespread concern about excessive government spending—aligning with a recent Cato poll—should encourage lawmakers to pursue meaningful spending reforms.
Commonsense Medicare reforms can save billions without cutting benefits. Paragon Health Institute’s Jackson Hammond writes: “Figure 1 shows that the amount of [Medicare] spending covered by dedicated funding (payroll taxes for Part A and premium payments for Parts B and D) has declined over time, meaning that Medicare is increasingly reliant on large general revenue fund transfers.” He highlights the program’s major role in persistent federal deficits and outlines several reforms that lawmakers should consider during the reconciliation debate—reforms that would save over $700 billion in 10 years without cutting benefits—including: site-neutral policies that eliminate higher reimbursement rates for hospital facilities than physician offices ($220 billion); capping Medicare Advantage costs ($250 billion); ending the compensation of hospitals’ bad debt by Medicare ($54.1 billion); and using a more accurate inflation index to update payment rates ($27.5 billion).
Both parties mislead on Social Security. The Washington Post’s Naftali Bendavid quotes me: “Romina Boccia, director of budget and entitlement policy at the libertarian Cato Institute, said Musk is not entirely wrong to compare Social Security to a Ponzi scheme. The main difference, Boccia said, is that payroll taxes guarantee an inflow of money, unlike in a traditional Ponzi scheme where the cash can simply dry up. Democrats are fearmongering, she said — but Republicans are trumpeting a nonexistent fraud problem. ‘The Democrats are basically scaring seniors while Republicans are shouting about fraud,’ Boccia said. ‘But neither party is willing to tell the truth about Social Security’s math.’” The truth is alarming enough without political misinformation: the program has been running cash-flow deficits since 2010, adding over $1 trillion to federal deficits over the last 15 years and is projected to add an additional $4 trillion over just the next 8 years. Unless Congress puts politics aside and addresses the program’s financial challenges, Social Security will be insolvent by 2033, threatening retirees with indiscriminate 21 percent benefit cuts.
A widely cited study significantly overstates wealth inequality. Mercatus Center’s Jack Salmon explains why a widely cited study by Gabriel Zucman, Thomas Piketty, and Emmanuel Saez—which claims the top 1 percent of households control over 40 percent of all US wealth—is misleading. He criticizes their methodology that relies on income reported on tax returns, noting: “[T]ax returns are an incomplete and unevenly distributed source of data. Not all forms of wealth generate taxable income, and when they do, returns can vary widely even for assets of similar value.” Notably, the study excludes the present value of Social Security benefits from its wealth calculations. Salmon cites a Congressional Budget Office report, which found that when Social Security wealth is included, the top 1 percent’s share of wealth increased only modestly—from 23 percent in 1989 to 27 percent in 2022. For a more extensive critique of the Zucman-Saez-Piketty findings, see this analysis by Cato’s Chris Edwards.
