Debt Digest | The Threat of Financial Repression

Links & Fiscal Facts

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

• Deportations could add $900 billion to the debt over 10 years. Cato’s David J. Bier argues that the cost of immigration and border-related provisions in the “One Big Beautiful Bill” is likely much higher than the Congressional Budget Office’s (CBO) $168 billion estimate. First, he notes that the assumption that this increased spending will be temporary is unrealistic, writing: “Congress is not going to let the wall collapse, force the firing of hundreds of unionized law enforcement officers, or drastically cut their pay. [...] If Congress chooses to maintain just half of H.R. 1’s 2028 immigration spending level, the bill will end up costing more than $100 billion more than advertised by 2035.” More importantly, the CBO doesn’t factor in the fiscal impact of deporting millions of immigrants, which, according to Bier, could amount to $900 billion over 10 years. He concludes: “This means that the nearly $900 billion cost of deportations will amount to about a quarter of the bill's total cost [see figure below].”

  

• The threat of financial repression. Josh Hendrickson, Professor and Chair of the Department of Economics at the University of Mississippi, warns that the US government may resort to financial repression as fiscal pressures increase. “A move toward explicit financial repression could come in the form of simply imposing a formal requirement that banks hold a certain percentage of their assets in U.S. Treasury securities,” he explains. Another approach would involve the Federal Reserve eliminating interest on reserves. This would also involve increasing reserve requirements for the banks to avoid fuelling inflation, as without this provision, banks would have an incentive to reduce their reserve holdings, expanding the money supply. “This would be an indirect form of financial repression. Higher reserve requirements when reserves pay no interest is akin to a tax on banks,” Hendrickson explains. He concludes: “It is naive to think that the U.S. will not attempt to use this tool in the event that politicians perceive a looming debt crisis. And, unlike the other options, the connection between the actions of the government and the costs are largely hidden from the public.”

• Senate Republicans should strengthen spending cuts in reconciliation. Tony Romm quotes Boccia in a New York Times article: “‘There’s a political alignment that comes often after major deficit binges that tend to occur during crises,’ said Romina Boccia, the director of budget and entitlement policy at the libertarian Cato Institute. Ms. Boccia said that the pandemic spending crystallized the policy divides between the two parties, as Democrats argued that the magnitude of cuts that Republicans began to endorse would destabilize government services — and that the nation’s fiscal woes would be better solved with higher taxes on the wealthy.” While Republicans criticized the nation’s fiscal trajectory during the previous administration and called for spending cuts, their reconciliation bill doesn’t do nearly enough to put the budget on a sustainable path. So far, they’ve engaged in budget gimmicks and avoided meaningful but necessary entitlement reform. The GOP still has time, through the Senate version of the reconciliation bill, to avoid a fiscal disaster.

• Republicans shouldn’t waste the opportunity for meaningful fiscal reform. In a recent article, the National Desk’s Cory Smith quoted Boccia on the GOP reconciliation bill: “Romina Boccia [...] said the Congressional Budget Office forecast for the bill’s deficit impact is only accurate is [sic] some of the bill’s temporary provisions stay that way. And she’s skeptical that’ll happen. [...] ‘[I]f they do not seize this moment to significantly reduce deficits and debt, it will be on them to have missed this key opportunity,’ Boccia said of the GOP-controlled government. [...] ‘[A] fiscally driven debt agenda would target Medicare, Medicaid and Social Security,’ Boccia said.” Lawmakers have no shortage of options to offset the bill’s costs. For example, Mercatus Center’s Jack Salmon has compiled a list of several prudent spending and tax loophole reforms that would save $6.8 trillion over 10 years and reduce the debt-to-GDP ratio relative to the current baseline.

• The GOP bill increases subsidies for millionaire farmers. Cato’s Chris Edwards highlights a GOP reconciliation bill provision that doesn’t get much attention: a $57 billion increase in farm subsidies over 10 years. These expanded subsidies—primarily benefiting wealthy farmers—include increased price guarantees, more acres eligible for subsidies, and higher insurance subsidies. Edwards argues: “Liberal critics are right that Republican efforts to cut low-income welfare in the reconciliation bill are hypocritical since the bill boosts high-income welfare for farmers. All types of welfare create dependency on government, and all should be cut to reduce budget deficits. [...] [T]he GOP doesn’t just spare millionaire farmers from cuts, they aggressively expand inefficient farm giveaways by $57 billion.”