Debt Digest | Treasury Nominee Bessent: We Have a Spending Problem
Capitol Hill Event, Links & Fiscal Facts
Join us this Thursday at NOON for a Capitol Hill briefing for congressional staff hosted by the Cato Institute. Titled “Empowering the DOGE and Extending Pro-Growth Tax Cuts: How the 119th Congress Can Grow the Economy and Fix the Debt,” this lunch briefing will be held on December 12, from 12-1 PM at the House Visitors Center. Adam Michel, Chris Edwards, and I will discuss how Congress can empower the Department of Government Efficiency (DOGE), what government agencies and spending programs Congress and the DOGE team should target, and the responsible use of the reconciliation process to extend the 2017 Trump tax cuts—without triggering inflation and rising interest rates. For more insights ahead of the event, explore our related work:
With a BRAC-like Structure DOGE Can Succeed Where Other Commissions Have Failed
12 Ways for Trump to Improve the Tax Code and Make His Tax Cuts Permanent
Here are this week’s reading links and fiscal facts:
Misguided monetary and fiscal policies, not supply shocks, drove the recent inflation. John H. Cochrane, an adjunct scholar at the Cato Institute, challenges the misconception that supply or relative demand shocks caused the recent inflation. He explains that these forces can only increase relative prices, not the overall price level, arguing that “forces that change relative prices do not raise the overall price level unless they induce a monetary or fiscal policy response.” Cochrane highlights that papers examining the causes of recent inflation point to either increased money supply or demand driven by fiscal stimulus. As Dominik Lett and I’ve written: “The previous administration’s disregard for fiscal sustainability, marked by excessive spending, contributed to sharp increases in inflation [...], one of the major factors costing them the election.”
Treasury Secretary nominee says we have a spending problem. Jonathan Levin writes in a Bloomberg article: “The choice of a Treasury secretary could matter more than usual this time around because the US has around $6.7 trillion in debt to refinance in 2025 [...].” Scott Bessent, the nominee for Treasury Secretary, seems to recognize the dangers of unsustainable debt and persistent deficits. Levin cites a Bessent quote from June: “‘I am alarmed by the size of these deficits and the spending’ [...] ‘We do not have a tax collection problem, we have a spending problem ... we’ve never seen anything quite like this.’” To address the fiscal challenges Bessent highlights, Congress must use upcoming fiscal deadlines as an opportunity to cut spending and put the US budget on a sustainable path. Fiscally responsible measures include adopting a credible path to long-term balance and stabilizing the debt before raising the debt limit again, extending expiring tax cuts without adding to deficits, reinstating discretionary spending caps, and allowing temporary Obamacare subsidies to expire, among broader health care reforms.
US Senator exposes truths about Social Security. Senator Mike Lee (R-UT) shared a thread on X, highlighting the Supreme Court decision that ruled Social Security contributions are just a tax rather than funds that belong to taxpayers. “[T]he proponents of the Social Security Act told American workers that what they paid into the system would remain *their* money, not the government’s—to get Congress to pass it—and then told the courts the exact opposite when defending the Act’s constitutionality,” writes Sen. Lee. He also emphasizes that Social Security contributions aren’t saved but are credited to a trust fund that the “government routinely raids.” He adds: “Every dollar you pay into Social Security, only to see it gobbled up by the government itself, is a dollar you can’t invest in your own future. It’s government dependency at its worst.” As I’ve written before, Social Security is an income transfer program rather than a mandatory savings scheme, and recognizing this reality is key to having a rational discussion about reforming the program.
Today’s US tax revenue levels trace back to World War II increases. Alex Muresianu of the Tax Foundation describes how World War II reshaped taxation in the United States, dramatically increasing tax revenue as a share of GDP: “During the war, federal receipts as a share of GDP rose from 6.7 percent in 1941 to 8.8 percent in 1942, 11.8 percent in 1943, 19.5 percent in 1944, and 19.8 percent in 1945. [...] But here’s the kicker: over the course of the nearly 80 years since the conflict’s end, tax revenue has remained at those elevated levels [see figure below].” Manhattan Institute’s Chris Pope describes parallel developments in Europe, where the total war justified drastic tax increases. Pope argues that these tax hikes enabled European governments to significantly expand their welfare programs. As we’ve previously noted in a Cato-published summary of Pope’s paper: “According to Pope, the modern European welfare state is a byproduct of the disruptive nature of the Second World War and features policies that originated in Nazi Germany.“
