Debt Digest | Trump’s Playbook for Winning the Fiscal Battles Ahead

Links & Fiscal Facts

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

Trump’s playbook for winning the fiscal battles ahead. President-elect Trump left office after his previous term with deficits significantly higher than initially projected (partly due to pandemic-related spending) and missed the opportunity to address the unsustainable growth of entitlement programs. The Trump administration and the 119th Congress will face several fiscal deadlines next year, creating opportunities for pro-growth fiscal reforms. They should take decisive action in response to this 2025 fiscal cliff by putting the US federal budget on a path to balance, and committing to this path before increasing the debt limit again, including:

• Establishing clear, enforceable fiscal targets toward budget balance

• Reforming entitlement programs, potentially through an independent fiscal commission modeled after BRAC (Base Realignment and Closure Commission)

• Pursuing pro-growth, deficit-neutral tax reforms, extending the pro-growth aspects of the Trump-enacted Tax Cuts and Jobs Act

• Cutting wasteful and duplicative bureaucracy and strengthening discretionary spending caps

• Allowing temporary Obamacare subsidies to expire and empowering patients with health care reform

Look out for our Cato Policy Analysis with further details in January 2025.

• Debunking Social Security myths: the reality of IOUs and the need for structural benefit reform. My forthcoming policy analysis examines the myths surrounding the Social Security trust fund, highlighting that it holds no real assets—only IOUs from the Treasury. Until 2010, Social Security ran surpluses, but instead of saving these for future benefit payments, the government spent them elsewhere. In exchange, the Treasury credited the trust fund with IOUs, which add to federal debt when redeemed, as they require the Treasury—which operates on a net-deficit basis—to borrow. Since 2010, Social Security has been running cash-flow deficits resulting in over $1 trillion in borrowing (see figure below). Policymakers shouldn’t focus on the trust fund balance but instead prioritize reforms that address the structural drivers of the program’s rising costs. These reforms could include indexing initial benefits to prices, discontinuing cost-of-living adjustments (COLAs) for wealthier retirees, adjusting eligibility ages, and ultimately transitioning to a flat benefit scheme. Keep an eye out for the full analysis on Wednesday, November 13th.

  

• Irresponsible fiscal policy threatens the Fed’s independence. Former Federal Reserve Governor Kevin Warsh, speaking with FOX Business host Larry Kudlow, expressed concerns over the Federal Reserve’s expanding role in fiscal policy. “I’m afraid to say there has been some mission creep. That mission creep has been going on for long time.[...] [The Fed has] taken some powers away from fiscal authority. Congress is the one who should be appropriating money [...] Instead the Fed is entering their business as if they are philosopher-kings in Washington. We need to keep them [the Fed] clearly focused on the remit. [...] You cannot have fiscally responsible economic policy and irresponsible monetary policy,” said Warsh. Dominik Lett and I’ve covered how increasingly irresponsible fiscal policy could lead to fiscal dominance, where monetary policy serves fiscal ends, undermining the Fed’s independence. As we’ve previously recommended, Congress should consider asking Fed Chair Jerome Powell about the effects of record-high debt levels on monetary policy, the risks of fiscal dominance, and the role of responsible fiscal policy in controlling inflation.

• Congress to vote on public workers’ Social Security benefits this week. This week, the House will vote on the Social Security Fairness Act (H.R.82), which aims to repeal the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). As I’ve covered before, this change would cost $196 billion over ten years, unfairly benefiting public sector employees and burdening younger workers. Rachel Greszler, Senior Research Fellow at the Heritage Foundation, critiques the bill, stating: “[T]he Social Security Fairness Act is neither fair, nor accurate, nor fiscally responsible.” Also on the agenda this week is the Equal Treatment of Public Servants Act of 2023 (H.R.5342), which offers a better approach to addressing the current rules of the WEP.

• The government should curb spending and prioritize long-term growth. John H. Cochrane, an adjunct scholar at the Cato Institute, explains that inflation spiked because the pandemic stimulus pushed demand to exceed the economy’s productive capacity. “A supply-limited economy requires supply-oriented policy, not stimulus, to grow. [...] Reviving long-term growth drowns any other policy, and only supply, efficiency, productivity, and incentive-oriented policy can revive long-term growth,” writes Cochrane. He further highlights the problems of mounting debt: “More debt leads to higher interest rates, trouble borrowing, and inflation [...] From now on, governments must spend money as if they have to raise taxes to pay for it, now or later. [...] If the $5 trillion pandemic response was more debt than people will hold and caused inflation, the $10 trillion response to the next crisis will face even more trouble.”