Debt Digest | Winter is Coming
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts.
Limits of taxing the rich. Brian Riedl of the Manhattan Institute “models an aggressive tax-the-rich agenda that pushes tax rates for corporations and wealthy families toward revenue-maximizing levels…such policies could raise, at most, 2% of GDP—and likely far less, when accounting for the macroeconomic losses that would result from layering so many new taxes on top of one another…Taxing the rich cannot even cover baseline deficits, much less finance the progressive spending agenda.” Instead, progressives should consider the $1 trillion in 10-year savings generated by “scaling back farm subsidies for large agribusinesses, as well as trimming Medicare subsidies and Social Security benefits for those retirees with (nonhousing) net worths in the millions.”
Historical lessons on Social Security reform. As Brooking’s Louise Sheiner and Georgia Nabors explain, Social Security’s financing challenge is double what it was in 1983—the last time Social Security faced a major financing challenge and underwent significant reforms. A few changes Congress adopted included delaying cost-of-living adjustments and gradually raising the normal retirement age from 65 to 67. One key takeaway: the longer we delay reform, the more painful the fiscal reckoning will be. Some commonsense changes Boccia advises include slowing excess benefit growth, increasing Social Security’s eligibility age, focusing income support on those with limited means, and indexing cost-of-living benefit adjustments to the more accurate inflation index.
How to reduce the national debt. “International experiences of successful debt reductions suggest gradual, spending-focused policies. Any serious debt reduction effort must acknowledge the need to rein in the largest mandatory spending programs, Social Security and Medicare, which constitute a growing share of the budget and are the primary drivers of long-run deficits,” find the Tax Foundation’s Will McBride, Erica York, and Alex Durante. “If lawmakers consider tax increases in a debt reduction effort, they should focus on less distortionary taxes, such as consumption taxes, or tax reforms that rationalize tax expenditures and broaden the tax base.”
CHIMPs are a budget gimmick. The Congressional Research Service explains, “[Changes in mandatory program spending or CHIMPs] budgetary effects are attributed to the Appropriations Committee rather than the legislative committee that would otherwise have jurisdiction over that program. In many cases, this allows them to be used as an offset for discretionary spending.” As Boccia argues, “Most CHIMPs provide no real savings. Instead, they facilitate increases in discretionary spending without running afoul of current spending limits.” Congress should prohibit the abuse of CHIMPs.
Fiscal winter is coming. The 10-year Treasury just hit a 16-year high of 4.5 percent—“catastrophic for long-term deficits” explains the Manhattan Institute’s Brian Reidl (see the graph below). “[T]he Age of Stimulus we’ve been living in since 2008 is going to give way to a new Age of Austerity fairly soon” due to higher interest rates and an aging population, argues Noah Smith. “When population is growing rapidly, programs like Social Security and Medicare are like sustainable Ponzi schemes — young working people pay into the system via taxes, and then during their retirement they get more out than they put in, because a new bigger crop of young people is now paying in.” Slow population growth makes this scheme unsustainable. What if the government just keeps borrowing anyway? “[Interest rates] go up and up, because private and foreign lenders worry that this borrowing spree will eventually end in either sovereign default or hyperinflation. This leads to a spiral where the government needs to borrow even more…Most macroeconomists agree that hyperinflation is the endgame of runaway government borrowing. When this happens, it is swift and devastating; the result is wholesale economic collapse.”
