“The federal government hasn’t fully paid for its normal, run-of-the-mill spending in a single year since 2001. If you believe the projections of the Congressional Budget Office (CBO), there is not a single year in the next 30 (the longest length of time for which the office projects spending and revenue) in which the budget will balance. Despite that, lawmakers from both parties continue to peddle this line whenever they want to make big policy changes. Democrats promised that Obamacare would be revenue-neutral. It hasn’t been. Republicans promised the Trump tax cuts would pay for themselves. They didn’t.
Now it’s the Democrats’ turn to play this game, and President Joe Biden has dutifully stepped up to the plate. Speaking Friday about the combination infrastructure package and budget reconciliation bills that the House may vote on sometime this week, the president declared that anyone worried about the latter legislation’s $3.5 trillion price tag should calm down.
“We talk about price tags. It is zero price tag on the debt,” Biden said. “We are going to pay for everything we spend.””
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“Democrats are proposing to pay for their $3.5 trillion reconciliation package with about $2.3 trillion of tax increases and $700 billion in savings from changing how Medicare and Medicaid purchase pharmaceutical drugs. The rest is written off as being paid for with future economic growth—the idea being that increases in government spending will cause more hiring and greater economic activity, which will cause future tax collections to be higher than projected.
It’s a little bit like saying that your drinking habit can pay for itself, as Reason’s Peter Suderman has explained.
The math doesn’t add up. In order to achieve the amount of “dynamic scoring” necessary to offset that last $600 billion or so of new spending, the reconciliation bill would have to boost America’s economic output by about 3.5 percent by 2031. That’s far in excess of what every independent assessment of the package says it will do. In fact, at least one assessment of the package says the bill’s tax increases and borrowing will more than cancel out the benefits of heightened spending, dragging growth lower.
The debate over those projections is pretty esoteric. But regardless of which forecast you believe, there’s no getting around the fact that some of the lawmakers now championing the magic of “dynamic scoring” used to be quite skeptical of it. Democrats on the House Ways and Means Committee—the very committee that put together the details of the reconciliation bill over the past few weeks—blasted Republicans for relying on “dynamic scoring” to make it look like the Trump tax cuts would balance over the long-term. In the Senate, meanwhile, Budget Committee Chairman Bernie Sanders (I–Vt.) used to call dynamic scoring a “gimmick” meant to “conceal” the real cost of legislation. Now, he’s fine with using it because Republicans did it first.
If hypocrisy could be taxed, maybe we’d be able to balance the budget.”
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“That isn’t the only dubious assumption behind Biden’s promise that everything will be fully paid for. It doesn’t fully account for the long-term budget impact of the newly expanded child tax credit, which allows Congress to claim $700 billion in “savings” that are unlikely to materialize. The reconciliation bill also calls for boosting IRS enforcement in the hopes of generating $239 billion in revenue from taxes that are currently going uncollected. That is likely an overestimation, as the CBO says the provisions would generate no more than $120 billion from increased tax compliance.”
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“If the bill is truly paid for, Democrats in Congress should prove as much by asking the CBO and the Joint Committee on Taxation to provide a detailed analysis of the “dynamic scoring” promises contained in the reconciliation bill. Without that, argues Chris Edwards, director of tax policy studies at the libertarian Cato Institute, Democrats’ claims that higher spending will generate sufficient economic growth have no hard backup.
“There is no magic money tree in Washington,” Edwards says. “Rather, taxpayers will ultimately pay for the spending through current tax increases, debt and future tax increases, and inflation.””
“The simplest way to understand economics is that it is a reckoning with unavoidable tradeoffs. If you spend money on something, you may obtain something in return—but you lose the ability to use those resources on something else. In the world of politics, economics helps us weigh the merits of those tradeoffs. It answers the question: Do the benefits of a policy outweigh the costs? Sometimes the benefits are larger. Sometimes they are meager or even nonexistent. But there are always costs. To acknowledge this is merely to acknowledge reality.”
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“White House press secretary Jen Psaki responded to a question about the tax impact of the $3.5 trillion spending plan now working its way through Congress by declaring that “there are some…who argue that in the past companies have passed on these costs to consumers…we feel that that’s unfair and absurd and the American people would not stand for that.”
When taxes are raised on corporations—the “companies” in Psaki’s response—corporations often respond by passing that tax on to others. In some cases, they pass costs to consumers. In others, as the Cato Institute’s Scott Lincicome wryly notes on Twitter, they reduce the amount they would have otherwise spent on wages. They have to pay more to do business, and so they make adjustments accordingly. Costs create consequences and tradeoffs.
Empirical research has consistently shown that a large portion of corporate tax increases is actually paid by labor down the line. There are some reasonable academic debates about the precise percentage of the tax paid by labor, and how that might change under certain circumstances. But there is little real debate about whether or not some of the costs are passed on. The point is that it happens. Workers, not owners, pay at least some share of higher corporate taxes.”
“it’s likely that many Americans don’t understand what the debt ceiling is or what raising it entails. Consider the high share of respondents who said they were unsure in The Economist/YouGov’s survey. Part of what’s tricky here is the debt ceiling refers to debt and financial obligations the U.S. has already accrued — such as interest on the country’s debt or previously authorized spending, like Social Security benefits. That is, the debt limit is not a tool that authorizes new spending, as such expenditures are decided in completely separate legislation, like a bill for the next federal budget.”
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“past polls back up the idea that many people don’t grasp what it is or what the risks are if it’s not increased. In a 2013 HuffPost/YouGov poll, for instance, 42 percent of Americans correctly responded that a higher debt ceiling allowed the country to pay interest on its debt and spending that’s already been authorized, but 39 percent mistakenly said that the debt ceiling directly increased government spending and the amount of debt the U.S. holds. This survey also found plenty of uncertainty, as 20 percent said they weren’t sure what raising the debt ceiling meant. A poll by the Washington Post/Pew Research Center from 2011 — when the debt-ceiling debate was particularly fraught — also reflected a misunderstanding of the consequences of raising or not raising the debt limit. In the poll, more Americans were worried about what would happen if the debt ceiling was raised than if it wasn’t: 48 percent were more concerned that raising the debt ceiling would lead to more spending and debt, while 35 percent were more worried that not raising the cap would force a debt default and cause economic harm.”
“The idea of a “limit” or “ceiling” on the public debt sounds like an important constraint on borrowing, the kind of thing the Constitution demands to keep a runaway White House in check. In reality, it’s a 20th century innovation, originally intended to give more, not less, authority to the president. A measure born of necessity during World War I and World War II to allow the Wilson and Roosevelt administrations greater leeway in financing government operations has evolved into a partisan noose.
Understanding the origins of the debt limit places into sharp focus how radical its current weaponization really is.
The U.S. government has always borrowed money to finance its operations. The total amount of outstanding debt hovered below $100 million in the years prior to 1860 but rose to over $2.7 billion during the Civil War. By the end of the 19th century, it stood at roughly $2 billion, a figure that more or less remained steady until World War I, when military mobilization necessitated a wave of borrowing, causing the national debt to balloon to $27 billion.
Less important than how much the government owed was the mechanism by which it raised debt. Prior to World War I, Congress authorized specific debt issuances. During the Civil War the legislative branch passed several bills permitting the Treasury Department to sell bonds at specific maturities and coupons. One popular issuance were 5-and-20s, which paid 6 percent annual interest over a 20-year maturity date, with an option allowing the government to redeem the face value after five years. Hundreds of thousands of Northern citizens purchased the government paper in a show of patriotic fervor. Generally speaking, new debt authorizations were earmarked for specific purposes — for instance, Panama Canal bonds, which could be used only to finance construction of the historic commercial passageway between the Atlantic and Pacific Oceans.
Until World War I, the Treasury Department enjoyed little leeway in rolling over or consolidating existing issuances, devising the terms of new debt offerings or moving funds between one committed stream and another. Congress largely dictated the terms; the Treasury Department’s principal role was to market and administer public debt instruments. This disparate system worked well enough when government borrowing remained at modest levels, but during World War I, the sharp spike in borrowing and spending made the old system impractical. The Wilson administration needed flexibility to raise and commit money for war production. In response to this reality, Congress for the first time set aggregate levels of debt financing and granted the Treasury Department more freedom to move money where it was needed. It was the origin of what we know today as the debt ceiling, though specific issuances — for instance, Liberty Loans — still retained their own statutory limits.
Beginning in 1941 the system evolved further, when Congress passed the first of a series of Public Debt Acts that both raised (on several occasions) the overall debt ceiling and consolidated all borrowing authority under the Treasury Department. Going forward, different departments and agencies borrowed what they needed from Treasury, which in turn issued, managed and marketed debt within the statutory limit. It’s effectively how things work today. “
“The Affordable Care Act offered states a huge infusion of federal money to expand Medicaid eligibility to low-income adults, and about 30 states took that deal right away in 2014. Since then, new medical debt in those states has fallen 44 percent, a dramatically bigger drop than was seen in the states that refused to expand the program over the same period. Those states showed only a 10 percent decline.”
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“nonmedical debt had fallen by similar amounts in expansion and non-expansion states over the time period they studied, 2009 to 2020, strengthening the case that Medicaid expansion was the difference with medical debt.”
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“In states that expanded Medicaid, both the lowest- and highest-income groups saw their medical debt drop after expansion, but the amount of medical debt added annually decreased much more for the former (by $180, from $458 to $278) than the latter (by $35, from $95 to $60).
In non-expansion states, on the other hand, the lowest-income group averaged a $206 average increase in new medical debt, from $630 to $836. But the highest-income bracket still saw a small decline in new debt for medical care.”
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“Those states are concentrated in the South. Eight of the 12 non-expansion states are in the region. Nearly one in four Southerners have some medical debt in collections listed on their credit report, compared to 10.8 percent of people in the Northeast and 12.7 percent in the West.”
“According to a recent congressional report, credit card balances actually declined sharply, by $76 billion, in the second quarter of 2020. You might also assume that, with the guillotine of joblessness hanging precipitously in the balance, Americans might defer large purchases, like homes or cars. Again, you’d be wrong: By the fourth quarter of 2020, mortgage debt grew to $10 trillion (compared to a fourth-quarter 2019 statistic of $9.56 trillion), and auto loan debt reached $1.4 trillion.”
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“During the worst part of Covid, people were pretty cautious. Debt did rise, but not all debt rose. For example, the US experienced the largest recorded quarterly decline in credit card balances (about $76 billion, see the Congressional Research Service study of May 6, 2021). For one thing, people stopped spending; they really just cut back on expenditures. That’s one of the reasons that businesses were so hard-hit: Aside from the lockdowns and all the rest of it, people weren’t buying stuff.
But I would say that what really saved it from being a total disaster was the three stimulus checks. That first stimulus check was spent almost entirely on expenses, and it appeared that was the period of highest unemployment. When the second stimulus check came out, people were more likely to spend that on debt; that may be one reason that we began to see a decline in credit card debt. And then by the time we got to the third stimulus check, some people were spending it, some people were buying down debt, but a surprising number saved it. The personal savings rate actually reached a high in April of 2020. Who would have believed it?”
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“The Census Bureau began doing a survey that was very helpful during the pandemic called the Pulse survey, which comes out every week and asks people about their economic difficulties. In the survey that covered May 12 through 24, there were still 26 percent of respondents who said they were having trouble paying their household expenses. That’s a red flag. And 9 percent of adults were in households where they said that at least some time in the past week, there had not been enough to eat. So it appears to me that the people who have been in dire straits are not going to get out of those dire straits any time soon.”
“a review of the literature about the impact of government spending on growth reveals that, generally, such spending crowds out the private sector. This dispels the hope that more spending will produce economic wonders.
Deficit spending will eventually result in higher taxes for future generations. That’s a profoundly unfair burden. Debt is also expansive in and of itself, as interest payments on an enormous amount of debt—even when interest rates are low—will result in a larger and expanding deficit. According to Brian Riedl at the Manhattan Institute, Congressional Budget Office data reveal that by 2049, “Interest payments on the national debt would be the federal government’s largest annual expenditure, consuming 42% of all projected tax revenues.”
Eventually, growing debt will also slow economic growth. Lower growth means fewer innovations, lower wage growth, and higher unemployment. It’s all-around bad news. Finally, higher debt could result in a debt crisis. These are good enough reasons for me to want to restrict the size of government and impose fiscal prudence.”
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“Interestingly, recent concerns over inflation have highlighted one additional reason why higher debt is problematic. You see, when it comes to inflation, people’s expectations about the price trajectory in the next few years are what really matters. So, it matters less than we think that the current inflationary forces are likely transitory. If people believe that inflation is here to stay, they will try to protect themselves from it today, and we will indeed have inflation today.
Under that scenario, to get inflation under control, the Federal Reserve will have to raise interest rates. And this is where your debt levels matter. Higher interest rates result in a large increase in overall interest payments fairly quickly, as so much of our debt needs to be rolled over on a short-term basis. A sudden increase in interest rates would slow down the recovery, too, which hurts lower-income Americans.
If the Fed were immune to political pressures, this reality might not matter. However, we can expect that political pressure to be enormous. No administration would be happy to see a large increase in interest payments suddenly show up on its balance sheet followed by a large increase in the size of the deficit, especially if that administration is already planning to spend a larger amount of money in the first place. This pressure only grows under an administration that will resist any rate change that could hurt growth. The Fed may also be slow to act because it has made addressing inequality one of its priorities.”
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“Do I know what expectations are and how long inflation will stick around? I don’t. But in truth, no one really does. That’s part of the point. In that context, fiscal prudence now is the best course of action, because with so much political pressure in the worst-case scenario, there will be fewer opportunities when the Fed must actually raise interest rates.”
“Republicans raised the debt ceiling with minimal drama under Donald Trump. Now Democrats are prepared to make them publicly refuse to do the same for Joe Biden.
Senate Republicans are digging in deeper and deeper in their resistance to raising the nation’s borrowing limit, with 46 of them vowing to oppose an increase this fall that will need at least 10 Republican votes. Yet Democrats still plan to burn their most expedient ticket out of the debt mess, with no intention to shift course and pass an increase along party lines.
Their move to pass a budget resolution without tackling the debt ceiling, completed last week, adds a perilous deadline to Democrats’ season full of lofty promises on infrastructure and social spending. It’s not only the majority party facing a fall challenge, however: Republicans will have to actually block a debt ceiling increase instead of just talking about it.
The borrowing fight is perhaps the most immediately consequential drama during a momentous fall for Biden and the Democratic agenda. In addition to raising the debt ceiling, Democrats must fund the government past Sept. 30, devise a likely multitrillion-dollar spending bill and put Biden’s infrastructure bill over the top in the House. Democrats will also make one last-gasp effort at passing voting rights legislation.”
“The Congressional Budget Office (CBO), the legislature’s nonpartisan number-crunching agency, says the bipartisan infrastructure bill would add about $256 billion to the deficit over 10 years. The real figure is likely to be higher, because the package contains a few gimmicky elements that are designed to trick the CBO’s forecasting metrics.
The biggest of those gimmicks is the promise that Congress will reallocate more than $200 billion of COVID relief funds to cover infrastructure costs. It remains unclear exactly what unused COVID funds will be redirected, and the bill only rescinds $50 billion in actual budget authority from previously passed COVID relief bills, according to an analysis by the Committee for a Responsible Federal Budget (CRFB).
Other proposals to save and redirect federal dollars to pay for the infrastructure bill are also unlikely to materialize. Take the $49 billion lawmakers plan to “save” by further delaying an already-delayed Trump administration regulation altering how prescription drug discounts are applied by health insurers. “Because the Congressional Budget Office projected that the so-called rebate rule would increase federal spending in Medicare and Medicaid by about $177 billion over a decade, due to a rise in Medicare premiums (and therefore, taxpayer-funded subsidies for Medicare premiums), lawmakers get to count a further delay in the rule (beyond the Biden administration’s one-year delay) as ‘savings’ for the federal government,” explains the National Taxpayers Union.”
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“When you filter out the gimmicks designed to game the CBO score of the infrastructure bill, the CRFB says the package will probably add $340 billion to the deficit over 10 years.”
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“But as the CBO’s report makes clear, actually paying for the infrastructure makes those benefits bigger than they otherwise would be. A fully offset infrastructure package would boost GDP by an estimated 0.11 percent over the next 30 years while a deficit-financed package would barely break even. That’s because, as the CRFB notes, running higher deficits to pay for infrastructure spending will reduce private investment over the long term and, thus, lower future economic growth as well.”