The debt ceiling debate is a farce, but fiscal policy is a fiasco
The debt ceiling law that is once again threatening a U.S. government default is both totally absurd and utterly typical. Washington’s budget process, unfortunately, aligns brilliantly with the country’s broken politics: Combined, they assure institutionalized dishonesty and fiscal recklessness, plus the occa- sional thrill of possible economic collapse.
Designing a stupider system would be quite a challenge. But critics who confine their complaints to debt ceiling brinkmanship are missing an important point. American fiscal policy is seriously off-track, and the costs of putting it right are getting bigger all the time. A system that does what the debt limit purports to do — force a review of budget imbalances and measures to correct the problem — is indeed necessary, even if it’s counterproductive to wire such a mechanism to an economic doomsday machine.
The country’s longer-term fiscal challenge has rarely, if ever, looked so daunting. The economy is running flat out, with an unemployment rate of just 3.4%. Yet government spending substantially exceeds revenue. The Congressional Budget Office expects the budget deficit to average roughly 6% of gross domestic product over the next 10 years. As a result, it projects that public debt will rise from roughly 100% of GDP now (about equal to what it was immediately after World War II) to 120% in 2033, 150% in the following decade and 200% by mid-century.
Long-term fiscal forecasting is notoriously difficult. Growth prospects are uncertain, policies are bound to change over time (not necessarily in a good way) and future interest rates (crucial for any calculation of fiscal sustainability) can only be guessed at. Nonetheless, estimates based on plausible assumptions, like those undertaken by the CBO, ought to be taken seriously. At the moment, they aren’t.
The downside risk is enormous. If investors get scared, the outlook would deteriorate much more rapidly under the pressure of higher interest rates. The next economic emergency will call for new fiscal stimulus to maintain employment — and delivering such a boost will be impossible if the prospect of exploding debt causes a financial panic.
Lack of attention to fiscal sustainability is baked into current procedures. It isn’t just that projections of rapidly rising debt are accepted almost without comment. Politicians disguise their plans’ fiscal consequences. For instance, standard 10-year projections for outlays and revenue typically include arbitrary reversals of tax cuts and/or spending increases in later years — changes that budget planners neither intend nor expect, which only pretend to restrain the growth of debt.
At root, this relentless shorttermism happens because the people in charge of fiscal policy are politicians, more concerned with scoring points than governing responsibly. For Republicans, cutting taxes gets more points than fiscal control; for Democrats, higher spending is what matters, not lower deficits. The hardening of the parties’ mutual loathing has made things worse.
With luck, some kind of short-term fix will nonetheless emerge from the discussions that President Joe Biden has finally consented to have with Republicans. That’s clearly what investors expect, otherwise financial markets would already be in turmoil. But there’s no reason to think the longer-term problem will be solved, because it isn’t even being addressed.
The bill passed last month by House Republicans won’t stop the debt from growing. It cuts “discretionary spending,” but this category accounts for less than a third of total outlays. Spending on entitlements — Medicare and Social Security — is set to rise rapidly as the population ages, and needs to be curbed as well. Higher taxes should also be part of the answer. Republicans are actually proposing to reduce tax collections by canceling the extra funding recently promised to the Internal Revenue Service.
Dysfunctional politics plus dysfunctional processes make solving the long-term fiscal problem all but impossible. What’s needed is an effort to overcome both, combined with a sincere acknowledgment that fiscal sustainability is indeed essential.
A start would be to create a bipartisan fiscal commission modeled in part on the Simpson-Bowles panel of 2010. Its task would be to propose tax and spending reforms capable of stabilizing the fiscal outlook. Among other things, it would need to say what “stabilizing the fiscal outlook” actually requires — a more complicated question than it first appears.
This new panel should also be told to devise better procedures for budget accounting and review, so that longterm sustainability is brought squarely into policy planning, where it belongs. The independent fiscal councils established in some European countries are well worth studying. They aren’t decision-making bodies, but their role is broader than that of the CBO, which is confined to analyzing budget proposals rather than judging or influencing them.
At the moment, America’s idea of successful fiscal policy consists of avoiding a needless, self-inflicted default and all the ensuing damage. Of course we should all want the various negotiating parties to come to an agreement. I would merely observe that their goal is somewhat lacking in ambition. Is it so absurd to hope that Washington can do better?