Members of the ultraconservative House Freedom Caucus are unhappy that the debt ceiling deal wouldn’t significantly reduce federal budget deficits in coming years. One referred to the deal as a sandwich made of excrement, another called it “insanity,” and a third tweeted a barfing emoji. Classy stuff.
Realistically, though, there are two problems with the right wing’s position on deficits. One is that the rapid reduction in deficits those legislators call for would not be healthy for the economy, especially right now. The other is that while deficit reduction is important in the long term, right-wing Republicans are looking for balance in the wrong places.
On the first point, it’s lucky for the U.S. economy that the deal reached by President Biden, House Speaker Kevin McCarthy and their lieutenants is less aggressive than the House-passed Limit, Save, Grow Act of 2023, which the Congressional Budget Office estimated would reduce federal deficits by $4.8 trillion over 10 years.
Too much fiscal austerity too fast can harm the economy because the federal government takes money out of Americans’ pockets when it spends less (or taxes more). While the economy is running hot now, with unemployment in April matching the lowest since 1969, there are abundant signs that a recession is near. The Conference Board’s index of leading economic indicators declined in April for the 13th consecutive month, “signaling a worsening economic outlook,” the board, a business-supported research group, announced.
Even the cuts in the debt ceiling deal would be a mild retardant for economic growth. As reported by The Times, the deal would hold nondefense spending in 2024 at roughly its 2023 level and would increase it by 1 percent in 2025. An initial estimate by The Times predicts that the limits would reduce federal spending by about $650 billion over 10 years, assuming that spending grows at the anticipated rate of inflation after the caps lift in two years.
Economically speaking, reducing federal budget deficits is important but not urgent. By the International Monetary Fund’s calculations, Japan’s central government debt totaled 221 percent of its G.D.P. in 2021, compared with 115 percent for the United States, and Japan seems to be doing OK. (Those numbers are somewhat exaggerated because they include debt held by other parts of the government, not just debt held by the public.)
Eventually, though, something will have to be done. In February the nonpartisan Congressional Budget Office projected that by current law, U.S. debt held by the public (a narrower measure than the I.M.F.’s) will reach 195 percent of G.D.P. in 2053, double the level of 98 percent in 2023. At that point, an uncomfortably large portion of federal spending has to be devoted to paying interest on the debt. There’s no risk of default, because the government can always print more dollars to cover its debts, but too much money printing would make it hard to keep inflation under control.
That brings up the second thing that’s wrong with the right wing’s condemnation of the debt ceiling deal. Freedom Caucus members, along with other Republicans and a fair number of Democrats, have unwisely ruled out tax increases as a key component of fixing the government’s finances.
The drama around the debt ceiling deal, which is far from over, is intense because negotiators are trying to achieve something that is impossible. They are looking for all of their deficit reduction on the spending side, rather than a more reasonable mixture of spending cuts and tax increases.
Cutting Social Security and Medicare is tough because they are justly popular programs. They are lifelines for a large share of the public. They are growing because society is aging, not because older Americans are getting sweetheart treatment. Cutting defense is tough because the world is a perilous place (although I do think there’s some fat to be pared). And cutting discretionary spending other than defense is tough because it accounts for only about 15 percent of outlays and does many valuable things, from funding scientific research to helping the poor to guaranteeing food safety. It would take devastating reductions in key functions of government to make a significant difference in the outlook for deficits and debts.
That leaves higher taxes as the underexplored option. According to the Congressional Budget Office, by current law, total outlays by the federal government are projected to rise to 30.2 percent of G.D.P. by 2053 from 23.7 percent in 2023. That big increase in outlays is not matched by a corresponding increase in revenue, which the C.B.O. projects will edge up to 19.1 percent in 2053 from 18.3 percent in 2023.
To keep debt from soaring, one of two things needs to happen. Either outlays need to increase more slowly as a share of G.D.P. or revenues need to increase more rapidly. I think the revenue option is going to come to the fore eventually.
Outlook: Stefan Schneider
Germany’s economy is likely to shrink about 0.3 percent this year from 2022, a team of Deutsche Bank economists led by Stefan Schneider, the chief economist, wrote on Friday. Next year doesn’t look great, either, the team said. “With the expected U.S. recession weighing on German economic momentum toward year end and in early 2024, we have cut our annual forecast for G.D.P. growth in 2024 to 0.5 percent from 1 percent.”
Quote of the Day
“But one can’t understand my ideas about Wikipedia without understanding Hayek.”
— Jimmy Wales, a founder of Wikipedia, blog post, July 17, 2005
Peter Coy has covered business for more than 40 years. Follow him on Twitter. @petercoy
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