The editors of Bloomberg prescribe a does of fiscal responsibility for the federal government:
President Joe Biden and Congress should take a break from their ritualized wrangling over the debt ceiling and look closely at last week’s projections from the Congressional Budget Office. These show that an already bad fiscal outlook is rapidly getting worse. The new forecast makes the standard assumption that the policies in place won’t change — thus proving beyond a doubt that they’ll have to.
Last May the CBO projected a budget deficit of just under $1 trillion for 2023. It now expects a deficit of $1.4 trillion, or 5.3% of gross domestic product. Deficits continue to trend higher, not just in dollar terms but as a proportion of national income. The cumulative deficit over the next 10 years is estimated at $19 trillion, $3 trillion more than before. The ratio of public debt to GDP rises to 98% this year, and to 118% by 2033. After that, the debt burden just carries on growing, year in year out.
There’s a word for all this: unsustainable.
They’re dreaming. Neither Democrats nor Republicans feel any need to exercise any fiscal responsibility and, indeed, doing so would discourage the very bases they’re trying to attract.
Democrats have tied themselves to an agenda of boundless public spending while promising to shield the vast majority of households from higher taxes. Republicans want spending cuts — but not to reduce deficits. Their goal is to shrink the government, and they’re perfectly happy with ever-increasing deficits and public debt so long as tax cuts are part of the mix. Meanwhile, they think, threatening to destroy the US government’s standing with creditors is permissible.
They do make one significant observation—that higher inflation is increasing the costs of many federal programs fast than it’s increasing revenues. Meanwhile, I suspect the overwhelming likelihood is that the debt overhang will reduce GDP growth while our elected leaders hope that inflation reduces the significance of that debt overhang. That strategy hurts the very people they purport to care about most.
“That strategy hurts the very people they purport to care about most.”
My point for more years than I can count.
This would be opposed to the GOP plan which also creates debt overhang AND cuts programs that might help “those people”. At least the GOP doesn’t (credibly) claim to care about those people.
Steve
“Meanwhile, I suspect the overwhelming likelihood is that the debt overhang will reduce GDP growth while our elected leaders hope that inflation reduces the significance of that debt overhang.”
Inflating away the debt has always been on the table.
I don’t see anything changing. Neither party wants to take the political hit on this, and both parties are too tribal for the usual strategy of them holding hands and jumping together to avoid the political hit.
Inflating the debt away would require the Fed to do the opposite of its mandate. How likely is that?
Basically, I think we are fucked and just have to hope that our venal political class will do the right thing when there is no more opportunity to kick the can – which is probably a forlorn hope.
The efficacy of the strategy assumes growth but today is different from 30 years ago. Now the debt overhang impedes growth. Is the worst case scenario inflation + low growth?