Jun 18th 2023

America's Mythical Fiscal Conservatives 

by Jeffrey Frankel

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.


CAMBRIDGE – The long-term sustainability of the United States’ government debt is back in the spotlight. The cause is not the manufactured debt-ceiling crisis, which was resolved at the end of May, just days before the US Treasury ran out of money. Instead, the impetus behind this renewed scrutiny is the rapid rise in interest rates over the past year.

As long as interest rates, both nominal and real, remained at near-zero levels, the federal government could keep borrowing. But the surge in interest payments on the US national debt and the expectation of further increases in 2023 and 2024 has become a powerful constraint on fiscal policy. While the inflationary spike of 2021-22 has improved the US debt-to-GDP ratio, real interest payments on the national debt are set to rise, now that inflation is cooling.

Broadly speaking, prudent fiscal policy rests on two guiding principles. First, it should be countercyclical: policymakers should increase spending (or cut taxes) to stimulate the economy in response to recessions, and they should restrict spending (or raise taxes) in response to booms. The second principle emphasizes long-term sustainability: debt should grow at a slower pace than the economy so that the debt-to-GDP ratio declines.

While US fiscal policy has generally been countercyclical, there is room for improvement. Both George W. Bush’s administration in 2008 and Barack Obama’s administration in 2009 rightly increased spending in response to the Great Recession, but these efforts – curtailed after the Democrats lost their majority in the House of Representatives in the 2010 midterm elections – were not sufficient for the economy to bounce back quickly. It was not until May 2018 that the unemployment rate finally fell below 4%.

Similarly, both Donald Trump’s administration in 2020 and Joe Biden’s administration in 2021 rightly increased government spending to counteract the economic fallout of the COVID-19 pandemic. But this time, policymakers overreacted: while unemployment fell back below 4% by December 2021, excessive fiscal expansion helped fuel the inflationary spike of the past two years. Nevertheless, US fiscal policy at least responded swiftly and effectively to the last two recessions.

When it comes to sustainability, however, US fiscal policy receives a low score. Amid the short-term fluctuations, it is often easy to lose sight of the long-term trajectory. Public debt, as a share of GDP, peaked at the end of World War II and then gradually declined until the Reagan tax cuts of the 1980s, which led to record deficits. Since then, the debt-to-GDP ratio has steadily risen, almost reaching its 1946 record in 2020. Only during the period 1996-2000, under President Bill Clinton, did this trend temporarily reverse.

Long-term projections suggest that the debt ratio will continue to increase as the rapid aging of the US population drives up mandatory spending. According to a recent report by the Congressional Budget Office, Social Security spending will rise from 4.8% of GDP in 2022 to 6% in 2033, and Medicare spending will increase from 2.8% of GDP to 4.1%. The report projects that the debt-to-GDP ratio will break its 1946 record within a decade, climbing from 98% of GDP in 2023 to 118% in 2033. Given that interest costs and mandatory spending are expected to outpace economic growth, federal debt is projected to reach 195% of GDP by 2053. In a recent speech, former Treasury Secretary Lawrence Summers convincingly argued that the US debt trajectory might actually be worse.

One might naively assume that the self-proclaimed ultra-conservatives who vehemently opposed raising the debt ceiling would have viable proposals for eliminating the federal deficit and restoring debt sustainability. After all, this is what fiscal conservatism is ostensibly all about. But the American fiscal conservative has become something of a mythical creature, at least within the Republican Party.

Ultra-conservative Republicans claim that they want to balance the budget by cutting federal spending without slashing Social SecurityMedicare, and certain health-care programs. In February, US Representative Marjorie Taylor Greene interrupted Biden’s State of the Union speech, calling the president a “liar.” What seemed to outrage her was the insinuation that any congressional Republicans support cutting Social Security or Medicare.

What ultra-conservatives do not seem to understand is that entitlement spending amounts to roughly half of all government spending and is steadily increasing. Mandatory spending accounted for 49% of federal spending in 2022, or 63% if farm-price support and other income-support programs are included. Moreover, conservatives advocate increasing military spending. Assuming the government continues to pay the interest on its debt, the combination of interest expenses and defense expenditures accounts for another fifth of government spending and will likely increase. (Benefits for veterans are not classified as entitlements or military spending.)

Ultra-conservatives, of course, also want to maintain low tax rates. Collectively, these provisos imply that Republicans intend to cut the remaining portions of the federal budget. But non-defense discretionary spending accounts for only 16% of total government spending. Needless to say, that is not enough to balance the federal budget.

It is a matter of simple arithmetic: the federal budget deficit is $1.4 trillion, and non-defense discretionary spending is expected to total $0.9 trillion in 2023. Moreover, cutting all non-defense discretionary spending means eliminating air traffic control, law enforcement, immigration control, national parks, and the weather service. But even in a world where we could make those cuts, the numbers simply do not add up.

To restore debt sustainability, US policymakers must take measures to slow the growth of entitlement spending, particularly Social Security. They must also raise some taxes while introducing reforms to make the tax system more efficient and equitable. That will require providing the Internal Revenue Service with the funding it needs to fulfill its mandate.

This approach aligns with the principles of fiscal conservatism that congressional Republicans claim to represent. Unfortunately, what Republicans really represent – implausible spending cuts, poorly targeted tax cuts, and empty threats to push the US into default unless IRS funding is cut – can only make the long-term fiscal outlook worse.


Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research. 

Copyright: Project Syndicate, 2023.
www.project-syndicate.org 

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jul 17th 2024
EXTRACTS: "Iran unveiled a digital clock counting down the days to the destruction of Israel in 2040. The display, located in Tehran’s Palestine Square, embodies the Islamic Republic’s long-held commitment to annihilating the Jewish state. Some view this promise as a mere rhetorical exercise...." ----- "From Adolf Hitler to Vladimir Putin and even Osama bin Laden, history has taught us to take threats of ideologically inspired attacks at face value. " ---- "Against this backdrop, the key enabler of Iran’s war of attrition is, in fact, Israel’s own government. Netanyahu’s unrealistic goal of achieving 'a complete victory' in Gaza serves Iran’s strategy of miring Israel in an inconclusive conflict while orchestrating a long-term plan to destroy the Jewish state." ----- "It turns out that the only truly irrational, trigger-happy fanatics in this lethal equation are Netanyahu and his theo-fascist allies, who are determined to engage in an apocalyptic war in Gaza and Lebanon." ---- "These messianic hallucinators have a willing collaborator in Netanyahu. Together, they are doing more to annihilate the Jewish national project than Iran could ever hope to achieve on its own."
Jul 16th 2024
EXTRACTS: "In her dissenting opinion in Trump v. United States, Supreme Court Justice Sonia Sotomayor declared that with the majority’s ruling, 'the President is now a king above the law'. In this, she is wrong: the majority opinion has given the US president far more power than English kings had at the time of the American Revolution." ---- "In June 1686, 11 of the 12 hand-picked justices ruled in favor of the king. Echoing the king’s own solicitor, Sir Thomas Powys, the Lord Chief Justice George Jeffreys contended that if the king did not have leeway above the law, “the preservation of the government” might be in jeopardy." ---- "In 1689, the English people roundly rejected such reasoning and asserted that their kings would thereafter be subject to the law. They set a precedent by removing James II from office. The Supreme Court’s decision goes beyond threatening more than two centuries of American jurisprudence; it overturns four centuries of Anglo-American jurisprudence. The Roberts majority did not give the president the power of an English king; it gave the president power that an English king could only covet."
Jul 4th 2024
EXTRACT: "Most American voters who believe that Trump is the best defender of democracy are not fascists, much less communists. The very thought would horrify them. But they almost surely have a strong opinion on who constitutes the true American people: God-fearing, hard-working, and most probably white. And they worry that these ordinary Americans are being displaced by illegal immigrants, and that their way of life is being threatened by new ideas about gender, race, and sexuality emerging from elite universities. Trump is stoking these fears and exaggerating these threats. His line that the US courts are attacking not only him, but every right-thinking American is horribly effective. Since he is heard as the true voice of the people, he is the purest democrat. As a result, liberal democracy might not withstand another four years of his rule."
Jul 3rd 2024
EXTRACT: "....the debate showed all too clearly that he is suffering cognitive decline and cannot possibly serve as a competent president for another four years. If Biden is true to his word, and stopping Trump from regaining the presidency is his overriding goal, he needs to announce that at the Democratic Convention in August, he will release his delegates from their obligation to vote for him, and instead ask them to vote for the candidate with the best chance of defeating Trump."
Jul 3rd 2024
EXTRACTS: "Both Chief Justice John Roberts and Justice Sonia Sotomayor of the United States Supreme Court have just announced grand opinions trying to resolve the fundamental constitutional issues raised by former President Donald Trump’s claim to absolute immunity" ---- "According to Sotomayor, who wrote for the three dissenting justices, Roberts’ sweeping grant of immunity has 'no firm grounding in constitutional text, history, or precedent.' ” ----- "For what it’s worth, I think that Sotomayor is right and Roberts is wrong." ----"But for now, it is much more important to consider the objection raised by Justice Amy Coney Barrett to both Roberts’ constitutional glorification of the presidency and Sotomayor’s devastating critique of Roberts’ majority opinion." ---- "Barrett is right to ask why Roberts and Sotomayor did not join her in adopting the problem-solving approach that they have repeatedly endorsed in many other contexts." ---- "Roberts took the path that not only betrayed Founding principles, as Sotomayor argued, but also betrayed the very principles to which he has dedicated his entire career. "
Jul 1st 2024
EXTRACTS: "Netanyahu’s disdainful criticism of Biden. Netanyahu knows how indispensable the US is to Israel, as no country has provided Israel with more financial, military, and political support than the US. And no American president has ever been more supportive and committed to Israel's security than President Biden. But then, leave it to the most loathsome Netanyahu, who dares to criticize the president for suspending the shipment specifically of 2,000-pound bombs to continue with his devastating bombardment of Rafah that could indiscriminately kill thousands of innocent civilians." ---- "All Israelis who care about their country’s future must rise and demand the immediate resignation of this corrupt and brazen creature who inflicted untold damage on the only Jewish state, making it a pariah state."
Jun 12th 2024
EXTRACTS: "One of the more amusing exercises on the economic calendar is the International Monetary Fund’s annual review of the United States. Yet while everyone knows that the US government pays absolutely no heed to what the IMF has to say about its affairs, the Fund’s most recent Article IV review of the US economy is striking for one unexpected finding. Readers will be startled to learn that, in the IMF’s estimation, US government debt is on a sustainable path." ---- "What then could go wrong? Well, US institutions could turn out not to be so strong. Donald Trump has a personal history of defaulting on his debts. As William Silber has observed, Trump in a second presidential term could instruct his Treasury secretary to suspend payments on the debt, and neither Congress nor the courts might be willing to do anything about it. The gambit would be appealing to Trump insofar as a third of US government debt is held by foreigners. The damage to the dollar’s safe-asset status would be severe, even if Congress, the courts, or a subsequent president reversed Trump’s suspension of debt payments. Investors in US Treasuries would demand a hefty risk premium, potentially causing the government’s interest payments to explode."
Jun 9th 2024
EXTRACT: "An all-too-familiar specter is haunting Europe, one that reliably appears every five years. As citizens head to the polls to elect a new European Parliament, observers are once again asking whether far-right anti-European parties will gain ground and unite to destroy the European Union from within. To be sure, skeptics of this doomsday scenario have always argued that the far right will remain divided, because nationalist internationalism is a contradiction in terms. But it is more likely that specific policy disagreements – mainly over the Ukraine war – and drastically diverging political strategies will prevent Europe’s various far-right parties from forming a 'supergroup.' ”
Jun 9th 2024
EXTRACT: "While the dreadful legacy of his Conservative predecessors – the morally vacuous Johnson and the reckless Liz Truss – would make it extremely difficult for Sunak to offer a credible vision of a better future, many of his current problems are self-inflicted. For example, he supported Johnson’s bid for the Conservative leadership, a decision that reflects poorly on his judgment. Sunak has also been a Euroskeptic since he was a schoolboy and was an early supporter of Brexit."
Jun 8th 2024
EXTRACTS: "Why are so many young people attracted to far-right politics? Polls show that 36% of French people aged 18-24 support Marine Le Pen’s National Rally, while roughly 31% in the Netherlands back Geert Wilders’s nationalist, anti-immigration ..... 26% of Americans aged 18-29 prefer former US President Donald Trump over the incumbent Joe Biden." ---- "Center-left parties had become increasingly associated with urban elites who benefited from a globalized economy in which immigrants provided cheap labor and well-educated cosmopolitans could seek financial profit or intellectual stimulation wherever they desired." ---- "Trump does not have to convince many young people to vote for him. If enough of them refuse to vote for Biden, either because he is too old, too conservative, or too pro-Israel, Trump could win November’s presidential election. If elected, he will continue to shatter the norms and wreck the institutions that allow democracy to function."
Apr 13th 2024
EXTRACT: "That said, even if Europe were to improve its deterrence capabilities, it would be unwise to assume that leaders necessarily make rational decisions. In her 1984 book The March of Folly, historian Barbara Tuchman observes that political leaders frequently act against their own interests. America’s disastrous wars in the Middle East, the Soviet Union’s ill-fated campaign in Afghanistan, and the ongoing war of blind hatred between Israel and Hamas in Gaza, with its potential to escalate into a larger regional conflict, are prime examples of such missteps. As Tuchman notes, the march of folly is never-ending. That is precisely why Europe must prepare itself for an era of heightened vigilance."
Apr 13th 2024
EXTRACTS: " Nathan Cofnas is a research fellow in the Faculty of Philosophy at the University of Cambridge. His research is supported by a grant from the Leverhulme Trust. He is also a college research associate at Emmanuel College. Working at the intersection of science and philosophy, he has published several papers in leading peer-reviewed journals. He also writes popular articles and posts on Substack. In January, Cofnas published a post called “Why We Need to Talk about the Right’s Stupidity Problem.” No one at Cambridge seems to have been bothered by his argument that people on the political right have, on average, lower intelligence than those on the left." ---- "The academic world will be watching what happens. Were the University of Cambridge to dismiss Cofnas, it would sound a warning to students and academics everywhere: when it comes to controversial topics, even the world’s most renowned universities can no longer be relied upon to stand by their commitment to defend freedom of thought and discussion."
Apr 13th 2024
EXTRACTS: "Word has been sent down from on high that there is room for only “good stories of China.” Anyone who raises questions about problems, or even challenges, faces exclusion from the public sessions. That was certainly true for me." ----- " But my admiration for the Chinese people and the extraordinary transformation of China’s economy over the past 45 years persists. I still disagree with the consensus view in the West that the Chinese miracle was always doomed to fail. Moreover, I remain highly critical of America’s virulent Sinophobia, while maintaining the view that China faces serious structural growth challenges. And I continue to believe that US-China codependency offers a recipe for mutually beneficial conflict resolution. My agenda remains analytically driven, not politically motivated."
Apr 11th 2024
EXTRACTS: "The insurrection began just after 8 p.m. on November 8, 1923, when Hitler and his followers burst into a political rally and held the crowd hostage. ---- The Nazi attempt to seize power ended the following morning, ---- After two and a half days in hiding, Germany’s most wanted man was discovered ----- Hitler was charged with treason, and his trial began on February 26, 1924. ---- .....the judge, having found Hitler guilty, imposed the minimum sentence....That miscarriage of justice was facilitated by the trial’s location in the anti-democratic south, and by the role of the presiding judge, Georg Neithardt, a conservative who was happy to allow Hitler to use his court as a platform to attack the Republic. ----- Like Hitler in 1924, Trump is using the courtroom as a stage on which to present himself as the victim, arguing that a crooked 'deep state' is out to get him."
Apr 9th 2024
EXTRACTS: "If Kennedy’s emphasis on healing suggests someone who has been through “recovery,” that is because he has. Following the trauma of losing both his father and his uncle to assassins’ bullets, Kennedy battled, and ultimately overcame, an addiction to heroin. Like Kennedy, Shanahan also appears to be channeling personal affliction. She describes grappling with infertility, as well as the difficulties associated with raising her five-year-old daughter, Echo, who suffers from autism," ----- "Armed with paranoid conspiracy theories about America’s descent into chronic sickness, loneliness, and depression, Kennedy has heedlessly spread lies about the putative dangers of life-saving vaccines while mouthing platitudes about resilience and healing. To all appearances, he remains caught in a twisted fantasy that he just might be the one who will realize his father’s idealistic dreams of a better America."
Mar 18th 2024
EXTRACT: "....the UK’s current economic woes – falling exports, slowing growth, low productivity, high taxes, and strained public finances – underscore the urgency of confronting Brexit’s catastrophic consequences."
Mar 18th 2024
EXTRACTS: Most significant of all, Russia’s Black Sea fleet has suffered significant losses over the past two years. As a result of these Ukrainian successes, the Kremlin decided to relocate the Black Sea fleet from Sevastopol to Novorossiysk on the Russian mainland. Compare that with the situation prior to the annexation of Crimea in 2014 when Russia had a secure lease on the naval base of Sevastopol until 2042." --- "Ukrainian efforts have clearly demonstrated, however, that the Kremlin’s, and Putin’s personal, commitment may not be enough to secure Russia’s hold forever. Kyiv’s western partners would do well to remember that among the spreading gloom over the trajectory of the war."
Mar 8th 2024
EXTRACT: "As the saying goes, 'It’s the economy, stupid.' Trump’s proposed economic-policy agenda is now the greatest threat to economies and markets around the world."
Mar 8th 2024
EXTRACT: "Russia, of course, brought all these problems on itself. It most certainly is not winning the war, either militarily or on the economic front. Ukraine is recovering from the initial shock, and if robust foreign assistance continues, it will have an upper hand in the war of attrition."
Mar 8th 2024
EXTRACT: "...... with good timing and good luck, enabled Trump to defeat [in 2016] political icon Hillary Clinton in a race that appeared tailor-made for her. But contrary to what Trump might claim, his victory was extremely narrow. In fact, he lost the popular vote by 2.8 million votes – a larger margin than any other US president in history. Since then, Trump has proved toxic at the ballot box. " -----"The old wisdom that 'demographics is destiny' – coined by the French philosopher Auguste Comte – may well be more relevant to the outcome than it has been to any previous presidential election. "----- "Between the 2016 and 2024 elections, some 20 million older voters will have died, and about 32 million younger Americans will have reached voting age. Many young voters disdain both parties, and Republicans are actively recruiting (mostly white men) on college campuses. But the issues that are dearest to Gen Z’s heart – such as reproductive rights, democracy, and the environment – will keep most of them voting Democratic."