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After 538,000 in job gains the prior two months, a pause was almost inevitable. Even so, the three-month average for job gains remains over twice the labor force’s growth rate. In contrast, even with the drop in the unemployment rate from 4%, the rate remains essentially unchanged over the past year. The really good news in the data is the hint wage gains are accelerating. With inflation anchored at or below 2%, the reported wage growth suggests a welcome pickup in workers’ real purchasing power.
A couple months ago Brian Riedl of the Manhattan Institute released “A Comprehensive Federal Budget Plan to Avert a Debt Crisis.” Riedl’s carefully presented and documented plan reflected less his own preferences than what he deemed minimally necessary and politically feasible. As is typical with such reports, Riedl’s was largely ignored. The Congressional Budget Office’s (CBO) recent “Budget and Economic Outlook” report suggests that it’s time for policymakers to dust off the Riedl report and sneak a peek.
The CBO report varied little from past efforts, portraying the nation’s finances in the direst terms. Last year’s budget deficit of $779 billion was enormous by any standard.
Naturally, the CBO report can be criticized in many respects regarding assumptions about spending and revenue and the economy’s projected performance. Tweaking the analysis however one might, the bottom line remains the federal government is running large, growing, substantially unsustainable budget deficits.
The long-ago Washington economist Herb Stein observed, “That which cannot go on forever, won’t.” Such budget deficits as the CBO predicts cannot go on forever. At some point, financial markets will become so satiated with federal debt and so concerned about the prospect of trillions more they will react most unpleasantly, beginning with a rapid escalation of interest rates not currently in the CBO forecast.
This fiscal reality naturally leads to the question Riedl attempted to answer: What would it take to clean up this mess? One easy answer is for the economy to rocket forward far faster than any credible forecaster would venture. Another easy answer would be to assume world peace settling on the planet for a few generations, thereby permitting a massive contraction in national security spending.
Setting fantasies aside, what would it take to right the federal fiscal ship?
The answer begins with defining the objective. The bare minimum would be for federal fiscal policy to be “sustainable,” where sustainability means the ratio of publicly held debt to gross domestic product (GDP) is held constant from some point onwards.
Other, more aggressive goals may be preferred, such as reducing the debt-to-GDP ratio over time or even balancing the budget. While laudable, the minimum will be difficult enough and often the most one can expect, so sustainability is the target for this discussion. Near-term sustainability would mean holding the debt-to-GDP ratio constant at the projected 2020 level of about 80%.
What fiscal consolidation is necessary to meet this target? About $300 billion in deficit reduction. Not over 10 years, but in 2020, and growing thereafter for a 10-year total of about $3.8 trillion.
For those who immediately respond that such a goal is unreachable, remember Herb Stein and remember this is the bare minimum to achieve sustainability. At some point, Congress will be forced to hit such a deficit reduction target. Delay beyond 2020 only means the work gets harder quickly.
Even a casual perusal of the federal budget makes clear such a fiscal consolidation cannot be achieved solely though cuts to discretionary spending.
The same can be said of the various populist nostrums now parading as tax policy, such as a wealth tax or raising the top income tax rate to levels not seen in decades. The amounts involved are little more than rounding error toward the goal, and the damage to the economy shrinks the net revenue gains to irrelevancy.
As a budget analyst – and with some straining – one can conceive of such consolidation occurring entirely in substantially slowing the growth in mandatory spending. But in reality, it is as fantastic as a pandemic of world peace.
Thus, a combination of very substantial tax hikes and mandatory spending restraint seem inevitable, the trick being for the tax hikes to leave economic prospects as undiminished as possible, as otherwise they become self-defeating from a budgetary perspective. Likewise, many of these mandatory programs are essential elements of the social safety net. Due regard will be needed to ensure the poor are protected, but this means even more restraint for everyone else.
Mechanically and politically, establishing a sustainable federal budget isn’t going to be easy. But it is broadly inevitable, with only the timing and degree of pain in question. Where did I leave that Riedl report, again?