By Paul Roberts / For The Herald
The next few weeks are critical in determining the future direction of the United States’ debt and deficit, as well as related national and international economic and security issues. The so-called X date — the day when the federal government can no longer meet its obligations without raising the debt limit — may come as early as June 1.
In a March 9 podcast, Moody’s Analytics Chief Economist Mark Zandi points out that we have raised the debt ceiling more than 100 times since WW II. Failing to do so could result in a U.S default, chaos in the marketplace, a credit freeze and added cost of borrowing. Zandi said: “Until the X date, it’s about the politics.”
It is helpful to draw a clear bright line between the debt ceiling and the budget deficit. Congress needs to raise the debt ceiling without further delay as the Constitution requires. Failing to do so is expensive, irresponsible and dangerous.
The FY-24 budget process is the appropriate policy forum for debate and action on the budget and deficits. As noted, the issues driving inflation and the budget (defense, entitlements, covid, and climate change) are complex and many are tied to global events. The following is a list of the more significant issues Congress will have to wrestle with as it crafts a budget:
Defense spending: The president’s FY-24 budget request is $842 billion, $26 billion more than FY-23. The war in Ukraine — munitions and war supplies — and the Pacific Deterrence Initiative are top-of-line issues.
Entitlements, Social Security and Medicare: These programs account for roughly half of the overall budget, and are rapidly growing. While both political parties have stated they will not cut entitlements in the budget, they have also recognized a need to make revisions. The Congressional Budget Office projects significant growth in entitlements, and most economists believe such growth is unsustainable. Aging populations and increases in health care costs are major factors pushing increases in entitlements. The U.S. is not unique in dealing with entitlement costs associated with aging populations as demonstrated by unrest in France over increasing the retirement age. These are third-rail political issues. If entitlements are the rock, the laws of math are the hard place. Sooner or later more revenue, cuts in costs, or both will be required. From an economic perspective sooner is better.
Covid: The pandemic is not as significant an issue for FY-24 as in prior years. While covid is largely under control, it is not over. Ongoing impacts associated with health care, labor, real estate and preparedness continue. We were not prepared for covid, and we are not prepared for the next pandemic.
Climate change: This has emerged as a significant budget issue. Climate-influenced events (floods, droughts, wildfires, heat events, and sea level raise) are increasing in frequency, intensity and cost. According to NOAA, there have been 341 weather and climate events that have cost $1 billion or more since 1980. The total cost is $2.475 trillion. In 2022, climate-fueled disasters cost $165 billion with 18 separate billion-dollar disaster events. Climate events will continue to increase until there is a sustained reduction in greenhouse gas emissions and transition to a clean energy economy. Clean energy transition is the focus of the Inflation Reduction Act passed by Congress in 2022; the most significant action in U.S. history addressing climate change.
Budget and tax policy: Both spending and tax cuts contribute to the deficit and both must be on the table in any serious effort to address the budget and reduce the deficit. Recently passed House rules tip the scales in favor of tax cuts and make spending more difficult. Not all spending has the same impact on the deficit or debt. For example, spending on infrastructure generally has a significant multiplier effect and return on investment. On the other hand, tax cuts have limited benefits beyond the recipients, and add significantly to the deficit and debt.
There have been previous efforts to address budgets, deficits and fiscal policy. In 2010 the National Commission on Fiscal Responsibility issued its report setting out recommendations. If Congress is to deal with deficit challenges, it will require a sober and transparent approach.
From an economic policy perspective, three keys actions are necessary:
First, raise the debt limit sending a strong positive message to the marketplace.
Second, engage in meaningful discussions regarding entitlements, respecting the laws of math, and moving beyond political rhetoric.
Third, craft meaningful policy solutions for defense, entitlements, economic recovery and climate change. Spending and taxes must be on the table. In this context, continuing or extending tax cuts benefiting wealthy individuals will not help address serious budget, deficit and debt issues.
Paul Roberts is retired and lives in Everett. His career spans over five decades in infrastructure, economics and environmental policy.
This is the last of three articles intended to unpack complex economic issues, expose myths and provide context for the news and social media reporting on the economy, debt and deficits. It will hopefully provide a reliable signal in the cacophony surrounding these issues. Sources for this work are respected publications and economists including: The Economist (a weekly publication), Moody’s (a financial rating organization), Bloomberg and Forbes (respected media organizations reporting on business and economics), Trading Economics (an economic data reporting firm) and the U.S. Department of the Treasury.
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