On the latest Facing the Future, I was joined by Concord Coalition Executive Director, Bob Bixby, Director of the Progressive Policy Institute’s Center for Funding America’s Future, Ben Ritz, and Brian Riedl, a senior fellow at the Manhattan Institute. We discussed Ritz’ article in Forbes, titled “How Deficits Could Cripple The Biden Agenda – And How He Can Overcome Them,” and Riedl’s article in the National Review, titled “Spending, Tax, and Deficit Myths Exposed.”
[Note: Portions of this week's Facing the Future can be seen in the video clip posted below.]
In a one-on-one conversation, Ritz said, “In the short term, from a substantive policy perspective, I don’t think the deficit should be Biden’s top concern when he comes in; I think he’s going to have to prioritize COVID relief and stimulating the economy.”
Ritz did, however, say that he sees two reasons for why President-Elect Biden will need to care about deficits later in his first term: 1) the potential for post-recovery interest rate increases and inflation; and 2) fiscal challenges within important programs like Medicare and Social Security, some of which have been expedited by the economic fallout of the pandemic.
He added that incoming-President Biden could help encourage addressing short and long-term fiscal needs through a mechanism called a “fiscal switch.”
“The fiscal switch is a concept that says the right fiscal policy is not the same at all times,” Ritz said. “It’s a roadmap for getting from one point to the other.”
He described it as having phases, from identifying the type and length of relief to phasing out relief and stimulus as it is no longer needed and then moving to deficit reduction when the economy is at a point of strength.
“We view this as a framework that will make it easier for Republicans to go along with stimulus knowing that it’s not a permanent deficit spigot and Democrats will be more comfortable with future deficit reduction knowing that it won’t prematurely cut off stimulus,” Ritz said.
During our individual session with Riedl, we discussed some of the fiscal policy myths he broke down in a recent article.
One myth is the belief that decreases in federal budget deficits under certain presidents and political leaders were the result of proactive or courageous deficit reduction measures.
“The danger is when people simply look at the trend of the deficit without looking at what caused the deficit to get bigger or smaller, and they prematurely give blame or credit to politicians for things they don’t really have much responsibility for,” Riedl said.
He broke down deficit reduction under President Clinton and House Speaker Gingrich in the 1990s. “From the peak deficit to the peak surplus, 80 percent of the deficit reduction was stuff that politicians really had nothing to do with: defense savings from the end of the Cold War and the revenue bubble from the economic bubble of the late 1990s,” Riedl added.
“Under President Obama, it is true, the deficit fell,” he said. “When he was elected, the deficit had already spiked from $160 billion to $1.2 trillion because of the recession.”
But Riedl explained that the Congressional Budget Office said, at the time, that if Congress did nothing, the deficit would dramatically shrink after The Great Recession as a result of the economic recovery. Instead, comparing what was expected to happen versus what post-recession policy actually produced, Riedl said that although the deficit fell, it fell more slowly than it would have naturally.
Riedl emphasized that the discussion on whether those were good or bad policies is a different conversation. He was just doing the math.
During the joint session with Ritz and Riedl, both provided feedback on each other’s analysis, but we also discussed the issue of whether long-term and growing budget deficits still matter and whether policymakers should be taking them into consideration after the pandemic.
Ritz said, “policy post-pandemic, I think the deficit does matter mainly because it’s about hedging risk.”
Some look at our debt burden and conclude that as long as interest rates remain low, it is an affordable cost.
“Even if that were true … it’s taking a really big gamble, sort of on the order of magnitude of what we did with climate change in the 90s,” Ritz said. “If you accrue this giant debt burden, and you’re wrong about interest rates, then you have a really big problem in the future and it becomes extremely difficult to keep your obligations and it creates an impossible situation for policymakers.”
Riedl said, “right now, CBO assumes that the debt is going to rise to 195 percent of GDP in 30 years, and that’s with low interest rates.”
He added that if interest rates exceed CBO projections by one percentage point, you add $30 trillion in interest costs over thirty years, increase the 30-year debt-to-GDP ratio to 264 percent, and widen the 30-year budget deficit to 17 percent of GDP. For context, Riedl said the U.S. typically generates tax revenue each year at about 17 percent of GDP.
Riedl said that the cost of being wrong on the belief that interest rates will never exceed their historical averages again could be calamitous.
“The question is, ‘are we feeling lucky?’ ” he added. “Do we want to gamble our entire economic future on the hope that interest rates never rise to 4, 5, 6 percent ever again?”
And, if interest rates do in fact remain incredibly low for the next 30 years, it means that we have had a pretty weak economy. It means that productivity has remained low, that economic growth has remained low, and that is not likely a situation that we want, Riedl said.
Hear more on Facing the Future. I host the program each week on WKXL, NHTalkRadio.com (N.H.), and it is also available via podcast. Join me and my guests as we discuss issues relating to national fiscal policy with budget experts, industry leaders and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Play Music or with an RSS feed. Follow Facing the Future on Facebook and watch videos from past episodes on The Concord Coalition YouTube channel.