High Inflation Points to a Recession in 2023 - How Bad Will it Be?

Blog Post
Thursday, October 20, 2022

This week on Facing the Future, we turn to our in-house panel, including Concord Coalition policy director Tori Gorman and chief economist Steve Robinson, to assess the state of the federal deficit according to the Congressional Budget Office (CBO). Plus we take a look at the latest economic numbers and how stubbornly high inflation might impact the federal budget. Later in the program, we hear from Nick Troiano, the executive director of Unite America, who is pursuing a state by state legislative strategy to open up party primaries so all eligible voters can participate. Troiano - a former Concord Coalition intern - believes changing the primary mechanics will result in more pragmatic and less politically polarized representation in Congress.

The CBO recently released its preliminary assessment for the fiscal year just ended on September 30th, showing that the FY 2022 federal budget deficit declined significantly from the previous fiscal year, to $1.4 trillion – half the figure from the previous fiscal year of $2.8 trillion.  While that might seem like good news, Tori Gorman - who wrote a recent blog on the subject - says when viewed in context, the deficit is still way too high and the picture is not so great.

 

“The federal government spent about 8% less than last year, but it’s not because any kind of fiscal restraint suddenly morphed over Congress and they decided to be more fiscally responsible. It’s not like they took proactive steps to reduce spending. What they did is they just didn’t renew emergency COVID relief. So literally Congress did nothing and the deficit fell,” said Gorman. “On the revenue side, the economy recovered from the pandemic a lot faster than anyone expected. So tax revenues were up big—21% over last year. Part of that was economic growth, but part of that was deferred taxes. Some of the COVID emergency relief legislation from 2020 and ‘21 allowed businesses and some individuals to defer their tax liability so they could pay it later…those due dates were in 2022.”  

 

There were two other major interrelated pieces of economic news last week that also have major impacts on the federal budget.  The federal Bureau of Labor Statistics released inflation figures for the month of September showing that  inflation increased by 0.4% in September and is up 8.2% overall for the last year. This means the Federal Reserve will likely continue to aggressively raise interest rates in order to combat inflation, which risks causing a recession.

 

“[September] inflation was a lot higher than people were expecting,” said Gorman. “The real shocker though, was the increase in core inflation. Core inflation excludes the highly volatile food and energy components of the CPI (consumer price index). That was up 6.6% year over year, which is the highest increase in the last 40 years. That was a big, big shocker. The takeaway from that is that the Federal Reserve isn’t even close to being done in terms of rate hikes to ease inflation. They’ve got a lot of ground still to cover. The top-line inflation number has moderated a bit in the face of action by the Fed, but the core inflation number is not following that trajectory.”  

 

A related report from the Bureau of Labor Statistics shows that real wages, adjusted for inflation, have actually declined because despite a nominal wage increase, they are not keeping pace with inflation.  

 

Higher prices also prompted a major move by the Social Security Administration, which  recently announced that the cost of living adjustment (COLA) for retired and disabled beneficiaries of the program will be 8.7% to keep pace with the rate of inflation. Steve Robinson says this means automatic increases in Social Security checks for recipients starting in January, and this will add to federal budget deficits for years to come.

 

“This is welcome relief for the seniors and the disabled who are getting those checks, but it obviously has an impact on the budget,” said Robinson. “The CBO had estimated about a 6% COLA, but now it’s up to 8.7% - that difference works out to be about an extra $33 billion in costs to the federal budget next year.  And of course, that cost will continue because that COLA will go into the base of people’s benefits. And then next year, the COLA will be paid on top of that $33 billion, so it actually compounds. So big COLAs mean the beneficiaries get more, but it also means the cost to the government and budget and the national debt are higher. The Social Security trustees had estimated a COLA of 3.8% in their annual report that they released this summer, so the real number is obviously much higher and may also push the date of insolvency for the trust fund up by about a year.”

 

If Steve is right (as he usually is), that means the Social Security trust funds will become insolvent in 2034, not 2035 as previously reported. This will require some important bipartisan compromise legislation to fix, the kind of thing that is in real short supply in Congress these days. Our guest for the third segment of the program, Nick Troiano, says no one should be surprised. Troiano is executive director of Unite America, which is seeking to change the representation in Congress by getting rid of party primaries in America, one state at a time. 

 

“My sense is that the country is going broke because our political system is broken,” said Troiano. “If we want to address the debt, or you name your other issue - immigration, health care, climate -  we have to have a functional, representative government. The big reason why we don’t today is what we refer to as the primary problem. This election cycle, 85% of Congressional seats are now safe for one party or the other. The only competition - if there is any - is in the primary of the majority party in those districts, and there are very few voters who participate. Only about 19% of voters turned out this year. So you have a very small number of voters, usually on the wings of both parties, that are determining the vast majority of our elections. That means the only incentive our leaders have is to pander to those wings. That’s why they won’t compromise with each other.”  

 

The good news, Troiano says, is that more and more states are moving away from party primaries to nonpartisan primaries - Alaska is a recent example - where all office seekers run on the same ballot, all voters can participate, and candidates need to build support from a broad coalition in order to advance to the general election. 

 

Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join my guests and me 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 Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.