25 Fiscal Lessons
Learned over the course of 25 years, paving the way toward a better economic future.Read the Lessons
Many politicians who want to simultaneously receive credit for promoting fiscal responsibility while avoiding the tough decisions required often look for easy solutions. The two most common of these are pledges to cut “waste, fraud and abuse” and to “grow our way out of the problem.” These supposedly easy options, however, are not enough to address our nation’s long-term fiscal challenges.
There is no line-item in the budget labeled “waste, fraud and abuse.” Even if such a category did exist, there would be strong disagreements about what it should include. Spending that some call waste may seem to others like valuable government services. And while improving efficiency and combating fraud would be helpful and could save money, it would not be a sufficient strategy for fixing the nation’s long-term fiscal challenges.
The Government Accountability Office (GAO) regularly identifies opportunities for consolidating duplicative programs and improving inefficient ones, but the savings total in the tens of billions of dollars -- a relatively small sum compared to the more than $9 trillion in deficits projected over the next decade. By the end of that period, virtually all non-defense discretionary spending -- not just the identifiable waste, fraud, and abuse -- would need to be eliminated entirely to close the government’s annual shortfalls.
In addition, even substantial savings from cutting waste, fraud and abuse would mostly provide one-time gains that would not alter the basic structural nature of our projected deficits.
Social Security provides a prime example of the challenges such a strategy faces when it comes to reducing mandatory spending programs. An analysis by the Social Security Administration estimated a total of improper payments in Fiscal 2015 of approximately $5 billion, a portion of them underpayments. Total improper payments represented just over half of 1 percent of the entire program. Even eliminating all of them would not come close to closing the program’s total funding gap.
As for “growing our way” out of the debt problem, some politicians claim that their policies would unleash economic growth of 4, 5 or even 6 percent per year. Such growth would allow the federal government to run substantially higher deficits without increasing the nation’s debt-to-GDP ratio. There is, however, no evidence to suggest that such growth could be sustained, and only slight evidence it would be possible even for a very short time.
Only once in the past three decades has GDP grown at 5 percent. The 30-year average GDP growth rate has been a far more modest 2.6 percent per year. And the challenge will be even more difficult going forward due to demographic changes. Since 1950 the growth in potential GDP (the maximum possible production of the economy if all resources were fully utilized) has been due in roughly equal parts to a growing labor force and rising productivity.
Over the next decade, the Congressional Budget Office projects productivity growth at slightly below what the average has been since 1950. The outlook for labor force growth, however, is far worse: just one-third of the recent historical average. This means it will be challenging to just maintain the growth rates of the past few decades, let alone to achieve levels unprecedented in recent history.
There are simply no easy solutions for our long-term fiscal challenges. Federal policymakers will instead need to confront difficult trade-offs on taxes and popular spending programs such as Social Security and Medicare.