Reconciling Deficits

Blog Post
Wednesday, January 13, 2021

On the latest Facing the Future, I was joined by Concord Coalition Executive Director, Bob Bixby, Concord's Policy Director, Tori Gorman, and Director of the Progressive Policy Institute’s Center for Funding America’s Future, Ben Ritz. We discussed a new publication by Ritz on how concerned the public and policymakers should be with federal budget deficits, a process known as reconciliation and how Congress might use it in the coming years, as well as PAYGO standards and COVID relief.

[Note: Portions of this week's Facing the Future can be seen in the video clip posted below.]

Ritz explained that he sees a difference in how policymakers should approach short-term and long-term federal budget deficits in the face of the COVID-19 pandemic and economic fallout.

“In the short term, we have an economy that has been deeply suppressed because of the coronavirus; people have lost their jobs, unable to engage in typical commerce activities, and we need a government response to help the economy recover after the pandemic has ended and help people get through the pandemic,” Ritz said. “Longer term, deficits could pose a much bigger threat and we do need to be concerned with the long term situation.” 

“In the short term, there’s actually a bigger risk of doing too little rather than too much,” he added. “If we were to spend too little in the short term, we could have longer unemployment than needed, higher poverty rates, and slower future economic growth.” 

Ritz and Bixby discussed the relative dangers of doing too much or not enough pandemic relief and how to best target that relief to individuals and industries that need it, as opposed to broad, costly measures that benefit those that have not been financially affected by the pandemic. 

Ritz highlighted the slow growth coming out of the Great Recession and the early emphasis on correcting growing deficits at that time that ended up hamstringing recovery. 

“The recovery was prolonged because we were too tight fisted, and the fears in the short term didn’t materialize,” he said. “We should have some humility this time around to be a little more aggressive in stimulating the economy before we are concerned about long-term threats.” 

But he emphasized that long-term interest rates and inflation are more of an unknown and growing structural budget deficits are a big problem. However, a growing argument against caring about increasing budget deficits and working to reduce them in the long-term is Modern Monetary Theory, which Ritz took issue with.

“If we just take the MMT approach of ‘we’re not going to worry about this until inflation happens,’ and then we hit inflation, what then?” Ritz said. “If in 2030, we have significant inflation and rising interest costs, we’ve racked up more debt, we’ve made more promises on Social Security and Medicare to more people who are now retired, and that puts policymakers in a no-win situation - they will either have to suddenly cut benefits on people who’ve planned their lives around them or they need to do it all on the tax side, which is going to fall exclusively on young workers, while having asked nothing of the people of the generations who went up to that point without making their contributions to make those programs sustainable.” 

“The problem with MMT is that it ignores the structural impediments that would prevent Congress from swiftly moving once inflation takes place,” he added. “Even if Congress could just snap their fingers and implement these policies, it would lead to bad policy outcomes.”

As a result, Ritz advocates the use of a “fiscal switch,” a mechanism for triggering the shift from stimulus policies to deficit reduction.  

 

In the news recently were changes to the pay-as-you-go rule in the U.S. House, which Ritz largely agreed with but expressed a desire to have more narrow interpretations of major, new exceptions to PAYGO. 

“What the House did recently was the right approach,” Ritz said. “They maintained the PAYGO principle, but they added two important exceptions: The first is spending to address the coronavirus pandemic … the other exception for long-term investments to combat climate change is also worthwhile.” 

Ritz added: “But I think the criteria should be, ‘is this an investment that we can credibly, plausibly say will benefit the economy in the long run more than it costs?’ ” 

He further explained that these exceptions should be used in the spirit in which they were designed, as opposed to simply justifying massive new legislation that is merely on topic. 

“Not counting those areas of the budget - public investment and short-term stimulus - I do think we need to be paying for things,” Ritz said.  

The conversation also covered the reconciliation process, often used to sidestep filibuster and reduce the threshold of votes to pass legislation, and how it might be used by the new Congress and the incoming Biden administration. 

Ritz expressed confidence that Democrats will not get rid of the filibuster itself, but they would likely resort to reconciliation on some of their agenda items if Republicans are reluctant to come to the table on timely issues like COVID relief and economic stimulus. 

Gorman said a lot depends on how much Republicans in the Senate are willing to cooperate, committee ratios, committee budgets, and rules that will govern the Senate. 

“It would be my preference to pass legislation via the regular process, and the reason why is because bipartisan legislation is always the most durable,” Gorman said. “When you try and pass legislation via reconciliation, the dirty little secret is that reconciliation in general produces crappy law; the rules and the restrictions that govern the contents of reconciliation really make it hard to create new law - it’s really good at changing and making adjustments to existing law.” 

She also highlighted that reconciliation rules require that policies within a title must not increase the deficit outside of the budget window.  This often forces lawmakers to make these provisions temporary - like the individual tax cuts in the 2017 tax reform law - generating more economic uncertainty and putting pressure on lawmakers to extend the policy changes and increase the deficit even more.  

Bixby said, “Some of the limitations of reconciliation include that legislation must be directly related to spending and revenue; try passing a major health care bill, for example, that doesn’t have provisions that relate to the provision of health care, rather than strict dollars and cents.” 

Gorman agreed and then broke down, in detail, what can and cannot be included in legislation passed through the reconciliation process, which is worth a listen even on its own. 

“It’s absolutely text driven,” she said. 

Gorman added that the reconciliation process has been used on a bipartisan basis and its original design and intent was not to jam through partisan policies when one party or another has a narrow margin of control in Congress, rather it is supposed to expedite changes in existing mandatory spending and revenue laws so as to comply with the contours of a congressional budget resolution. 

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 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.