Favorable Position, Unsustainable Policy

Special Guests: Jim Capretta, Bob Bixby

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On the latest Facing the Future, I was joined by American Enterprise Institute Resident Fellow and Milton Friedman Chair, Jim Capretta, and Concord Coalition Executive Director, Bob Bixby. We discussed current fiscal and economic policy, entitlement programs, health care and even the federal debt limit.


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

Capretta provided a summary of the state of fiscal policy before COVID-19 and what it looks like now.

“It was pretty bad before the crisis hit,” Capretta said. “You had a run up in debt … and then boom, this crisis hits. And, so you’ve taken a deteriorating situation and thrown it into complete turmoil.” He added that the nation is likely still a year or two away before people wake up to the fiscal challenges we face because of the current health crisis.

“The U.S. is in a very favorable position, and has been for a long time, because the dollar is the reserve currency,” he said. “That makes it very easy for the federal government to borrow money, but that doesn’t mean that’s always going to be that way.”

Capretta said that the usual purchasers of our debt could eventually start asking about the risks associated with it and whether they have been evaluated fairly. Other countries would happily displace the dollar as the world’s reserve currency and make it less attractive to put global capital into our debt.

“At that point, it won’t be so easy for the federal government to borrow money; interest rates would rise and we’d have a real crisis on our hands,” Capretta said. “Having to convince the world to buy our debt instruments by paying them a reasonable rate of return.”

“What we ought to be doing is saying to our country and to ourselves, ‘let’s prudentially make adjustments to make sure our preferred position is sustained over a long period of time, and then we can always borrow at low interest rates,’ ” Capretta said. “But you need to attend to that and work at it, and that means you need to cut the deficit over the long term.”

Caprettta said that the aggressive fiscal and monetary actions of the federal reserve and congress in response to the pandemic is not an experiment in Modern Monetary Theory (MMT). To avoid deepening a crisis, it is normal for the government to pump money into the economy to avoid a full-scale collapse.

“There’s broad agreement in both parties that it needs to be done when you’re having a severe contraction, as we’re having right now,” he said. “So, there’s lots of spending going on that is aimed at putting a cushion underneath the freefall of an economy, that’s sort of a traditional Keynesian approach; that’s different from MMT.”

Read Capretta’s RealClear Policy article concerning MMT by clicking here.


The conversation then firmly grabbed hold of the third rail of politics, entitlements. Capretta provided an update on the deteriorating health of Social Security and Medicare prior to the pandemic and some of the long-term trends and challenges.

“The bottom line here is that we have a big demographic change – we’re about 30 percent into it with a long way to go – where the country is going to get a lot older in the sense of the number of people over the age of 65 that are eligible for these programs relative to the working-age population paying more taxes,” he said. “That ratio is going to adjust very substantially in the next two decades.”

“The projections all are that the burden for these programs is going to go up very, very substantially,” Capretta added. “You’re adding six-or-so percentage points in new spending every year basically associated with health care and demographics, and that’s going to put big fiscal pressure back on the budget, more than what’s even occurring right now.”

On controlling health care cost growth, Capretta said that most of the developed world has embraced a strong regulatory approach, setting price limits and capping capital budgets and salaries.

“I’m a proponent of trying to use competition, choice and markets to control costs,” he said. “But I freely admit that requires putting a structure around it so that it can work, so that the choices are clear, that the competition is fair, that it’s on the right terms and not at the expense of the consumer.”

He called that framework a structured market and added that there are failures that need to be corrected with some regulatory control. Capretta pointed to what he thought were promising strategies.

“One would be moving to a system where we are still very heavily subsidizing people into health insurance because everybody should have health insurance, but you do so in a way where there’s an incentive to go into higher-value, lower-cost options,” he said. “Price transparency is another big part of this … done in a way and through a regulatory structure so that people can actually use the information in a meaningful way; you have to force the provider system to disclose prices on what I would call ‘shoppable services.’ ”

Read Capretta’s report on fiscal policy and entitlements by clicking here. And read the health care reform paper written by Joe Antos from AEI and the late Alice Rivlin that was featured in Concord’s Fiscally Responsible Economic Growth Agenda by clicking here.

Bixby provided an explanation of the federal debt limit, how it works, its current status and whether it fulfills its original intent.

“It’s one of my least favorite subjects because I think it is greatly misunderstood and even misused as part of the budget process,” Bixby said. “Congress sets a statutory debt limit and then when the debt limit is reached, you really have no choice but to raise it, so it becomes a little bit of a game.”

He said the limit was created during World War I to actually help facilitate the issuance of debt, not to control the growth of it. The limit has never prevented Congress from running up debt through large deficits. But failing to raise the debt limit when it is reached would result in default, failing to pay already committed obligations.

“It would be ridiculous for the United States to not pay its debts or not pay obligations it owes to taxpayers,” he said. “It would seriously damage the creditworthiness of the United States for no particular reason.


To achieve fiscal responsibility, the debt limit is the wrong metric and mechanism, which has become a political weapon to hold the nation’s creditworthiness hostage, and that is not a good idea, said Bixby.

The debt limit is currently suspended until July 2021, which means it is not in effect and the debt is growing as needed. But next July, it will be set at the new, existing level and then will need to be raised again, or suspended again, given the nation’s projected debt accumulation in the coming years.

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, 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.

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