Opportunity Costs and Heroic Assumptions

Blog Post
Wednesday, February 12, 2020

Concord Coalition Executive Director Robert L. Bixby and Diane Lim, Economist Mom and director of outreach and senior advisor at the Penn Wharton Budget Model, joined the latest Facing the Future to discuss President Trump’s budget proposal, the opportunity costs of an unchecked national debt and why budget deficits still matter. 

Lim said that economists consider opportunity costs because of “the social science that deals with making choices in a world with constraints, and because of those constraints there are always tradeoffs.” And opportunity costs are what occur when resources are devoted to one purpose, as opposed to an alternative. 

The most common constraints economists discuss are budgetary or financial, she added, but the true constraints are much broader than that. 

“It’s not just what we see being generated in terms of income or output in the market economy, but what is possible to be generated out of our entire productive capacity,” Lim said. And she outlined several principles to consider when determining if a policy is going to be helpful or harmful to the economy, including ‘What is the current economic situation in terms of constraints on the economy?’

“It’s very important to get that question right,” she said. “The answer to that question directly influences the best kind of fiscal policy to apply to the economy at the moment.” 

She believes the current constraint in our economy is related to workforce demand and productivity and identifying areas where Americans clearly want more output. Lim said that effective use of tax dollars and resources is important, whether increasing demand or supply. 

“The big problem with deficits and deficit financing in terms of government activity is that it’s negative savings,” Lim said. She gave an example of a deficit-financed tax cut, which reduces government savings dollar for dollar, and what that does to the productive capacity of the economy depends upon what the private sector does with the tax cut, whether it spends or saves. 

Bixby said that is where the opportunity cost comes in. “There is an interest cost to the federal government that becomes a budgetary expense over time that goes up,” he said. “It’s a generational transfer … bringing forward resources from the future into the present to pay for current consumption.” 

Lim said, “it’s a claim on the income that will be generated by future generations.” 

On the president’s budget proposal for Fiscal 2021, Bixby said, “All presidential budgets have optimistic assumptions that reflect the president’s policy priorities, they all assume that the president's policies will have a positive effect on the economy; so that’s why you always have to look at a presidential budget with a little bit of a grain of salt, but this one requires a pound.”

He expressed concern over the fact that the proposed budget appears benign, even projects a reduction in the debt-to-GDP ratio, but the details on how it gets there matter because the current fiscal hole the nation is in matters.

“It really has a lot of budgetary gimmicks in it and really rosey economic scenarios, they’re flaming red,” Bixby added. “Even with rosey economic assumptions and very, very heroic assumptions about spending cuts in certain areas, you don’t get back to a balanced budget.” 

Read Bixby’s official response to the president’s budget proposal, here

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. And follow Facing the Future on Facebook