On Tuesday, Democrats won control of the U.S. House of Representatives and state legislatures across the country thanks torecord-breaking turnout among young voters. Now it is time for newly elected Democrats to stand up for the interests of their constituents by supporting an economic agenda that funds America’s future.
The reckless policies of the current administration, and many of its predecessors, have slashed critical public investments that most benefit young Americans while simultaneously burying them and future generations under a mountain of debt. In a recent report, the Progressive Policy Institute documents these trends and explores how these reckless policies could drain America’s economic strength and seriously harm young Americans for decades if no action is taken to change course.
Director of PPI’s Center for Funding America’s Future, Ben Ritz, participated in two radio interviews this week to discuss his new report, Defunding America’s Future: The Squeeze on Public Investment in the United States. The report explains how short-sighted fiscal policy is undermining critical investments in education, infrastructure and scientific research that are integral to the long-term health of our economy.Read the full report here.
The first interview was on Facing the Future with host Chase Hagaman, which airs on New Hampshire’s WKXL radio station.Listen to the WKXL interview here.
The second interview was on Reality Check with host Charles Ellison, which airs on Philadelphia’s WURD radio station.Listen to the WURD interview here.
Public investment spending could fall to lowest level in modern history by 2026
WASHINGTON — Young Americans are having their future mortgaged by Washington lawmakers who are slashing critical public investments in future generations while simultaneously burying these generations under a mountain of debt, according to a new report published today by the Center for Funding America’s Future (CFAF) at the Progressive Policy Institute.
The comprehensive report documents these trends and explores how the reckless policies of the current administration and its predecessors will drain America’s economic strength and seriously harm young Americans for decades to come if no action is taken to change course.
“America’s current fiscal trajectory is on a dangerous path,” said Ben Ritz, director of the CFAF and author of the report. “By 2029, the national debt as a percent of gross domestic product is projected to surpass the all-time high it reached at the end of World War II, if current policies remain in place. Meanwhile, annual interest payments would explode from $316 billion today to nearly $1 trillion in 2028. That’s $1 trillion every year we could be using to build bridges and railroads, find a cure for cancer, train a next-generation workforce, strengthen our armed forces, or cut taxes for middle-class workers. Instead, it will be spent servicing past debts.”
Instead of tackling these problems, President Trump and the Republican-controlled Congress are making them worse, Ritz argues. While virtually every other developed country is paying down their debts post-recession, they enacted $2 trillion in tax cuts and abandoned spending caps that Republicans demanded be imposed at a time when most economists believed it was far more perilous to cut spending than it is today.
As America racks up debt thanks to irresponsible fiscal policies, public investments are being starved. According to the report, federal spending on public investments in education, infrastructure, and scientific research was just over $300 billion in 2017 – less than 1.5 percent of GDP. Between 1965 and 1980, total federal spending on public investments regularly equaled about 2.5 percent of GDP (roughly $470 billion in 2017). If current policies continue, public investment spending is projected to fall to its lowest level in modern history as a share of the economy by 2026.
The unaffordable tax cuts enacted over the past year can and should be reversed, writes Ritz, but even if federal taxes were immediately raised to their highest level since WWII and remained there indefinitely, deficits and debt would still be growing significantly faster than the economy. It is critical that policymakers also control the costs of Medicare, Medicaid, and Social Security, which are growing on autopilot faster than the economy due to America’s aging population.
By abandoning any pretense of fiscal responsibility, today’s policymakers are placing fiscal handcuffs on the elected officials of future taxpayers. By 2048, the report estimates Congress will have the authority to appropriate just 18 cents out of every dollar spent by the federal government, compared to 66 cents in 1968. This erosion of fiscal freedom robs future elected officials of their ability to respond to the changing policy priorities of their constituents and address unforeseen national emergencies, such as natural disasters and economic recessions.
Republicans’ fiscal mismanagement gives Democrats a unique opportunity to offer the electorate a compelling alternative: a new progressivism that invests in our country without leaving the bill to young Americans. But instead of holding Republicans accountable, some Democrats seem determined to outdo them. Many on the left now propose tens of trillions of dollars in new social spending on top of the unfunded promises the federal government already has made, without offering credible ways to pay for either.
Fixing our fiscal policy won’t be easy, but it is necessary. Ritz argues that the next Congress and President must modernize federal health and retirement programs to reflect an aging society and enact pro-growth tax reform that raises the necessary to renew public investments in the foundation of our economy. Only then can policymakers ensure America has a bright economic future.
It’s official: House Republicans are campaigning on a pledge to increase the federal budget deficit. It was just 10 months ago that they enacted a package of ostensibly temporary tax cuts that is projected to increase deficits by roughly$2 trillionover the next decade. This week, they offered a series of proposals dubbed “Tax Reform 2.0” to expand upon and make permanent the first tax cut’s expiring provisions. Although the package is unlikely to become law in this Congress, this legislation sends a clear message to voters about the GOP’s main objective if they retain control after the midterm elections: more deficit-financed tax cuts.
The Joint Committee on Taxation estimates that the new tax cut package will add another$657 billionto budget deficits between 2019-2028. This score, however, understates the true cost of the legislation because of the time period analyzed. The original tax cuts are largely in place through 2025, so most of the new package’s costs don’t begin to materialize until 2026. The upshot is that although the $657 billion is technically a 10-year cost estimate, 96 percent of that cost is concentrated in just the last three years.
What would the true cost of “Tax Reform 2.0” be? The Tax Policy Centerestimatesit could cost nearly $4 trillion over the next 20 years – and that’s on top of the $2 trillion cost of the original tax-cut law. Over half of these additional tax cuts wouldgo to benefit the richest tenth of Americans. The tax cut isn’t just larger for wealthy Americans in dollars – they would also see their after-tax incomes rise by over two percent, while Americans in the bottom half of the income distribution would only see their incomes rise by less than one percent.
And how does the GOP plan to pay for the enormous costs of their regressive tax proposals? They don’t. It was recently reported that when former National Economic Council Director Gary Cohn asked President Trump how he would finance the administration’s budget deficits, Trump proposed to“just run the presses — print money.” Congressional Republicans haven’t offered a serious alternative.
As PPInoted earlier this year, a deficit-financed tax cut is really no tax cut at all. Households that received a tax cut of less than $1,610 in 2018 are likely to lose more in the long-run than they will gain from those tax cuts, including most lower- and middle-income households. Perhaps it should be no surprise that these tax cutsare incredibly unpopularamong non-Republicans.
When Republicans won their House majority in 2010, theycampaigned against deficitsand the implicit tax it imposes on future generations. Eight years later, as those same Republicansprepare to lose their majority, they’ve cravenly embraced the very things they were supposedly elected to oppose.
They’re a tempting alternative to raising taxes, but their long-term costs far outweigh the revenue they bring in.
Raising taxes is painful. That may be why, since 2010, 47 states and a number of cities have instead raised both civil and criminal fines and fees. These increases are often viewed as a conflict-free way to plug budget holes.
In the last decade, for example, New York City grew its revenues from fines by 35 percent, raking in $993 million in fiscal 2016 alone. The monies came largely from parking and red light camera violations, as well as stricter enforcement of “quality of life” offenses such as littering and noise. In California, routine traffic tickets now carry a multiplicity of revenue-boosting “surcharges.” As a result, the true price of a $100 traffic ticket is more like $490 — and up to $815 with late fees, according to the Lawyers’ Committee for Civil Rights of the San Francisco Bay Area.
This increasing reliance on fines and fees comes despite what we learned following the shooting in 2014 of Michael Brown by a police officer in Ferguson, Mo. A federal investigation of the city’s police department subsequently revealed that as much as a quarter of the city’s budget was derived from fines and fees. Police officers, under pressure to “produce” revenue, extracted millions of dollars in penalties from lower-income and African-American residents. In 2017, the U.S. Commission on Civil Rights issued a follow-up report finding that the “targeting” of low-income and minority communities for fines and fees is far from unique to Ferguson.
This week, Sen. Elizabeth Warren (D-MA) unveiled new legislation aimed at turning American’s largest companies into better corporate citizens.
Under Warren’s “Accountable Capitalism Act,” companies earning more than $1 billion a year in revenues would be required to obtain a new federal corporate charter her legislation would create. Among other things, this charter would mandate directors to “consider the interests of all major corporate stakeholders—not only shareholders—in company decisions,” as Warren wrote in a companion Wall Street Journal op-ed.
There is much to like about Sen. Warren’s approach.
For one thing, she rightly attacks the culture of “shareholder primacy” that has dictated corporate behavior in recent decades. As Warren points out, companies once spent a much greater share of their earnings on workers’ wages and long-term investment. “But between 2007 and 2016,” she writes, “large American companies dedicated 93% of their earnings to shareholders.” Recent evidence of this shift has been the spate of disgracefully large share buybacks in the wake of last year’s corporate tax cuts, which one analysis estimates could exceed $800 billion in 2018. Meanwhile, the modest gains in wages workers have seen have already been wiped out by inflation. Workers would likely indeed be better off if their employers spent more money on wages and less on fattening shareholders’ wallets.
A second appealing aspect of Warren’s approach is her adoption of the “benefit corporation” as a model for corporate reform. As I explain in this PPI policy brief, companies that choose to charter themselves as “benefit corporations” legally commit themselves to corporate purposes other than the sheer pursuit of profit.
Since 2010, 32 states and the District of Columbia have passed benefit corporation statutes, including the corporate powerhouse state of Delaware. Thousands of “double bottom line” companies are chartered as benefit corporations, including such well-known brands as Etsy and Warby Parker. Many further choose to become “certified B Corps,” adhering to the strict standards for corporate responsibility promoted by the nonprofit B Lab.
By organizing as benefit corporations, these companies are directly refusing to kowtow to the tyranny of shareholder primacy. In return, they are legally shielded from shareholder liability for decisions that don’t maximize profit. They also send a signal to consumers and investors looking for socially responsible firms.
Benefit corporations are a relatively new invention, but the already significant growth in these firms and the ready adoption by states of benefit corporation statutes shows the enormous potential of this model as well as the interest and capacity of companies to reform themselves.
It would be a pity if Sen. Warren’s legislation were to wreck this potential.
Set aside what the creation of a federal corporate charter would mean to the states, which have traditionally been the arbiters of corporate governance. From a sheer practical standpoint, corporate culture is not something that can be easily dictated by fiat, and Warren’s legislation will be difficult to enforce. Companies seeking to evade their new obligations will no doubt litigate what the new federal charter means, as will stakeholders – not necessarily workers – who see an opening to claim a stake in corporate spoils. Meanwhile, the workers intended as the legislation’s beneficiaries will still end up holding the bag.
Second, by requiring all companies of a certain size to become benefit corporations, Warren goes too far in dictating how companies should govern themselves. One of the most important principles in corporate law is the so-called “business judgment rule,” under which courts restrain themselves from second-guessing the business decisions a company makes, so long as the board of directors can show it acted in good faith on an informed basis and in the honest belief it was acting in the best interests of the company.
Companies that choose to become benefit corporations are exercising a business judgment that this is the right corporate status for them. Warren’s legislation essentially substitutes the federal government’s business judgment for that of individual companies in deciding how to run themselves. Government has traditionally had a poor track of interfering in the markets this way. Among the unintended potential results are that companies either keep themselves small enough not to trigger the $1 billion threshold (not a good thing when we want companies to grow) or that they leave the country once they reach a certain size.
There are, however, potentially effective ways to tip companies’ business judgment in favor of behaving like benefit corporations, which is the approach we propose in this brief. Rather than mandating companies to behave as we’d like them to see, government should offer an incentive attractive enough that they’ll do so on their own. In particular, we propose a preferred corporate tax rate for benefit corporations, provided they also supply sufficient evidence of their commitment to other aims besides shareholder profit.
A voluntary embrace of corporate responsibility is more likely to be an authentic one. This approach also builds on and accelerates a reform that is already happening, which means more room for innovation and less likelihood of litigation.
Sen. Warren deserves applause for beginning an important conversation about the rights and responsibilities of the nation’s most powerful “citizens.” The introduction of this bill could also serve as welcome wake-up call to the nation’s CEOs – if they do not work soon to reform themselves, reforms will be thrust upon them, and perhaps in ways they will not like.
When the non-partisan Congressional Budget Office published its Long-term Budget Outlook in June, itestimatedthat the national debt relative to the size of the economy would nearly double over the next 30 years – from 78 percent of gross domestic product today to 152 percent of GDP in 2048. Yesterday, a new report from CBO warned that legislation passed within the past year by Donald Trump and the Republican-controlled Congress has the potential to make the problem far worse.
When Washington Republicans enacted a nearly$2 trillion tax cut last year, they included arbitrary expiration dates that minimized the projected cost after 2025. Congress took a similar approach in February, when it passed abipartisan budget agreementthat increased spending by almost $300 billion over just two years. Because CBO is required to make budget projections based on the laws as they are written (the “current-law baseline”), neither of these ostensibly temporary policies had a material impact on the long-term budget picture.
But what if policymakers extended or made these changes permanent? CBO’s models show debt would hit 210 percent of GDP by 2048 under this scenario – 58 percentage points higher than the baseline projection and nearly triple today’s level. CBO also scored two other scenarios: one in which policymakers prevent tax revenue from rising as a percent of GDP after 2028 and one in which policymakers keep taxes at 2018 levels in perpetuity. In these scenarios, CBO projects debt would rise to 230 percent and 260 percent of GDP respectively. However, these projections come with an important caveat. The report states:
“Assessing the economic effects of such large and rising debt would probably require reevaluating the economic relationships in CBO’s current models. In particular, in CBO’s models, the responses of private saving, capital inflows, and interest rates to fiscal policy are based on the nation’s historical experience with federal borrowing. But in these alternative scenarios, debt as a percentage of GDP grows to levels well outside that experience.
Nevertheless, to provide some sense of the possible outcomes, CBO employed its usual models to produce longer-term projections of deficits and debt under the three scenarios—but the actual outcomes would probably be worse than the range of estimates that those models indicate.”
Essentially, these policy scenarios would drive the national debt to unprecedented levels so high that CBO can’t be confident in the precision of its models at that point. These estimates, grim as they are, are thus likely to be overly optimistic.
Yet even under those “optimistic” projections, CBO estimates that the added debt burden from each of the measured scenarios would significantly hurt our economy. By 2038, CBO projects annual national income would be reduced by upwards of $1,000 per person relative to what it would be under current law – and the damage would only get worse as time goes on.
Despite the harm it would cause, Washington Republicans appear committed to pursuing even more unaffordable tax cuts if they retain control of Congress after the midterm elections. House Ways and Means Chairman Kevin Brady (R-TX) has been preparing a “Tax Cuts 2.0” package that would make permanent most expiring provisions of the 2017 tax law. At the direction of President Trump, the Treasury Department alsorecently explored a moveto unilaterally cut capital gains taxes by $100 billion, with 97 percent of the benefit going to the richest tenth of Americans.
Yesterday’s CBO report should be a warning to both them and the American people that we cannot afford to keep piling these irresponsible tax cuts onto our large-and-growing national debt. If Republicans insist on continuing down this reckless fiscal path, Democrats should hold them accountable and offer an alternative approach that pairs responsible fiscal policy with public investments to promote long-term economic growth.
Yesterday, the non-partisan Congressional Budget Office published their firstlong-term budget outlooksince the passage of last year’stax cutsand February’sspending increases. In contrast toApril’s budget and economic outlook, which made budget projections only for the next decade, the long-term budget outlook offers budget projections over the next 30 years – and it shows a significantly worse picture. The projections should dissuade policymakers who want to extend or double down on the unaffordable policies enacted by the Trump administration and Congress over the past year.
Over the next 30 years, CBO projects the that our national debt relative to the size of the economy will nearly double – from 78 percent of gross domestic product today to 152 percent of GDP in 2048. This would be well over the all-time high reached at the end of World War II, when our national debt topped out at 106 percent of GDP.
But there’s a big difference between our fiscal situations in 1946 and today. Back then, our debt was the result of temporary borrowing to respond to a national emergency. After the war ended, the federal government ran balanced or near-balanced budgets almost every year for the next three decades. That, combined with a post-war boom in economic growth, resulted in the national debt plummeting to just 23 percent of GDP in 1974. Our current and future debts, however, are caused not by temporary borrowing but by a structural mismatch between revenue and spending that will only grow worse as time goes on. And with potential economic growth projected to be just half of what it was in the aftermath of WW2, this structural mismatch is one that will be virtually impossible to grow our way out of.
The main problem is theunsustainable growth of social insurance programsthat provide health care and retirement benefits. As our populationages, CBO projects that annual spending on these programs will increase by 5.4 percent of GDP over the next 30 years – four fifths of which is attributable to growth in just two programs: Social Security and Medicare. Because federal revenue will grow more slowly than spending on these programs, the government must borrow more and more money each year to help finance them – and that comes with a higher cost of debt service.
In 2018, the federal government will spend about $316 billion on interest payments (equivalent to 1.6 percent of GDP). By 2048, CBO projects that interest on the debt would consume 6.3 percent of GDP under current law – nearly five times today’s levels. In contrast, CBO projects that discretionary spending (the portion of the federal budget appropriated annually by Congress) will shrink from 6.3 percent of GDP in 2018 to 5.5 percent of GDP in 2048, which means that interest on the debt will eventually cost more than all discretionary spending combined.
To put these figures in perspective, discretionary spending – which is divided evenly between defense and non-defense programs – has never fallen below 6 percent of GDP since the end of WW2. CBO warns that could change as soon as 2021. Thecrowding out of discretionary spendinghas significant ramifications for our ability to invest in the future, as discretionary spending funds critical public investments such as education, infrastructure, and scientific research. These investments help to spur innovation and productivity which are essential to long-term economic growth and future prosperity. Meanwhile, CBO estimates that allowing our irresponsible fiscal policy to continue could reduce the size of our economy by $2500 per person come 2048.
As concerning as these projections are, they could be even worse if the policies enacted over the past year are allowed to remain in place. In December, Washington Republicans rammed through apackage of tax cutsthat will cost almost $2 trillion before much of them are scheduled to expire by the end of the next decade. Abipartisan budget dealjust two months later then paved the way for nearly $300 billion in additional spending over the next two years, but these elevated spending levels are assumed by CBO to expire after 2019. Although these laws will result in debt levels that are significantly higher in the near term, neither has a substantial impact on the long-term budget outlook after 2041 because most of their policies won’t be in effect for over the latter two thirds of the projection period.
But extending current policies – or making them permanent – would dramatically worsen our fiscal situation. The Committee for a Responsible Federal Budgetestimatesthat doing so would result in the national debt surpassing its post-WW2 record by 2029 (echoingPPI’s estimatesfrom earlier this year). And by 2048, CRFB projects the national debt would be almost double the size of the economy. Simply put, we cannot afford to maintain the policies put in place during the first year of the Trump administration, let alone double down on them as many Congressional Republicanshave proposed.
Instead, policymakers need to heed CBO’s warning and reverse course immediately. If they permanently increase revenue by 11 percent, cut spending by 10 percent, or adopt some combination of the two beginning in 2019, policymakers could stabilize our debt at current levels for the foreseeable future. If they wait another 10 years to act, however, the size of the policy changes needed to stabilize the debt at today’s levels would increase by half. That translates into an additional cost of over $600 (in 2019 dollars) per person per year. With unemployment athistorically low levels, there is little justification for continuing to rack up massive debts today at the expense of taxpayers tomorrow.
When the Social Security and Medicare trustees warned last week that both programs are ontenuous financial footing, Treasury Secretary Steve Mnuchinsaid: “The administration’s economic agenda — tax cuts, regulatory reform and improved trade agreements — will generate the long-term growth needed to help secure these programs and lead them to a more stable path.” He couldn’t be more wrong.
Asmore and morebaby boomers retire, Social Security and Medicare will require additional revenue just to fund the same level of benefits enjoyed by previous generations. Yet instead of raising more revenue to help fund these programs, the Trump administration and Congressional Republicans recklessly pursued a package of tax cuts that the non-partisan Congressional Budget Office projects willreduce revenueby $2 trillion over the next decade. This law put Social Security and Medicare on a decidedly less stable path.
WASHINGTON — Ben Ritz, director of the Center for Funding America’s Future at the Progressive Policy Institute (PPI), today released the following statement after the annual Social Security and Medicare Trustees reports were released:
“The annual reports from the Social Security and Medicare trustees should serve as a reality check for politicians who support costly expansions of these programs. As they have consistently done for several years, the trustees again warn that current program revenues are insufficient to sustainably finance promised benefits – an imbalance that must be addressed by policymakers before considering changes that could make the problem even worse and crowd out resources needed for other important public investments.
“Last year, Social Security spent $41 billion more on benefits than it collected in dedicated revenue. Over the next 25 years, the gap between dedicated revenue and promised benefits will grow to 1.26 percent of gross domestic product as the baby boomers move into retirement and the ratio of workers to retirees continues its decline. If nothing is done to address this growing shortfall, beneficiaries face the prospect of a sudden and permanent 21-percent benefit cut beginning in 2034 (the year in which the combined Social Security trust funds, which are credited with surpluses from previous years in which program revenue exceeded spending, are exhausted).
“The challenges facing Medicare are even more alarming. The gap between spending and dedicated program revenue ($307 billion in 2017) is projected to double as a share of the economy in the next 25 years, from 1.58 percent of GDP in 2017 to 3.16 percent of GDP in 2042. If these gaps are left unaddressed, Medicare and Social Security will consume an ever-greater share of general revenue, leaving less money available to fund critical public investments in our future – including key progressive priorities such as infrastructure, education, and scientific research.
“Policymakers could strengthen Medicare and Social Security while protecting public investments for the foreseeable future by modernizing their benefit structures and adopting modest revenue increases. Unfortunately, President Trump and Congressional Republicans made bipartisan action even less likely than it already was when they passed their egregious $2 trillion tax cut last year. Although the financial challenges facing Social Security and Medicare predate the tax bill and exceed it in size, Republicans cannot expect Democrats to make changes to programs that benefit the middle class just so the GOP can squander the savings on more tax giveaways for the wealthy.
“Nevertheless, Republican recklessness doesn’t give Democrats an excuse to ignore the very real problems facing Social Security and Medicare. Democrats have a moral obligation to not only reverse the Trump tax cuts but also to secure the future of our social insurance programs in a way that is equitable to both current beneficiaries and young workers. Elected officials in both parties should take their lead from the trustees instead of Trump by eschewing expensive tax cuts and broad-based benefit expansions, instead pursuing pragmatic reforms that ensure benefits are adequate and sustainable for all.”
President Trump’s most recent budget proposal was widelypannedwhen it was released in February for being both fiscally irresponsible and dependent on unrealistic economic assumptions. Ananalysispublished last week by the non-partisan Congressional Budget Office confirms these criticisms were valid and highlights the significant difference between the Trump administration’s approach to fiscal policy and that of Trump’s predecessor, President Barack Obama. Based on CBO’s analysis, anyone who criticized Obama’s fiscal policy for being irresponsible should be outraged about Trump’s.
When the Obama administration released its final budget proposal in 2016, CBOestimated that it would result in the national debt held by the public equaling 77.4 percent of gross domestic product in 2026. According to last week’s CBO report, debt under the most recent Trump administration budget proposal would reach 85.3 percent in the same year. In dollar terms, CBO estimates that the federal government would accumulate over $2 trillion more in debt by 2026 under the most recent Trump budget than it estimated would be accumulated under the final Obama budget two years ago.
Perhaps more interesting is the discrepancy between the projections of CBO and Trump’s Office of Management and Budget: CBO projects debt as a percent of GDP will be almost 9 percentage points higher in 2026 under the Trump budget than OMB projected in February. By comparison, the difference between OMB’s and CBO’s estimates of the final Obama budget was only about 2 percent of GDP.
The Trump administration’s unrealistic budget forecasts continue its pattern of dubious economic claims. Prior to the passage of last year’stax legislation, for example, the Trump administration claimed it would fully pay for itself or even reduce the national debt. CBO, on the other hand, now projects the legislation to cost roughly$2 trillion over the next decade – an assessment most independent analystslargely agree with.
But even CBO’s forecasts likely understate the debt that would be accumulated under the Trump administration’s fiscal policy. CBO is required to score the president’s budget assuming even its most unrealistic policy proposals could be enacted. These policies include deep cuts to non-defense discretionary spending (the category of federal spending that includes virtually all non-defense, non-entitlement programs), which would reduce such spending below itslowest levelas a share of the economy since before World War II.
Just before the Trump budget was published, however, the Republican-controlled Congress passed – and President Trump signed – legislationthat significantly increased both defense and non-defense discretionary spending. By the end of the projection period, CBO estimates that non-defense discretionary spending under the Trump budget would be less than half what it would be if the spending policies in February’s budget deal were extended. The idea that Congress would suddenly reverse course and support such deep cuts to thislong-starved category of federal spendingis outlandish at best.
Altogether, last week’s CBO report should serve as a damning indictment of the Trump administration’s faulty fiscal policy. It’s remarkable that this administration had to rely upon so many flawed assumptions in crafting this year’s budget proposal, and even then, produced debt projections well above those in President Obama’s final budget. President Trump has certainly earned his self-proclaimed status as “the king of debt” with this year’s budget. On the other hand, perhaps it should be no surprise given therecent track record of Democratic and Republican presidentsthat one of the former would put forth a more responsible budget proposal than one of the latter.
In recent years, innovation has become synonymous with digital companies such as Apple, Google and Amazon.The Internet, the smartphone, and the cloud have transformed daily life and the way we do business, and artificial intelligence and machine learning will continue the process.
Nevertheless, overall productivity growth remains sluggish. The reason is simple: The digital sector of the economy, where innovation today is focused, is still far smaller than the physical sector. Even today, we spend much more time interacting with the physical world than with the digital world. The chairs we sit on, the food we eat, the cars we ride in, are all made of physical materials, not intangible bits and bytes. According to recent research, digital industries such as communications, entertainment, and finance comprise only 30 percent of the economy, while physical industries such as manufacturing and construction comprise 70 percent.
When taxpayers file their tax returns this time next year, four out of five will likely see a smaller tax liability than they do today, due to major tax legislation enacted last year. But these savings to taxpayers will be nothing more than a mirage: after accounting for the true cost of this legislation, what looks like a free tax cut today will turn into a massive tax increase on the middle class tomorrow.
For years, policymakers in both parties have supportedreforming the tax codeby eliminating so-called “tax expenditures” (provisions in the tax code that reduce a taxpayer’s tax liability if they engage in certain preferred behaviors) and using the savings to reduce tax rates. Donald Trump and Congressional Republicans, however, were unable to tackle tax expenditures to the degree necessary to offset their desired rate cuts. Instead of paring back their ambitions or working with Democrats on a bipartisan tax reform bill, the GOP opted to abandon revenue-neutral tax reform and pursue a package of deficit-financed Trump tax cuts.
Many Republicans argued that their tax bill (formerly known as the Tax Cuts and Jobs Act before it wasrenamed for procedural reasons) would generate enough economic growth to pay for itself. But according to the non-partisan Congressional Budget Office, this legislation will actually cost nearly $2 trillion over 10 years. Even CBO’sofficial estimateunderstates the true cost of the Trump tax system, as Republicans set arbitrary expiration dates for many expensive provisions to minimize the bill’s official cost and subsequently enacted additional tax cuts. If current tax policies are made permanent, as many Republican leaders intend to do, CBO estimates that they will increase deficits by roughly $3 trillion over the 10-year window.
This game is one the GOP played before. In 2001 and 2003, President Bush and Congressional Republicans enacted costly tax cuts that were set to expire after 10 years. But in 2013, over 80 percentof the Bush tax cuts were made permanent, dealing a major blow to federal finances. The Trump tax system is imposed on top of these tax changes, further reducing revenue in 2018 to the point that revenue as a percent of gross domestic product (GDP) will be below where it was at any point in the Reagan administration.
Unlike the Bush tax cuts, which were enacted when the federal budget was in surplus, the Trump tax system takes an existing budget deficit and makes it even worse. Spending is 3 percent of GDP higher today than it was in 2001 thanks to the growth of mandatory spending programs, which are those with funding determined by formula rather than congressional appropriations. The largest of these programs, Social Security and Medicare, are projected to grow twice as fast as the economy over the next decade as more and more baby boomers move out of the workforce and onto the benefit rolls. By 2026, thanks to the combination of tax cuts and rising spending, every dollar of incoming revenue will be spent on mandatory spending programs and interest on the debt.
Every dollar Congress appropriates thereafter for national defense; public investments, such as infrastructure and scientific research; or basic functions of government, such as our courts system and law enforcement, will be borrowed money. At some point, this borrowing will become unsustainable and policymakers will have to reduce deficits with spending cuts, tax increases, or some combination of the two. The American people will be the ones who must foot the bill for these policy changes and those costs will dwarf the benefits of whatever tax cut they see this time next year.
According to the Urban-Brookings Tax Policy Center, the cost per household of the debt incurred to finance the Trump tax system in 2018 alone is $1,610. If the burden of future deficit reduction is spread evenly, every household that receives a tax cut of $1,610 or less in 2018 will effectively be getting a tax increase over the long-term. When accounting for this impact, it becomes clear that the Trump “tax cuts” are essentially a massive tax hike on those who can least afford to bear it.
Of course, the burden of deficit reduction is unlikely to be equally shared. Older Americans, who are likely to exit the workforce or pass away before the debt comes due, will reap all the benefits of tax cuts now and pay little of the cost. Future workers, on the other hand, will bear the brunt of deficit reduction later without receiving any benefit from the tax cut today. Moreover, as Tax Policy Center notes in their analysis, if deficit reduction is predominantly done by cutting welfare spending that benefits low-income beneficiaries, the Trump tax system plus its financing will be even more regressive than it appears in the chart above.
The American people are acutely aware of these trade-offs. Prior to the implementation of the Trump tax system, several polls showed that voters across the political spectrum – including most Republicans – wouldn’t even support cutting their own taxes if it meant increasing federal budget deficits, let alone those of the ultra-rich. Policymakers should immediately replace the irresponsible Trump tax system with real tax reform that puts our money to better use elsewhere.
Thelatest reportpublished yesterday by the non-partisan Congressional Budget Office shows the United States faces arapidly deterioratingfiscal situation. Beginning in 2020, the federal government will spend over $1 trillion more than it raises in revenue every single year in perpetuity. The government has to borrow money to finance these soaring deficits and that additional borrowing threatens to take our national debt to unprecedented heights.
Based on CBO’s projections, PPI estimates that by 2029, the national debt relative to the size of the economy (as measured by gross domestic product) will surpass the record-high level reached just after World War II. This estimate would besix years earlierthan the one in CBO’s 2016 and 2017 budget projections, where it was estimated that the national debt wouldn’t surpass its previous record until 2035, and 13 years earlier than the estimate from CBO’s 2015 budget projections.
PPI’s analysis assumes recently enacted fiscal policies, including December’s Trump-Republican tax cut and February’s bipartisan budget deal, remain in place even though they are scheduled to expire under the law as currently written. This approach differs from CBO’s baseline estimates, which assume that policies scheduled to expire under current law will do so despite the fact that many lawmakers have made clear they intended for these policies to bemade permanent.
According to CBO, the federal government will need to borrow $2.7 trillion more over the next decade just to cover the cost of legislation enacted by Donald Trump and the Republican-controlled Congress since June. But if these policies are extended, as PPI assumes they would be, CBO says it would add another $2.6 trillion to the gap between federal revenue and spending over the next 10 years.
Tax Cuts Are the Primary Cause of New Deficits, But Spending is the Long-Term Challenge
As the chart below illustrates, the vast majority of the difference between CBO’s 2017 baseline and today’s current policy projections is attributable to lower revenue estimates. Thanks to the budget-busting tax cuts passed by Congressional Republicans and signed by Donald Trump last year, federal revenue as a percent of total economic output will be lower over the next five years than it was for almost every year of the Reagan administration. These tax cuts clearly will not pay for themselves despitepromises to the contraryby their supporters.
Although Republican tax cuts account for most of the difference in projections, increased spending from the February’s bipartisanbudget dealalso contributes to the worsening deficit. The impact of this increased spending, however, is somewhat masked in the chart above by other changes in CBO’s estimates not directly related to the effects of legislation. The upshot is that current policy spending projections over the next decade are largely the same as CBO’s baseline estimates from last year.
Current spending levels are relatively reasonable in the short term. Until 2020, projected federal spending as a percentage of GDP will actually be below where it was for most of the Reagan administration. But in the medium- and long-term, out-of-control spending growth will become increasingly problematic. By 2028, spending as a share of GDP is projected to reach the level it was in 2010 at the height of post-financial crisis stimulus.
Unlike in 2010, future deficits will not be a temporary spike in borrowing to stabilize a collapsing economy. Rather, these deficits will be driven by the rapid growth of mandatory spending programs (those which have spending determined by formula, instead of annual appropriations by lawmakers). The largest of these programs, Social Security and Medicare, provide benefits primarily to older Americans and will grow roughly twice as fast as the economy over the next decade as more and more baby boomers retire. Medicaid, a social insurance program which serves many lower- and middle-income Americans of all ages, is also projected to grow over the next decade albeit at a slower rate.
Growing Deficits Threaten to Crowd Out Critical Public Services
The longer policymakers put off the difficult decisions about how to make major social insurance programs financially sustainable, the more debt must be incurred to finance the deficit. That debt comes at an enormous cost: by 2026, all incoming revenue will be consumed by mandatory spending programs and rising interest payments to service our debt burden. This unsustainable trend puts enormous pressure on the discretionary programs that Congress appropriates funding for annually.
Discretionary spending consists of two categories: defense and non-defense (domestic) discretionary spending. Both were increased significantly in the February budget deal, but nevertheless would shrink relative to GDP under current policy. The trend is particularly concerning for domestic discretionary spending, as it includes critical public investments such as infrastructure and scientific research that provide long-term economic benefits. Under current policy, this category of spending is soon likely to fall to itslowest level in modern history.
Other mandatory programs outside of Medicare, Medicaid, and Social Security are also feeling the pressure. Many Republicans are now seekingdraconian cutsto programs that serve low-income populations, such as the Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Programs (food stamps), even though this category of spending is also projected to grow significantly slower than the economy. It is ill-advised to cut programs that serve our most vulnerable when they contribute little to our country’s long-term fiscal challenges.
By 2026, interest on the debt will be more expensive than these other mandatory programs, defense, or domestic discretionary programs. Moreover, as the above chart shows, the growth in interest costs over the next decade is almost twice as big as the decrease in all these categories of spending combined. Solving our fiscal challenges would thus free up resources for these valuable public services and save future generations from being buried under a mountain of debt.
The takeaway for policymakers is clear: in the short term, they should “repeal and replace” the disastrous tax cut package enacted by Republicans last year. But in the medium-to-long term, leaders in both parties must come together and address the growth of spending on major social insurance programs. Only a combination of the two can provide the United States with a bright and prosperous fiscal future.
On Thursday, House Republicanswill voteon aconstitutional amendmentproposed by Rep. Bob Goodlatte (R-VA) that would require the federal government to balance its budget every year. The vote, which is virtually guaranteed to fall short of the two-thirds super majority necessary for passage, is nothing more than a cynical ploy to give the party of debt and deficits a veneer of fiscal responsibility while they make no serious effort to earn it. Anyone who is truly concerned about soaring deficits should ignore this distraction and focus on the real record of the Republican-controlled Congress.
In December, the same House Republicans who now ostensibly want to reduce budget deficits championed a partisan tax cut that instead grew the gap between revenue and spending by $1.9 trillion over 10 years. In February, they voted to increase deficit spending by roughly $400 billion over two years. As if more than $2 trillion of additional deficits over two months wasn’t enough, Republicans are hoping to pile on even more borrowing later this year withyet another roundof tax cuts. On our current path, deficits over the next decade could total$15 trillion.
Closing this gap through spending cuts alone, as most Republicans would presumably seek to do, would require lawmakers to immediately and permanently cut more than one-quarter of all non-interest spending. If they sought to exempt defense spending or entitlement programs such as Social Security, the cuts to non-exempt programs would need to be even deeper. Simply mandating the budget be balanced doesn’t liberate policymakers from the painful trade-offs required to make it happen.
Should Congress and the president fail to adopt the policy changes necessary to comply with the balanced budget amendment of their own volition, there is no enforcement mechanism in the Goodlatte proposal to compel them. Ill-equipped courts would inevitably be asked to determine national economic policy that should be crafted by the legislative and executive branches.
The Republican crusade for this poorly crafted amendment is particularly dubious considering that most economic experts, including those who are sincerely and deeply committed to promoting fiscal responsibility, don’t believe in the necessity of a balanced budget. Small deficitscan be sustainableas long as the debt burden that finances them is growing slower than the economy. For this reason, most informed deficit hawks believe the goal should be to stabilize and reduce the debt as a percentage of gross domestic product rather than to balance the budget.
In fact, requiring a balanced budget in every year could be quite harmful if it prevents the government from using temporary borrowing to stabilize the economy during a downturn. The Goodlatte proposal would only allow spending to exceed revenue in a given year if supported by a three-fifths super majority in both the House and the Senate. When economic output falls, this onerous requirements would make it incredibly difficult for the federal government to maintain even pre-recession spending levels, let alone provide the kind of economic stimulus necessary to prevent a recession from turning into a deep depression.
The sole reason House Republicans are pushing this half-baked proposal now is to give themselves a fig leaf to cover their shameful legislative record. When Congress returned to Washington yesterday, the Congressional Budget Office greeted them with updated projections showing federal budget deficits that weretrillions of dollars higherthan those projected last year. Republicans hope their constituents will ignore thereal damage they’ve doneto our nation’s finances if they merely affirm their support for balancing the budget in principle.
Democrats and deficit hawks shouldn’t let the GOP off the hook so easily. They should repudiate this meaningless show vote and demand Congressional Republicans either put up or shut up. Making our fiscal policy sustainable requires real solutions; the proposed balanced budget amendment is nothing more than a sham to avoid them.
This post has been updated to reflect that the version of the amendment being voted on is different than the version Rep. Goodlatte posted on his website last week. That version, which can still be foundhere, would have also required a three-fifths super majority in both chambers to raise additional revenue and an even larger two-thirds super majority to authorize spending more than one fifth of economic output.
U.S. social policy traditionally has emphasized supporting income for low-income families, to the neglect of wealth-building strategies.1 While income supports are essential for covering daily expenses, upward mobility depends on saving and building personal assets, especially completing post-secondary education, purchasing a home, or creating a business.2
Moreover, inequality of wealth in America is worse than income inequality. That’s why it’s time for a new approach to empowering low-income and working Americans. U.S. social policy in the 21st century should stress social investment and wealth creation, not just income transfers to support consumption. This report proposes a new policy – American Development Accounts (ADAs) – intended to help younger workers and blue-collar households rise into the middle class by enabling them to save and accrue assets.
