(Originally published by the Brookings Institution)

Executive summary

President Biden’s tax, spending, and deficit legacy continues to spark debates. Supporters assert that Biden inherited a pandemic crisis and enacted vital stimulus spending to resuscitate the economy, undertook key investments in long-neglected areas, defended Social Security and Medicare against cuts, and still left with a smaller budget deficit than the one he inherited. Biden defenders add that even more could have been accomplished had he maintained a Democratic Congress for the last half of his presidency.

Critics believe that the economy that was already re-opening from the pandemic when Biden took office and that his programs only served to raise inflation. They contend that the new policies reflected special interest giveaways to partisan allies. Finally, critics note that Biden added trillions to budget deficits and argue that keeping deficits below their pandemic-peak levels is a weak criterion.

The end of Biden’s presidency allows for a final assessment of his tax, spending, and deficit record. As the methodology section explains, this analysis begins with the 10-year budget baseline that President Biden inherited in February 2021 and measures all subsequent tax and spending changes through the February 2025 baseline that was released as the president left office. The analysis is based on more than a half-dozen Congressional Budget Office (CBO) baseline updates over these four years, supplemented with the line-item scores of all notable bills and executive orders signed into law by Biden.¹

Here are the key findings:

• The cumulative 2021-2031 budget deficits were projected by CBO at $14.5 trillion when President Biden entered the Oval Office. Four years later, he left office with the same period facing a total deficit of $21.2 trillion. The president signed or enacted $6.6 trillion in new initiatives and oversaw economic and technical budget revisions that were nearly budget-neutral over the 2021-2031 period.

• Economic and technical factors added $0.1 trillion in actual and projected deficits over this period. Higher-than-projected inflation and a slight bump in economic growth expanded projected 2021-2031 revenues by $6.9 trillion, and mandatory and net interest costs increased by a combined $6.7 trillion. Technical revisions added roughly $1.4 trillion in revenues, but they also pushed up mandatory and net interest costs by a slightly higher amount. The fiscal effects of these factors largely offset each other, leading to a net addition of just $0.1 trillion to 2021-2031 actual and projected deficits.

• President Biden signed legislation and approved executive actions cumulatively costing $6.6 trillion over the decade—compared to $7.8 trillion for President Trump, $5.0 trillion for President Obama, and $6.9 trillion for President Bush. And like President Trump, Biden enacted these costs in just a single four-year presidential term, compared to Obama’s and Bush’s eight years in the Oval Office. The largest drivers were pandemic response and stimulus legislation ($2.1 trillion), expansions to discretionary spending excluding defense and veterans’ benefits ($1.7 trillion), veterans’ benefit expansions ($837 billion), student loan executive orders ($755 billion), and defense spending hikes ($596 billion).

• President Biden’s four annual budget proposals averaged 10-year tax increases of $3.9 trillion and spending expansions of $2.5 trillion. The proposed tax hikes—overwhelmingly consisting of drastic tax increases on businesses—were largely ignored by Congress. However, spending proposals such as pandemic relief, infrastructure, and family benefits found a receptive legislature.

• Biden left the White House with structural budget deficits of nearly $2 trillion, interest costs surging, and spending at its highest share of the economy in American history outside of world wars and deep recessions. The ongoing failure to address unsustainable Social Security and Medicare costs leaves a projected 30-year baseline deficit of $110 trillion.

As the methodology section explains, most changes in this report are scored over the full 2021 through 2031 period because most policy, economic, and technical changes have at least 10-year budget effects, and they can also be measured against the original February 2021 CBO baseline that covered the 2021-2031 period.

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Introduction

As Washington prepares for a 2025 dominated by tax policy—led by the issue of whether to extend the expiring 2017 tax cuts—the debate is likely to bring a fresh recirculation of the most common myths about the federal tax system from both the left and the right.

On the one hand, the false conservative narrative suggests that the middle class is buried in taxes and that tax cuts pay for themselves, or even reduce deficits by “starving the beast” of the ability to expand federal spending. The false liberal narrative, on the other hand, suggests that “tax cuts for the rich” drive the deficit upward and lead to a regressive tax code, in contrast to the strongly progressive tax systems of 1950s America and contemporary Europe.

In reality, the federal tax system is quite progressive—more so than those of Europe and pre-Reagan America. Middle- and low-earners pay very low tax rates. And the vast majority of tax cuts truly reduce federal revenues and increase deficits (albeit less so than rising spending levels). The following report corrects the most common and pernicious federal tax myths.

Myth 1: “Tax Cuts Pay for Themselves”

Myth 2: “Tax Cuts Will Starve the Beast”

Myth 3: “The Middle Class Pays Higher Tax Rates than the Rich”

Myth 4: “Those Old 91% Tax Rates Raised Large Tax Revenues”

Myth 5: “Europe’s Higher Tax Revenues Derive from Aggressively Taxing the Rich”

Myth 6: “ ‘Tax Cuts for the Rich’ Drive Soaring Budget Deficits”

Myth 7: “Taxing Millionaires and Corporations Can Eliminate the Deficit”

Myth 8: “Most of the 2017 Tax Cuts Went to Corporations and the Wealthy”

Myth 9: “Repealing All Post-1980 Tax Cuts Provides Painless Deficit Reduction”

Myth 10: “America’s Corporate Taxes Are Far Below International Standards”

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Introduction

Soaring federal debt represents the greatest long-term threat to the U.S. economy. Simply extending current tax and spending policies would push the debt to 236 percent of GDP over three decades. If interest rates rise — a typical consequence of steeply rising debt — then projections show the debt possibly exceeding 300 percent of GDP in three decades, with annual interest costs consuming nearly all annual federal taxes. Obviously, this fiscal path is not sustainable. The economists at the University of Pennsylvania’s Wharton School could not even model a functioning long-term economy under the current debt path. Responsible stewardship requires confronting these fiscal trends before they bring a financial crisis.

Addressing deepening deficits requires reforming annual Social Security and Medicare shortfalls that will rise from $650 billion this year to $2.2 trillion within a decade, according to Congressional Budget Office (CBO) data. Over three decades, these two program shortfalls will total $124 trillion, and exceed 11 percent of GDP annually by 2054 when including the interest costs resulting from their borrowing. The rest of the budget is projected to approximately balance over the next few decades. While all policies must be on the table, it is simply not possible to build a sustainable budget without reining in these Social Security and Medicare shortfalls.

The blueprint presented would stabilize the long-term debt around the current level of 100 percent of GDP through 2040, after which the blueprint’s compounding policy and interest savings would create a “virtuous cycle” that reduces the debt to 68 percent of GDP by 2054. Stabilizing the debt will ensure that the economy maintains the resources necessary to invest, create jobs, and raise incomes.

Top Three Policy Recommendations

1. Reform Social Security

Over the next 30 years — driven by baby boomer retirements — Social Security is projected to run a cash shortfall of $20 trillion, plus $17 trillion in interest costs on its debt. Bringing Social Security into solvency requires addressing three cost drivers: 1) a retirement age that allows someone retiring at age 66 and living until 90 to collect benefits for one-third of his/her adult life; 2) generous benefits for wealthy retirees who do not need them; and 3) benefit formulas that over-correct for inflation and thus allow each generation’s benefits to well-exceed the inflation-adjusted benefits of the previous generation.

These issues can be addressed with reforms such as gradually raising the early eligibility age to 64 and the normal eligibility age to 69. Lifetime earnings can be converted into an initial benefit level using lifetime price inflation rather than overly generous wage inflation.

Once the initial benefit is determined, benefits can grow annually by the more accurate chained CPI rate. Annual cost-of-living adjustments can also be cancelled for those retirees still earning exorbitant incomes after retirement. In order to protect low-income seniors from significant benefit cuts, a minimum benefit of 125 percent of the federal poverty line can be guaranteed to retirees with full work histories.

These reforms would gradually bring Social Security’s finances into annual balance. They would also help flatten benefits between high- and low-earners, and ensure that initial and yearly benefit levels grow generally with inflation over the long term and with parity across generations.

2. Rethink Healthcare Entitlements

Medicare is projected to run a 30-year cash shortfall of $49 trillion, plus $38 trillion in additional interest costs. Within three decades, its annual deficits will reach 3.6 percent of GDP, or 8.1 percent including interest costs. This is the result of the typical retiring couple receiving Medicare benefits more than three times as large as their lifetime contributions to the system, adjusted into present value.

Efficiency savings are a true fiscal free lunch. Moving Medicare to a premium support system would create a robust health insurance market where private insurers must compete for retirees. Each insurer would be required to offer a benefit package as generous as the current Medicare system, and each senior would buy insurance with a payment set at the cost of the midpoint-priced plan. Through choice and competition, CBO estimates that seniors would quickly save 7 percent on their premiums, and the government would save 8 percent on the cost of providing their care.

Medicare reform should also better align premiums with the cost of coverage. Currently, more than 90 percent of seniors are charged Medicare Part B and D premiums that cover no more than 26 percent of their cost of coverage (and these benefits are not prefunded with payroll taxes like they are for Medicare Part A). While the bottom-earning 40 percent of seniors should see no premium hikes, those premium rates should gradually rise as incomes move up the ladder.

Within Medicaid, rising costs are driven in part by an irrational system that bribes states to add Medicaid costs with generous and open-ended federal matching funds. Additionally, these federal matching rates are substantially higher for the coverage of higher-earning, able-bodied adults than for seniors, children, low-income adults, and disabled individuals. A commonsense reform would replace this system with a set federal payment to states for each Medicaid recipient that rises by 4 percent annually for disabled and elderly recipients, and 3.5 percent annually for children and able-bodied adults. Additionally, states should be given more freedom to innovate in their Medicaid programs. Such caps would stabilize federal Medicaid spending without dumping new liabilities on states or cutting caseloads.

3. Raise Revenues Responsibly

Even aggressive reforms to Social Security and Medicare shortfalls are not enough to bring long-term debt sustainability. All other spending must also be on the table, and so must tax revenues. Responsible tax policies would raise revenue without dramatically raising tax rates or reducing incentives to work, save, and invest.

Most of the 2017 tax cuts should be extended, with exceptions that would end the 20 percent pass-through business deduction and would restore the earlier top income tax bracket of 39.6 percent. Additionally, for upper-income families, tax deductions should be capped at 15 percent of their value, capital gains should be taxable at death, and the recent IRS tax enforcement funding should be made permanent.

More broadly, lawmakers should cap the tax exclusion for employer-provided healthcare, raise the Medicare payroll tax rate by one percentage point, hike the gas tax, and impose a carbon tax with its costs rebated to all but above-average earners. On the corporate side, the energy credits from the Inflation Reduction Act — which are well over budget — should be repealed. Combined with other modest tax changes, this tax package would gradually raise revenues by 2.3 percent of GDP over several decades compared to a current-policy baseline.

Address Near-Term Policy Issues

The multiple upcoming fiscal deadlines present a threat to add more red ink — and also an opportunity to scale back deficits. The 2017 tax cut extensions should be offset by the tax policies above. Discretionary spending caps should be extended beyond 2025 because, over the past several decades, discretionary appropriations have on average grown 2.7 percent in capped years versus 6.4 percent in uncapped years. The recent Affordable Care Act expansion should be allowed to expire, and the insolvency of the Highway Trust Fund should prompt legislation to devolve more of the highway system back to the states. The looming insolvency of the Social Security and Medicare Part A trust funds should motivate the creation of a fiscal commission to impose the reforms detailed above. And finally, the debt limit has ceased to serve any purpose in limiting runaway spending and deficits, and instead endangers the financial system by risking default on federal obligations. Lawmakers should replace it with legislation capping the long-term federal debt at 100 percent of GDP, with automatic savings reforms to address overages.

Conclusion

The reform proposals detailed here will not be easy or popular. Indeed, the broad popularity of Social Security, Medicare, and low taxes have created the unsustainable fiscal outlook that now threatens the economy. However, the mathematical and economic reality always eventually wins. The federal government has simply promised far more government benefits than the economy and tax system will be able to deliver. These swelling deficits will not be solved by conservative fantasy scenarios of unilaterally eviscerating social and international spending. Nor can the liberal fantasy scenarios of exorbitant tax-the-rich hikes or defense cuts by themselves come close to stabilizing long-term deficits. Both Republicans and Democrats will have to come together, put everything on the table, and move far outside of their ideological comfort zones in order to build a bipartisan solution that can prove sustainable both economically and politically over several decades. The individual policy levers are somewhat flexible, what matters is a bipartisan willingness to come together and address the debt before it jumps even higher, interest rates escalate further, and the baby boomers grow too old to absorb any benefit reforms. Until the debt is stabilized, all other long-term economic priorities will remain endangered.

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Executive Summary

Annual budget deficits doubled to $2 trillion over 2022–23 and are headed toward $3 trillion a decade from now. Social Security and Medicare face a combined $124 trillion cash deficit over the next 30 years. The national debt is projected to soar past 165% of gross domestic product (GDP) within three decades—or as high as 300% of GDP if interest rates remain elevated and Congress extends expiring policies. At that point, interest costs could consume half to three-quarters of all federal tax revenues. Unless reforms are enacted, Washington’s escalating borrowing demands will come to overwhelm the capacity of financial markets to supply this much lending at plausible interest rates. When that event occurs, or even approaches, interest rates will soar and the federal government will not be able to pay its bills, with dire consequences for the U.S. economy.

In short, Washington is on a totally unsustainable fiscal path, and a debt crisis is coming.

There is a way to avert this debt crisis. However, lawmakers must act quickly to reform Social Security and Medicare, as every year 4 million more baby boomers retire into those programs, and the eventual cost of reform rises by trillions of dollars. This report presents a realistic, nonpartisan, and specific 30-year blueprint—each element of which is “scored” using data from the Congressional Budget Office (CBO)—to stabilize the national debt at the current 100% of GDP, and even reduce it eventually.

The fiscal consolidation in this report calls for trimming some Social Security and Medicare benefits for upper-income recipients. Some taxes would rise. Spending on defense would continue to fall as a share of the economy. In short, there is something in this blueprint for everyone to oppose. But letting the country plunge into a debt crisis would be far more painful than this blueprint’s reforms.

Introduction

Annual budget deficits doubled to $2 trillion over 2022–23 and are headed toward $3 trillion a decade from now (Figure 1).[1] Social Security and Medicare face a combined $124 trillion cash deficit over the next 30 years. The Congressional Budget Office (CBO) projects that the national debt will soar past 165% of gross domestic product (GDP) within three decades—or as high as 300% of GDP if interest rates remain elevated and Congress extends expiring policies.[2] At that point, interest costs could consume half to three-quarters of all federal tax revenues. Unless reforms are enacted, Washington’s escalating borrowing demands will, at some point, overwhelm the capacity of financial markets to supply this much lending at plausible interest rates. When that event occurs, or even approaches, interest rates will soar and the federal government will not be able to pay its bills, with dire consequences for the U.S. economy.

In short, Washington is on a totally unsustainable fiscal path that virtually ensures some version of a debt crisis. Yet most lawmakers tasked with the responsibility of averting that outcome express little interest in doing so. No recent president has presented a specific plan to stabilize the long-term budget, and Presidents Trump and Biden each added trillions in new debt. Congress continues to drive up federal spending, and is soon likely to renew trillions of dollars in expiring tax cuts. President Biden and Republican lawmakers compete to see who can most vociferously oppose any reforms to Social Security and Medicare’s massive shortfalls, as well as any new taxes for all but the top-earning 5% of earners. Deficits rise by $1 trillion annually while proposals to trim even a few billion dollars are met with overwhelming resistance. Surveys show that voters continue to demand even more tax cuts and spending hikes.[3]

Thus, American presidents, lawmakers, and even voters are in deep denial of the fiscal reckoning that is ahead. Interest rates are already rising, and politicians have made popular long-term spending commitments that vastly exceed what they are willing to tax and what the financial markets will be able to lend. The only decision is whether Washington gradually imposes savings proposals on its own terms, or whether it waits for a debt crisis to impose much more drastic and painful savings reforms.

There is a way to avert this debt crisis without historic broad-based tax increases or significant cuts to antipoverty and social spending. However, lawmakers must act quickly to reform Social Security and Medicare, as every year 4 million more baby boomers retire into those programs and the eventual cost of reform rises by trillions of dollars.

This report presents a specific 30-year blueprint—each element of which is “scored” against the most recent CBO Long-Term Budget Outlook—to stabilize the national debt at the current 100% of GDP. Section I identifies the drivers of long-term debt. Section II addresses false “easy” solutions deployed to avoid real reform. Section III presents the blueprint. Section IV defends the blueprint against both conservative and liberal objections.

The approach of this report requires a careful explanation. Yes, the current political environment renders virtually every significant deficit reduction proposal fatally unpopular and unpassable (otherwise, they would already have been enacted). However, at some point down the road—whether due to a courageous Congress, a voter uprising, or (most likely) fiscal constraints imposed by financial markets and a weak economy—Congress and the White House will likely be forced to confront deficits and placed previously rejected savings options back onto the table. When Congress finally commits to stabilizing the debt, this report will provide a specific, scored, and potentially bipartisan proposal to achieve that goal.

In other words, this report does not propose yet another hyper-partisan conservative or liberal fantasy scenario. It does not necessarily even feature reforms that the author would select if political compromise were unnecessary. Nor is it just a set of generic (and unrealistic) long-term spending and tax targets without detailing specific programmatic reforms that could meet those targets. This report is intended to provide a specific, well-crafted blueprint that could realistically appeal to both parties if they ever commit themselves to stabilizing the debt.

The fiscal consolidation in this report calls for some Social Security and Medicare benefits for upper-income recipients to be trimmed. Some taxes would rise. Spending on defense would continue to fall as a share of the economy. In short, there is something in this blueprint for everyone to oppose. But letting the country plunge into a debt crisis would be far more painful than this blueprint’s reforms.

I. Why the Debt Is Soaring

From the mid-1950s through 2008, the national debt held by the public averaged 35% of GDP (typically ranging between 25% and 50%). This level of borrowing could easily be absorbed by the increasingly global financial markets, and it resulted in interest costs averaging 2% of GDP (roughly 10% of a typical federal budget). Since 2008, the great recession and the beginning of the baby-boomer retirements have nearly tripled the debt, to 100% of GDP.[4] If current policies continue, the debt is projected to reach an unprecedented 236% of GDP within 30 years.[5] Interest would become the largest federal expenditure and consume a majority of federal taxes.

Even these escalating debt estimates accept CBO’s rosy assumption that the interest rate paid on the federal debt gradually rises to 3.8% over three decades. Yet the 10-year Treasury bond (which often approximates the average rate paid on the federal debt) has already spent the first half of 2024 at 4%–5%. While the Federal Reserve is expected to reduce interest rates within the next year, both history and economic fundamentals suggest that the rate will not return to the abnormally low federal funds rates that prevailed between 2008 and 2021. Over time, interest rates are more likely to rise because of a less-accommodating Federal Reserve, retiring baby boomers moving from savers to spenders, a lessening of the global savings glut, and the economic consensus that a steeply growing federal debt will push up interest rates.[6]

Each percentage point that interest rates exceed the 3.8% baseline estimate would saddle Washington with an additional $35–$45 trillion in interest costs over three decades—nearly the cost of adding another defense department (again, that is for each percentage point). If the average rate on the federal debt rises to 5% or 6%, the federal debt could exceed 300% of GDP within three decades (Figure 2). At that point, interest on the debt would likely consume nearly all federal taxes. Higher interest rates would also affect borrowing for housing, cars, student loans, and business loans, risking a significant economic slowdown. Unlike Greece’s, the U.S. debt would be too large to be easily absorbed by the global economy.

This is not a problem caused by falling tax revenues. Even as tax rates greatly fluctuated, federal revenues have averaged 17.4% of GDP since 1960, and are projected by CBO over the next three decades to grow to 18.8% of GDP (or 17.9% if the 2017 tax cuts are renewed). On the spending side, both discretionary spending and outlays for smaller mandatory programs are projected to fall as a share of the economy over time.

Instead, the entire increase in long-term debt will come from surging Social Security, Medicare, and other government health-care spending (Figure 3). According to CBO, these costs have risen from 7% to10% of GDP since 2000 and are projected to reach 14.3% of GDP by 2054—or 20.6% of GDP when the interest cost of Social Security and Medicare’s annual deficits are included. By 2054, CBO data project the Social Security and Medicare systems to run an annual combined deficit of 11.3% of GDP—and the rest of the budget to run a 2.8% of GDP surplus.[7]

Why Social Security and Medicare Face a $124 Trillion Cash Shortfall

It is a popular myth that Social Security and Medicare are fully paid for and cannot contribute to budget deficits. In reality, Medicare Parts B and D benefits (physician and drug benefits, respectively) are not pre-funded by payroll taxes at all and represent a federal handout no different from any other income support program (senior premiums finance only one-quarter of their cost). The “trust-fund” programs of Social Security and Medicare Part A are entitled to run annual deficits in proportion to their prior-year program surpluses, while receiving annual general revenue subsidies in the form of interest payments on their bonds (and occasional bailouts of payroll-tax holidays). Moreover, CBO projections assume that Social Security and Medicare Part A benefits will continue to be deficit-financed even after their trust-fund balances reach zero in the next decade.

The costs are soaring, as well. Between 2008 and 2030, 74 million Americans born between 1946 and 1964—on average, 10,000 per day—will retire and receive Social Security and Medicare benefits. Of this group, those collecting early retirement at age 62 and living to age 84 will spend one-third of their adult life receiving federal retirement benefits.[8] The combination of more retiring baby boomers and longer life spans will expand Social Security and Medicare caseloads far beyond what current taxpayers can afford under current benefit formulas. In 1960, five workers paid the taxes to support each retiree (and, of course, Medicare did not exist). The ratio of workers to retirees has now fallen below 3–1, and is on its way to 2–1 by the 2030s. When today’s teenagers are adults, each married couple will basically be responsible for the Social Security and health care of their very own retiree.

These demographic challenges are worsened by rising health-care costs and repeated benefit expansions enacted by lawmakers. Today’s typical retiring couple has paid $214,000 into Medicare and will receive $635,000 in benefits (in net present value), partly because Medicare’s physician and drug benefits are not pre-funded with payroll taxes and are only partially funded by retiree premiums.[9] Most Social Security recipients also come out ahead. Thus, most seniors’ benefits greatly exceed their lifetime contributions to the Social Security and Medicare systems. By 2030, 74 million baby boomers will have joined a retirement benefit system that runs a substantial per-person deficit.

This year, Social Security and Medicare will collect $1,701 billion in payroll taxes and dedicated revenues and pay $2,349 billion in benefits. Add in $21 billion in resulting interest costs from this borrowing, and Social Security and Medicare will contribute $651 billion to the 2024 budget deficit. As Social Security and Medicare costs mount, these annual shortfalls will leap to $2.2 trillion a decade from now (Figure 4).[10] This will drive the vast majority of the growth of the budget deficit.

The long-term figures are even more dire. CBO data project that, between 2024 and 2054, Medicare is projected to collect $28 trillion in dedicated revenues (such as payroll taxes) and spend $77 trillion in benefits. This shortfall will, in turn, add $38 trillion in interest costs, bringing Medicare’s total budgetary shortfall to $87 trillion. During that same period, Social Security will collect $74 trillion and spend $94 trillion, combining with $17 trillion in resulting interest costs for a total shortfall of $37 trillion (Figure 5).[11] (To adjust these 30-year totals for inflation, trim by one-third.) Rather than adequately self-finance through payroll taxes and premiums, these two programs are set to add $124 trillion to the national debt over three decades. The rest of the federal budget is roughly balanced over the next 30 years, depending on the fate of the 2017 tax cuts and discretionary spending.

Figure 6 expresses the same projections in a different manner. By 2054 Social Security and Medicare will collect 6.3% of GDP in dedicated revenues and spend 11.3% of GDP in benefits—plus 6.3% of GDP in interest costs resulting from these two programs’ deficits. Allowing two programs to run a budget deficit of 11.3% of GDP is unsustainable. There is no way for other tax increases or spending cuts to finance that gap.

Most Seniors Are Not Poor

The Social Security and Medicare debate often brings opposition to reform based on the myths that: 1) most seniors are poor; and 2) seniors are simply getting back the money they paid into Social Security and Medicare. The first myth of widespread senior poverty is a holdover from the 1930s, when Social Security was created. Today, senior citizens are the wealthiest age group of Americans in history.[12] Millions of retiree households continue to earn incomes greater than $100,000 even after retirement, driven by (nonhousing) net worths in the millions.[13] Senior household incomes have grown 60% faster than inflation since 1980, compared with 15% for the average worker.[14] In fact, because most retirees are wealthier than the taxpayers financing their benefits, Social Security today largely redistributes income upward, not downward. These effects are further magnified by the fact that most seniors no longer face mortgage or child-raising expenses. Of course, many seniors still struggle (which can be affordably addressed by hiking the minimum benefit). Nevertheless, seniors have the lowest poverty rate of any age group.[15]

The relative wealth of seniors should influence the conversation of the second myth that seniors are merely getting back what they paid in. A middle-earning couple turning 65 years old next year will have paid $997,000 over their lifetime into Social Security and Medicare yet receive $1,466,000 in benefits (all adjusted into present value). Lower-earners as well as one-earner couples will come out even further ahead. Moreover, Social Security and Medicare automatically become more generous for each generation (even after adjusting for inflation), partly because of benefit formulas that provide subsequent generations with much higher initial benefits. A middle-earning married couple retiring in 2050 will receive Social Security benefits that are more than double the benefits of those who retire in 2000 (again, these figures are adjusted for present value).[16]

So a key question for policymakers is whether it makes sense to raise taxes on working families by a staggering $69 trillion over three decades[17]—in the largest intergenerational wealth transfer in world history—to ensure that even millionaire seniors can continue to receive Social Security and Medicare benefits far exceeding their lifetime contributions to those systems (this figure reflects the program shortfalls excluding interest costs that would be averted).

Time Is Running Out for Reform

A common argument against addressing Social Security and Medicare is that “we’ve been hearing these same fake warnings for decades and nothing has happened.” This view misinterprets the warnings. Between 1999 and 2023, the year in which the Social Security trust fund was projected by the system’s trustees to reach insolvency has moved up—not back—from 2036 to just 2033.[18] This period corresponds to the point at which virtually all 74 million baby boomers will have retired into Social Security and Medicare, and rising health-care costs will have deepened Medicare’s shortfalls. The aggressive case for reform in the 1990s and early 2000s was driven not by an impending budget crisis but rather a hope that Social Security and Medicare reforms could be gradually phased in while the baby boomers were still in their peak earning years. That opportunity was missed, and now the Social Security trust fund is in deficit and heading toward insolvency on a similar schedule as was warned 25 years ago. Medicare’s annual shortfalls (most of which are not limited by a trust fund) are accelerating as well.

Thus, responsible reforms cannot wait any longer. Every year, 4 million more baby boomers retire into Social Security and Medicare, and within six years nearly all 74 million will be retired. As baby boomers move into their seventies and eighties, they will be unable to absorb any significant reforms to these programs—leaving the massive taxpayer costs politically irreversible. Surging interest costs are mostly irreversible, too, because of the rising debt that will have accumulated (and will continue to accumulate if Social Security and Medicare cannot be reformed) and because the rising interest rates in this situation cannot simply be reversed, either (unless the Federal Reserve unwisely commits to monetizing much of the debt). In fact, if interest rates are driven upward by financial markets losing faith in the federal government’s long-term ability to manage its debt, the resulting risk premium might remain baked into interest rates for several years or even decades. Thus, every year of delay dramatically raises the cost of reform.

Nor is it any longer sustainable to grandfather out of reform everyone over the age of 50. That window closed in the 2000s, when the trillions in unfunded costs were still 20 years away. Now, such a policy would grandfather out the 74 million baby boomers whose costs are driving the shortfalls, as well as most of Generation X. It would gradually phase in reforms beginning in the 2040s and thus leave in place nearly the entire $124 trillion Social Security and Medicare shortfall that is projected over the next three decades. Decades of denial and procrastination by lawmakers (and voters) mean that Social Security and Medicare reform is no longer just about future generations. More than 10,000 baby boomers are retiring every day, trillion-dollar deficits are here, the trust funds are approaching insolvency, and reform can no longer wait for future generations.

How a Debt Crisis Might Play Out

The national debt’s share of the economy cannot rise forever. At a certain point, even large global savings markets will be stretched, and investor confidence in the U.S.’s ability to finance its debt will evaporate. Additionally, interest costs will consume an increasing share of tax revenues, creating pressure for unpopular tax increases and spending cuts.

It is unclear from whom Washington will borrow as much as $175 trillion (assuming that current tax cuts and spending programs are renewed) over 30 years to cover its projected deficits. China and Japan each hold roughly $1 trillion in U.S. debt and have neither the capacity nor the interest to cover more than a tiny fraction of impending American borrowing.[19] Other countries limit their Treasury holdings, and the Federal Reserve has been trying to shrink its $5 trillion holdings of Treasury debt.[20] That leaves the U.S. financial markets—insurance companies, investors, pension funds, and state and local governments—to cover perhaps $150 trillion in projected Washington borrowing. The impending debt surge has barely begun, and yet a 2023 Wall Street Journal headline had already declared: “Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds.”[21]

Initially, Washington’s insatiable borrowing demands will push up interest rates (which will, in turn, further widen budget deficits). But at a certain point, the financial markets might be unable to supply Congress’s lending demands at plausible interest rates. Even before that point, investors might simply lose confidence in Washington’s long-term finances, and shift their investments away from Treasury holdings. Ultimately, Washington cannot borrow what investors will not lend and a vicious cycle of rising debt and interest rates increasingly appears to be the most likely outcome.

A debt crisis will not likely come in a single cataclysmic crash that brings chaos and depression. Instead, persistent deficits of 8%–10% of GDP might bring a series of financial “mini-panics” of rising interest rates and economic stagnation that force Washington to rein in budget deficits. The most likely scenario involves Congress initially targeting lower-hanging fruit such as taxing the rich, trimming defense, and cutting programs such as foreign aid. When these savings prove insufficient to close such large and swelling deficits, lawmakers might reform other tax breaks, as well as spending on antipoverty and social programs. Eventually, they will discover that Social Security and Medicare shortfalls approaching 10% of GDP cannot remain completely protected by eviscerating the rest of the budget and taxing the rich at revenue-maximizing rates. With all savings alternatives tapped out, the only remaining option will be to go where the money is: Social Security, Medicare, and middle-class taxes. If most baby boomers are too old to absorb benefit changes, financing the projected budget deficits might require payroll tax increases as high as 10% combined with a value-added tax exceeding 10%. The result will be a massive debt, sluggish economy, high interest rates, and European-sized taxes—without the accompanying social benefits enjoyed by working European families.

No one can predict whether the financial markets will force reforms in 5, 15, or 25 years.[22] However, the math always wins, and no economy can finance structural budget deficits of 8%–10% of GDP (and eventually higher) forever. On the one hand, the U.S. will have some leeway due to its reputation as a safe harbor for investment and status as the world’s reserve currency. On the other hand, absorbing a debt of nearly 200% of the U.S. economy would be much more expensive for the global markets than absorbing, say, 200% of a smaller GDP like that of Greece.

There is another potential danger. Rather than allow rising interest rates on the debt to force even larger tax hikes and spending cuts, Congress or the executive branch could simply require that the Federal Reserve maintain low interest rates and purchase much of the debt to reduce interest costs. A version of this approach—known as fiscal dominance—previously occurred during World War II and contributed to substantial inflation and economic instability when the White House and Treasury refused to free the Federal Reserve until several years after the war.[23] Such a response to future deficit projections would surely bring substantial inflation and economic instability.

Lest these fiscal warnings appear excessively alarmist, the sober-minded economists at the University of Pennsylvania’s Penn-Wharton Budget Model recently attempted to analyze the long-term fiscal outlook of the United States.

Their study explains that leading economic models used by economists and by Congress “effectively crash when trying to project future macroeconomic variables under current fiscal policy. The reason is that current fiscal policy is not sustainable” (italics added).[24] In fact, the Penn-Wharton economists note that the current fiscal trajectory is so dangerously untenable that economic modelers are forced to add in an assumption that Washington aggressively raises taxes and/or slashes spending. They simply cannot model a functioning long-term economy at the baseline-projected debt levels.

II. The Mirage of “Easy” Solutions

Standing in the way of making the changes to be outlined in this budget plan—or other plausible proposals to avert a debt crisis—are a series of false claims that the problem is easily solved.

Economic Panaceas

Steep economic growth. Political candidates routinely promise to address deficits by producing economic growth rates of 4% and even 5%—more than double the projected levels—while citing the fast economic growth in the decades following World War II. The first problem with this promise is that the economic growth of the 1950s–1970s was primarily driven by the large labor-force expansions of women and then baby boomers. However, the size of the labor force is projected to grow by just 0.1% annually over the next 50 years as the baby boomers retire, birth rates slow, and immigration rates dip.[25]

That leaves productivity to drive nearly all economic growth. CBO projects that total factor productivity growth will average 1.1% annually for the next three decades—roughly matching the last three decades, which included a late-1990s technology boom.[26] If productivity somehow grows by 1.6% annually—nearly 50% faster than CBO’s 1.1% long-term annual projection—it would shave approximately 44% of GDP off the projected debt growth within three decades.[27] The debt would still continue growing to unsustainable levels, but each given debt level would occur a decade later than under baseline productivity growth. In other words, economic growth helps but is no panacea.

One limitation is that faster productivity growth pushes up interest rates on the federal debt and drives up costs for Social Security (benefits rise with wages) and Medicare (health-care consumption rises with income). Thus, the Social Security trustees have noted that a 50% hike in real wage growth would delay the system’s trust-fund insolvency by merely one year.[28]

Much can be done to increase real economic growth rates above CBO’s long-term 1.7% annual projections. In particular, lawmakers should aim to grow the labor-force participation rate; should continue to refine the tax code to encourage work, savings, and investment; and should improve policies in the areas of trade, energy, job training, education, and health care. However, a refusal to address surging spending and deficits would still undermine economic growth by raising interest rates, decreasing business investment, and ultimately forcing up taxes. Lawmakers should aspire to faster growth but not simply assume it—especially if entitlement costs keep growing.

Inflate the debt away. Advocates of Modern Monetary Theory (MMT)—a fringe theory aggressively promoted on X (formerly Twitter), primarily by individuals with no formal economics training—assert that escalating debt is not a serious concern because the federal government can print its own money. Cutting through its blizzard of unnecessarily dense jargon and tautologies, MMT would have the Federal Reserve essentially pay for current and future debt by printing money.[29]

Of course, expanding the money supply enough to pay down a $28 trillion federal debt and finance $69 trillion in (noninterest) Social Security and Medicare obligations over three decades would surely bring hyper-inflation. This hyper-inflation would also dramatically expand future federal spending liabilities by: 1) raising Social Security and Medicare benefits that are tied to price levels; and 2) raising interest rates on any future federal debt.

Low interest rates. CBO’s long-term budget projections—which show a federal debt surging past 165% of GDP within three decades under its rosiest scenario (or 236% of GDP under a more realistic scenario under current policies)—already assume that Washington’s average interest rate never even exceeds 3.8%. This rate is not only below the levels of the 1990s (6.9%) and 2000s (4.8%); it is also below the Treasury 10-year bond yield, which in late 2023 approached 5%. Furthermore, the economic-policy-community consensus is that such a large increase in federal debt would raise interest rates. For each percentage point that interest rates rise, Washington must pay an additional $35–$45 trillion in interest costs over 30 years.[30] In other words, CBO debt projections are far more likely to underestimate than to overstate future interest rates.

Immigration. Smart immigration policy might, on net, marginally improve the federal budget picture and the economy. But it is not a cure-all. High-skill immigrants send higher tax revenues during their working careers, but their eventual retirement into Social Security and Medicare would add new liabilities to the system. Low-skill immigrants generally increase costs to the federal government (and especially to state and local governments)—at least, in the first or second generation—because the resulting education, infrastructure, and social spending exceeds the added tax revenues.

Conservative Fantasies

Pro-growth tax policy. Economic growth is obviously important to deficit reduction—and tax legislation that depresses savings and investment must be avoided. Nevertheless, the historical record clearly shows that the vast majority of tax cuts do not increase tax revenues—especially by enough to keep pace with federal programs growing 6% annually.

Eliminating welfare and lower-priority spending. Over the past 30 years, congressional GOP deficit-reduction plans have typically imposed nearly all the first decade’s cuts on antipoverty programs (Medicaid, Affordable Care Act subsidies, SNAP, and others) as well as nondefense discretionary spending, such as education, veterans’ health, homeland security, medical research, foreign aid, and infrastructure. This pot of spending—7% of GDP and declining—would have to be nearly entirely eliminated to balance the budget a decade from now. Such drastic cuts will never be passed by any Congress, as their advocates on Capitol Hill and in top think tanks surely know. While there are any number of failed and unnecessary programs in need of major reform, proposals to eviscerate these entire categories of spending while letting Social Security and Medicare off the hook are a politically delusional distraction.

Impossibly tight spending caps. Spending caps are a vital tool to enforce realistic spending targets. But absent any achievable underlying programmatic reforms to meet those targets, they are an empty gimmick. Nevertheless, many conservative budget blueprints simply divide the federal budget into five to eight spending categories and then assume unprecedented cuts in targeted categories, with no underlying policy proposals to achieve those targets. The 2011 Budget Control Act has shown that Congress will cancel overly tight caps rather than force politically suicidal cuts.[31] Budget process reforms can lay the groundwork for subsequent spending cuts, but the spending cuts themselves still must be specific, realistic, and passable.

Devolution to state governments. There is a strong policy case for allowing states to have more control over poverty relief, education, infrastructure, economic development, and law-enforcement spending.[32] However, counting the federal savings from devolution as the centerpiece of a deficit-reduction strategy is disingenuous because it simply shifts the deficits and taxes to the state level (minus modest efficiency gains that might come from better state fiscal management). The purpose of deficit reduction is to limit government borrowing and tax increases (and to limit economic damage), not merely to change the address where the taxes are sent.

Liberal Fantasies

“Just tax the rich.” Liberal advocates often vastly overstate the degree to which upper-income tax increases can finance the ever-expanding government. In the first place, the U.S. already has the most progressive tax code in the OECD—even adjusting for differences in income inequality. And setting aside the moral questions that would be raised by the government seizing the vast majority of any family’s income, basic math shows that large tax increases on high-income Americans cannot close most of the long-term budget deficit.

Even if Washington taxes away every dollar of income earned over the $1 million threshold (and everyone affected kept working anyway), that additional 3.8% of GDP collected would not even balance the long-term budget.[33] Seizing every dollar of wealth from America’s billionaires—every home, car, business, and investment—would fund the federal government one time for nine months.[34]

In a 2023 report, “The Limits of Taxing the Rich,” I modeled the maximum potential tax revenues that can be raised from taxing the rich.[35] Specifically, the report modeled a scenario in which individual, corporate, investment, and estate tax rates were each raised to their revenue-maximizing levels. Additionally, relevant individual and corporate tax preferences were drastically scaled back, and the IRS was given nearly unlimited resources to combat tax evasion.

Such a tax package would hit wealthy families and corporations with some of the highest income, investment, corporate, and estate tax burdens in the developed world, dwarfing those of much of Europe. Yet the total revenue raised would be 2.1% of GDP (or $7 trillion over the decade) before accounting for the macroeconomic losses that would likely reduce new revenues to somewhere 1.0%–1.5% of GDP (or $3.5 trillion–$5 trillion over the next decade). The reality is that layering higher rates on top of each other would reduce work, savings, and investment; encourage income shifting to minimize tax burdens; and induce tax evasion. Setting tax rates at their revenue-maximizing levels means that—by definition—the economic damage has swelled large enough to completely offset any additional revenue gains. Layering multiple revenue-maximizing tax policies on top of each other would induce behavioral and macroeconomic responses that would pare back 10%–50% of the static revenue gain, according to consensus economic analysis. The likely 1.0% and 1.5% of GDP in new tax revenues from these policies would not come close to eliminating annual budget deficits that are projected at 8% of GDP within a decade, and 14% of GDP within three decades, under current policies. Additionally, the significant reduction in investment and business expansions would reduce wages, slow job growth, and lower overall economic growth.

The point is not that taxes on the wealthy should not rise. Everything must be on the table, and this report proposes significant tax increases for businesses and high-earning families. Rather, the point is that such policies must be economically and mathematically realistic. There are simply not enough millionaires to finance a progressive utopia. The top-earning 5% of families and pass-through businesses currently account for 32% of all income. That means that 68% of this tax base comes from those outside the top 5%. Furthermore, that top 5% already pays 42% of all federal taxes, including 62% of all federal income taxes, which leaves less room for additional taxes.[36] So while some upper-income tax increases are possible, the idea that the U.S. can close a $69 trillion noninterest shortfall for Social Security and Medicare—and even pay for additional spending proposals on the liberal agenda—solely by sticking it to the rich is a fantasy that finds no support in budget math.

Europe has already figured this out. The U.S. already taxes the rich—measured by both tax rates and tax revenues—at levels roughly equal to the OECD average. Yes, the other 38 OECD nations collect tax revenues that, on average, exceed the U.S. by 7.5% of GDP (at all levels of government). However, nearly this entire difference results from the other 38 OECD nations hitting their middle class with value-added taxes (VATs) that raise an average of 7.2% of GDP. And while the progressive avatars of Finland, Norway, and Sweden exceed U.S. tax revenues by 16% of GDP, that gap virtually disappears after accounting for the 14.5% of GDP in higher payroll and VAT revenues that broadly hit the Nordic middle class. Europe finances its progressive spending levels on the backs of the middle class, not the wealthy.[37]

An inescapable reality gets lost in this country’s intractable budget debates: if the U.S. wants to spend like Europe, it must also tax like Europe. This means, in addition to federal and state income taxes, a broad-based VAT set at an exorbitant rate. Lawmakers who pledge to stabilize the debt without touching government spending would need new tax revenues equivalent to a VAT that rises to 22% by 2030 and 36% by 2054.[38] Alternatively, lawmakers could gradually nearly double the payroll tax from 15.3% to 29.6%.

We likely need a combination of large income, payroll, capital-gains, corporate, and value-added tax increases to eventually raise 5% of GDP and stabilize the debt without touching Social Security, Medicare, Medicaid, antipoverty, and social spending (Table 1). While it is easy to say that major spending decreases are a nonstarter, the all-tax alternative is even less plausible. Remember that, during 2021–22, a Democratic White House and Congress never even seriously considered raising taxes on the rich, other than a modest corporate minimum tax (after all, wealthy people vote and donate to Democrats, too). A Bernie Sanders-style soak-the-rich tax package is not plausible, economically or politically.

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Introduction

Social Security’s deepening funding shortfalls are driving the system’s trust fund to within a decade from insolvency, which would mean an immediate 23% reduction in benefits. Social Security’s program deficits—which budget experts have warned for decades would occur as the 74 million baby boomers retire—remain largely ignored by politicians and political activists. However, when pressed for solutions, both progressives and an increasing number of nonprogressives claim to have a simple and obvious answer: apply Social Security’s 12.4% tax rate to all wages, rather than continue to limit this tax to an individual’s first $168,600 earned annually (this cap is the limit for 2024, and it automatically rises with inflation).[1] Eliminating the tax cap is not typically presented as a partial solution to Social Security’s budget shortfalls, to be combined with other policies such as raising the eligibility age or trimming upper-income benefits. Rather, this policy is often sold as a singular cure-all that would bring permanent Social Security surpluses and thus avert the need for any benefit or eligibility age hikes.

Such savings assumptions are vastly overestimated, according to consensus estimates. And the prospect of imposing a steep 12.4% tax-rate increase on families that would be considered upper middle class in many metropolitan areas is so unpalatable that even the leading progressive Social Security proposals by Senator Bernie Sanders (D–VT)[2] and Representative John Larson (D–CT)[3] would reimpose this tax only beginning at the higher wages of $250,000 and $400,000, respectively (and neither bill comes close to achieving solvency purely on this policy).

While some changes to the Social Security tax cap should certainly be on the table, eliminating the cap would provide smaller than expected savings while imposing a substantial, mostly unanticipated, burden on other federal funding priorities. This issue brief details the six main drawbacks of uncapping the tax.

The Drawbacks

1. Capping High-Earners’ Social Security Taxes Also Caps Their Benefits.

The current cap on Social Security taxes is not intended to be a giveaway to the rich. Because benefit formulas are directly tied to Federal Insurance Contributions Act (FICA) tax contributions, the $168,600 cap on taxable wages (which translates into a limit of $20,906 in Social Security taxes split between the employer and employee) also caps the amount of wages and taxes that can earn Social Security benefits. Uncapping Social Security’s wage base and taxes would also uncap the benefits that high-earning workers could earn.[4]

Even with the cap on taxes, high-earners receive a worse deal than low-earners. This is because—once lifetime wages are adjusted into current levels based on wage inflation—the initial Social Security benefit replenishes 90% of the first $14,088 in annual wages, then 32% up to the $84,936 level, and 15% of the remaining wages up to the taxable maximum (benefits are calculated based on monthly wages but are annualized here for illustrative purposes).[5] Thus, while typical high-earners will receive a larger initial Social Security benefit than low-earners, their return as a share of the lifetime Social Security taxes will be lower. Low-earners will see their Social Security benefits replace a larger share of their lifetime contributions than high-earners. Sure enough, a 2023 analysis by the Urban Institute shows that—measured by net present value—low-earners come out far ahead on Social Security, while some categories of high-earners will receive a net negative return on their lifetime program contributions.[6] Social Security formulas are already strongly progressive even with the tax cap.

Nevertheless, a common reform proposal would uncap Social Security taxes while canceling the corresponding benefit increase. Such a reform would fundamentally change the nature of the Social Security system. Social Security has always been presented as a social insurance program in which, as with a traditional pension, your benefits are “earned” by your level of tax contributions. Thus, Social Security’s benefit formulas have always ensured that future benefits rise alongside current tax contributions (albeit by a ratio that declines as wages and payroll taxes rise, as described above). If lawmakers completely de-link these new payroll taxes from earning any corresponding benefits, Social Security will function more like a traditional income-redistributing welfare program. De-linking contributions and benefits may be justified on fiscal grounds; yet such a move was opposed for decades by New Deal–inspired liberals who feared that converting Social Security more into a welfare system would undermine public support.

2. No, Eliminating the Cap Does Not Bring Permanent Solvency.

Advocates regularly overstate their case by relentlessly claiming that eliminating the cap will bring permanent solvency to Social Security and thus prevent any benefit cuts or eligibility age hikes. However, eliminating the cap would close only half of Social Security’s long-term shortfall.[7] Social Security spending is projected by the Congressional Budget Office (CBO) to level off at 6.2% of GDP over the long term.[8] Yet the Social Security trustees calculate that eliminating the cap would merely raise Social Security revenues from 4.5% to 5.4% of GDP—while also eventually nudging up spending levels by 0.1% of GDP because more payroll taxes automatically bring modestly higher long-term benefit levels.[9]

For a rule of thumb, the current Social Security tax raises 4.5% of GDP[10] by catching 83% of all wages in eligible jobs,[11] so catching 100% of wages would collect revenues of 4.5/0.83 = 5.4% of GDP. Thus, as Figure 1 shows, even eliminating the cap would not avert the need to raise the eligibility age and reform benefits.

3. Social Security Would Quickly Return to Deficits.

The Social Security trustees project that, even if the tax cap is eliminated, the system would fall back into deficit by 2029—just five years from now.[12] The trustees also show that the Social Security trust-fund exhaustion date would move out 21 years, to 2055.[13] However, the box below explains that the trust fund is an accounting mechanism that is largely irrelevant to Social Security’s finances. If those initial Social Security surpluses are not saved or used to pay down debt—a safe bet—then those Social Security deficits between 2029 and 2055 would still have to be financed by concurrent taxes or borrowing the same, as if no trust fund existed.

Is the “Raided” Trust Fund to Blame?

A common argument asserts that Social Security’s financial difficulties are simply the result of lawmakers raiding its $3 trillion trust fund. In reality, the trust fund was always just an accounting mechanism. It never contained real economic resources from which to pay benefits, and there was never any statutory mechanism for Congress to “save” the $3 trillion surplus that Social Security ran between 1983 and 2009. Instead, the Social Security Administration (SSA) was required by law to lend its surpluses to the Treasury to finance current government spending—with a promise that the Treasury (i.e., the taxpayers) would repay the Social Security system (with interest) down the road when it begins to run deficits. The balance of the Social Security trust fund is merely a running tally of how much of that $3 trillion loan has yet to be repaid to SSA by the Treasury and taxpayers. It is not a savings account with economic resources from which to pay the benefits.

But don’t take my word for it. Even President Obama’s FY 2017 budget proposal clarified that:

From the perspective of the Government as a whole, the trust fund balances do not represent net additions to the Government’s balance sheet…. When trust fund holdings are redeemed to fund the payment of benefits, the Department of the Treasury finances the expenditure in the same way as any other Federal expenditure—by using current receipts if the unified budget is in surplus or by borrowing from the public if it is in deficit. Therefore, the existence of large trust fund balances, while representing a legal claim on the Treasury, does not, by itself, determine the Government’s ability to pay benefits.[a]

Put another way, investing an initial Social Security surplus in Treasury bonds creates an asset for Social Security and an equal liability for the Treasury. Since both borrower and lender are part of the same federal government, the net effect on overall federal finances is to cancel each other out. Counting those Treasury bonds as net wealth is the equivalent of raiding one’s own retirement savings to go on vacation, writing yourself an IOU to repay your retirement fund later, and then treating that IOU as new net wealth to offset the cost of the vacation.

Setting aside the accounting minutiae, even if that $3 trillion Social Security surplus had been saved in the “lockbox,” it would finance only a small fraction of the $39 trillion Social Security shortfall ($23 trillion in program deficits plus $16 trillion in resulting budget interest costs) projected by CBO over the next 30 years (Figure 2).[b] The effect of the Social Security trust fund on the system’s long-term finances has been greatly exaggerated.

4. Even Canceling the Accompanying Benefit Hike Does Not Save Much.

Advocates of eliminating the tax cap often claim to ramp up the savings by canceling the additional Social Security benefits that—by current formula—would be paid out of some of those new taxes. However, in addition to undermining Social Security’s status as a social insurance program, such a reform would have no significant fiscal effect for the next several decades because the benefit-side changes resulting from uncapping FICA taxes are so small. Thus, the trustees estimate that canceling that benefit would still leave the system in deficit by 2029.[14] The trust-fund exhaustion date would move from 2055 to 2060—but again, that is mostly an accounting mechanism unless those earlier surpluses are saved.

The points above show that eliminating the payroll tax cap is not the cure-all that has been suggested and will not prevent the need for benefit and eligibility age changes. Still, many progressives might assert that even closing half of the Social Security shortfall would represent significant progress and reduce the amount of remaining savings required from other program reforms. However, the next two points show why eliminating the cap could be harmful to federal priorities.

5. It Would Use Up Nearly All Available “Tax-the-Rich” Revenues.

Most progressives (and even many nonprogressives) vastly overestimate the amount of tax revenues that could be raised from taxing the rich.[15] For example, even 100% tax rates on million-dollar earners would not come close to balancing the budget,[16] and seizing all $4.5 trillion of billionaire wealth—every home, car, business, and investment—would merely fund the federal government one time for nine months.[17]

Currently, the marginal tax rate on wages for the highest-earning Americans exceeds 50% when including the 37% federal income-tax rate, 2.9% Medicare payroll tax, 0.9% additional Medicare tax, and state income taxes that can surpass 10% in states with high concentrations of millionaires (and rise as high as 13.3% in California). Uncapping the payroll tax would add a 12.4% tax-rate increase for higher earners, pushing the top marginal rates well into the 60s. Given the economist consensus that the revenue-maximizing tax rate on labor income is 50%–73% (with marginal tax revenues quickly declining toward zero as tax rates approach the peak level), this policy clearly would leave no additional room to raise tax rates on wealthy families.[18] Note that investment tax rates are also near revenue-maximizing levels, a wealth tax is almost certainly unconstitutional, and the mortgage interest and state and local tax deductions have already been aggressively capped. America’s corporate tax rates remain higher than those of most competitors, and the plausible corporate tax hike revenues pale in comparison with Washington’s long-term budget deficits and new funding proposals.[19]

This means that—with the exception of a few modest tax tweaks—uncapping the payroll tax to finance Social Security would leave no pot of potential tax-the-rich revenues to close Medicare’s much larger funding shortfall (rising to 3.7% of GDP over three decades).[20] Nor could taxes on wealthy families finance much of the progressive wish list such as climate-change mitigation, free college, student loan forgiveness, health-care coverage expansions, K–12 education, infrastructure, child care, family leave, safety net, and housing. Progressives would need to sell (strongly unpopular) middle-class taxes to finance the rest of their agenda, as well as to address the massive Medicare shortfalls that will drive deficits steeply upward.

6. Are Wealthy Baby Boomers the Most Deserving Recipients of the Limited Remaining “Tax-the-Rich” Revenues?

Given the more pressing progressive priorities listed above (as well as growing baseline deficits driven by Medicare shortfalls and the remaining Social Security gap), directing nearly all remaining tax-the-rich revenues to baby-boomer Social Security benefits would be a curious choice. It would be especially surprising since today’s retirees are the wealthiest age group of Americans in history, with household incomes that have grown four times as fast as those of the average worker since 1980.[21] In fact, because most retirees are wealthier than the taxpayers financing their benefits, Social Security today largely redistributes income upward, not downward. Of course, many seniors still struggle (which can be more affordably addressed by hiking the minimum benefit), yet pledging that today’s workers will pay any tax necessary to ensure that even multimillionaire seniors can continue to receive benefits far exceeding their lifetime Social Security contributions is neither progressive nor sensible.

In fact, raising Social Security taxes (rather than addressing benefits) would accelerate the largest and most inequitable intergenerational wealth transfer in world history. Over the next 30 years, working families are on the hook to finance $164 trillion in Social Security and Medicare benefits for seniors (plus $47 trillion in interest costs resulting from these programs’ shortfalls).[22] Paying all promised Social Security and Medicare benefits would require—in addition to eliminating the Social Security tax cap—eventually raising the payroll tax rate by 8 percentage points plus imposing a 10% value-added tax. This burden would merely ensure that the wealthiest generation receives Medicare benefits more than triple their lifetime Medicare taxes (adjusted for net present value) and that they also come out ahead by 6% on Social Security.[23]

At least when working European families pay exorbitant tax rates, they immediately receive the benefits back through a healthy safety net. American workers will pay all these taxes to finance retirees, on the hope that perhaps the system will still be around decades later when they retire.

A more progressive reform would scale back the unaffordable (and, in many cases, not fully earned) spending promises made to wealthier baby boomers and save any future tax-the-rich revenues for higher progressive priorities.

Conclusion

Social Security’s growing shortfalls and looming trust-fund insolvency require the consideration of a broad range of savings policies. No single policy—including lifting the Social Security tax cap—can fix the entire shortfall without the need for other savings proposals. And while fully eliminating the cap could close half the long-term shortfall, advocates should note that such a policy would dramatically raise taxes not just on the rich but also the upper middle class. It would also rob nearly all other progressive priorities (and the larger Medicare shortfalls) of their largest potential tax-the-rich funding mechanism—all to ensure that (mostly) wealthy baby boomers receive benefits vastly exceeding their lifetime contributions to Social Security. Generational equity requires scaling back the unaffordable promises made to current and future retirees, rather than maxing out the taxes on working families.

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(Originally published by the Manhattan Institute)

Executive Summary

Budget deficits have risen to nearly 6% of GDP and are projected to rise to 10% of GDP over three decades. If Congress continues to enact additional tax cuts and spending expansions, these deficits will grow even larger. To close these baseline deficits and finance additional expansions, most progressives reject most spending cuts as well as middle-class tax increases. Instead, just “tax the rich” has become an easy and popular answer. However, while there is surely room to raise some revenue from corporations and wealthy families, the plausible revenue estimates from these proposals fall far short of closing these budget gaps.

This report models an aggressive tax-the-rich agenda that pushes tax rates for corporations and wealthy families toward revenue-maximizing levels. It shows that such policies could raise, at most, 2% of GDP—and likely far less, when accounting for the macroeconomic losses that would result from layering so many new taxes on top of one another. Consequently, a sustainable economic and tax agenda would limit upper-income-tax increases to 1% of GDP.

In response to likely progressive counterarguments, this report also shows that: 1) Senator Bernie Sanders’s tax agenda has not identified additional plausible tax-the-rich policies; 2) America’s upper-income-tax rates align with international norms, and Europe’s higher tax revenues overwhelmingly result from broad-based consumption and payroll taxes; and 3) the 1950s and 1960s income tax rates exceeding 90% raised little additional tax revenue.

Given the mathematical limits of taxing the rich, policymakers should broaden their deficit-reduction strategies to include spending savings and even middle-class taxes.

Introduction

The persistent growth of budget deficits now exceeding $1.5 trillion annually, as well as the recent deluge of trillion-dollar spending proposals, has created an enormous funding challenge for the federal government. Specifically, annual budget deficits are projected by the Congressional Budget Office (CBO) to approach $3 trillion (or 7.3% of GDP) within a decade.[1] Over the long run, CBO projects that Social Security and Medicare cash shortfalls of $116 trillion over three decades will push budget deficits past 10% of GDP even in the rosy scenario of expiring tax cuts, no spending expansions, and low interest rates on the federal debt (see Figure 1).[2] Most economists believe that the likely combination of sustained deficits of 10% of GDP and a federal debt greater than 200% of GDP is unsustainable and risks a debt crisis.

Yet Washington seems more likely to expand these deficits than to curtail them. In his first two years in the Oval Office, President Biden signed legislation and executive orders that altogether expanded 10-year deficits by $5 trillion;[3] and his latest budget proposed trillions in new spending over the decade. The expected renewal of the 2017 tax cuts for most taxpayers would push annual deficits well past $3 trillion within a decade. Progressives such as Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) have proposed tens of trillions of dollars in new spending expansions covering health care, Social Security, climate, education, antipoverty aid, infrastructure, family leave, federal job guarantees, and child tax credits.

When pressed on how to finance budget deficits likely heading past 8% of GDP within a decade, as well as trillions of dollars in proposed spending expansions, progressive leaders and activists usually respond, “Easy! Just tax the rich!” Indeed, President Biden and many progressive lawmakers have committed to never raising taxes on the 98% of families earning below $400,000, and opposing all spending cuts involving Social Security, Medicare, Medicaid, the safety net, veterans, and most social programs. That leaves only cuts to defense spending (which has already declined to 3.5% of GDP and is projected to fall further over time) and taxing upper-income families and corporations to produce virtually all necessary savings.

President Biden and progressive leaders regularly claim that such a budget path is sustainable—that America can close deficits rising to 10% of GDP and also pay for new European-style social welfare expansions on the backs of corporations and the richest 2% of families. This makes for popular politics—everyone wants a free lunch, and taxing the rich has always been popular with voters—but even moderately informed voters understand that such a promise is mathematically—and economically—absurd. Yet the persistence of these claims raises the important question of just how much tax revenue can be raised by taxing “the rich.” Specifying the limits of taxing the rich can help us move past the false “easy answers” and begin to explore other, less popular, options to stabilize budget deficits, such as restraining the Social Security and health-care spending that are driving deficits upward, and raising middle-class taxes. In modeling various tax proposals, this report will show that:

• America’s federal tax code is already the most progressive in the Organisation for Economic Co-operation and Development (OECD) and has become sharply more progressive over the past 40 years.

• Much of this tax progressivity is the result of drastic cuts to low- and middle-income taxes while leaving upper-income-tax rates closer to international norms.

• An aggressive tax-the-rich agenda that targets high earners and corporations could raise, at most, 1.5% or 2.0% of GDP in revenues—and likely significantly less than that.

• While modest upper-income- and corporate-tax increases may not significantly harm the economy, tax rates approaching revenue-maximizing levels would substantially reduce economic growth, incomes, and wages.

• Progressive leaders like Bernie Sanders have not produced tax-the-rich proposals with tax revenues exceeding the estimates in this report.

• Europe’s significantly higher tax revenues are driven overwhelmingly by broad-based consumption and payroll taxes, rather than by notably higher tax rates on the wealthy.

• The income-tax rates exceeding 90% in the 1950s and early 1960s produced minuscule levels of additional tax revenue.

For much of the past 50 years, budget deficits were small enough that raising taxes by 1% of GDP on corporations and high-income families could have solved much of Washington’s fiscal challenges. However, baseline budget deficit projections—as well as the cost of progressive spending proposals—have grown so steeply that the usual tax-the-rich options can no longer come close to filling this gap. Either middle-class taxes must also rise sharply, or Washington’s spending appetite must be pared back.

Specifically, stabilizing the federal debt at 100% of GDP over the long term—which would far exceed the post-1960 average of 45% of GDP—would require non-interest savings beginning at 2% of GDP and ramping up to 5% of GDP over the next three decades. (The resulting interest savings from a smaller debt would provide the rest of the savings.) These figures assume the renewal of the 2017 tax cuts (as there is strong bipartisan support for extending the tax cuts for the bottom-earning 98% of earners)[4] but do not assume any additional spending expansions, tax cuts, or economic crises—all of which would also have to be fully offset to meet this debt target. In short, the non-interest savings required to stabilize the debt will almost surely rise past 5% of GDP when accounting for additional spending and tax-cut legislation. Taxing the rich cannot close more than a small fraction of this gap.

In order to avoid the partisan misrepresentations that typify tax policy debates, it is important to clarify, at the outset, that this report is not a conservative antitax manifesto. It does not argue that upper-income taxes should not be raised at all. Nor does it claim that all tax cuts pay for themselves. Indeed, soaring deficits will require some tax increases to accompany the necessary spending reforms.

Instead, this report employs consensus economic modeling and research to build a more realistic framework for taxing the rich—and to rein in the unrealistic perception that taxing the rich can sufficiently eliminate budget deficits and finance the progressive agenda. The limits of upper-income taxes should induce lawmakers, analysts, and voters to broaden their savings proposals to include substantial spending reforms and even to consider middle-class tax increases.

Background: Washington’s Progressive Tax Code

As background, the U.S. is a relatively low-tax nation with a highly progressive federal tax code. Total federal, state, and local tax revenues in 2021 totaled 26.6% of GDP, making it 32nd of the 38 OECD countries, which averaged revenues of 34.1% of GDP.[5] A nation born from a tax rebellion has long maintained a more libertarian resistance to exorbitant broad-based taxes, even as Europe built expensive social democracies in the decades following World War II.

At the same time, the taxes that America does collect—particularly at the federal level—are extraordinarily progressive. America’s corporate, capital-gains, and estate-tax rates exceed those of much of Europe and OECD. Even America’s top income-tax brackets are within the norm of other major economies. But there are two unique features of U.S. tax collection.

First, America’s comparatively lower tax revenues overwhelmingly result from being the only OECD nation without a value-added tax (VAT). The average 7.2% of GDP raised by VATs accounts for 96% of the total tax-revenue gap between America and the OECD average. Excluding VATs, OECD nations collect 26.9% of GDP in taxes, compared with America’s 26.6%.[6]

Second, America taxes lower- and middle-income families at a substantially lower rate than other major economies. Decades of refundable child tax credits, earned income-tax credits, increased standard deductions, and lower marginal tax rates have essentially moved half of all families off the federal income-tax rolls. America’s non-wealthy families also benefit from lower payroll-tax rates than other nations and, most important, the lack of a VAT.

Consequently, an OECD study in 2008 concluded that—even when controlling for income inequality—the U.S. had the most progressive income and payroll-tax code in OECD.[7] Specifically, the highest-earning decile of American families pay a share of the nation’s income and payroll taxes that is 35% greater than its share of the total income earned—compared with an average of 11% across OECD. And these income- and payroll-tax figures even understate America’s relative progressivity by excluding the VATs that further drag down other nations’ overall progressivity levels.

Washington’s income taxes are extraordinarily top-heavy. Treasury data show that, in 2023, the bottom 40% of earners collectively pay no income tax and will instead receive a collective tax rebate of $123 billion. The middle-earning quintile pays an effective income-tax rate of just 2.2%, while the second-highest quintile pays an effective rate of 5.7%. Even when including all payroll and other federal taxes, the middle-earning quintile still pays only 11.9% of its income in federal taxes, and the second-highest quintile pays 16.2%. Overall, the bottom-earning 60% of families altogether financed just 23 days of federal spending in 2023.[8]

Meanwhile, the top-earning quintile—while earning 58% of all income—pays 69% of all federal taxes and 90% of all income taxes. And the top 1% of earners—while earning 18% of all income—pay 25% of all federal taxes and 40% of all income taxes. By contrast, the bottom-earning 60% earns 23% of all income, yet pays just 13% of the total federal taxes, including a combined negative income tax.[9]

In contrast to conventional wisdom, the federal tax code has grown significantly more progressive over time. Figure 2 shows that, since the election of Ronald Reagan, effective income-tax rates have fallen dramatically for middle- and low-income earners while slightly rising for the top-earning 1%. Between 1980 and 2019 (the latest year available), the effective income-tax rate for the middle-earning quintile collapsed by more than two-thirds, from 7.9% to 2.4%. The bottom-earning two quintiles saw their effective income-tax rates fall by 8 percentage points into negative tax rates. Meanwhile, the top-earning quintile’s income-tax rate fell by much less, from 16.6% to 15.4%. And—most surprising—the effective income-tax rate for the top-earning 1% slightly rose from 22.9% to 23.3%.[10] Even as the top income-tax rate dipped, soaring incomes for the top 1% left more of their earnings in the top tax bracket, pushing up their effective tax rate.

At the same time, the income tax has become more progressive even adjusting for changes in income inequality. Adopting the OECD methodology above, we can divide each income group’s share of the taxes paid by its share of the income earned—essentially adjusting tax shares for changes in income equality over time. A “progressivity ratio” greater than one means that an income group is paying a higher share of the income taxes than its share of the income earned. A ratio of exactly one means that a group’s share of income taxes paid matches its share of the income earned (a perfectly proportional system), while a ratio below one means that their tax share is less than their income share. Negative ratios reflect negative tax rates.[11]

For the top-earning 1%, Figure 3 shows that the progressivity ratio has increased since 1980 from 1.81 to 2.26 (meaning that its share of the federal income taxes paid has risen to 226% of its share of the income earned). The progressivity ratio of the highest-earning 20% of taxpayers has risen from 1.33 to 1.54. The ratio has fallen for every other income quintile, including the second highest income quintile (from 0.88 to 0.66), the middle (from 0.68 to 0.28), fourth (0.43 to –0.22), and bottom (0.00 to –1.45).

Other measures of tax progressivity consider the amount of redistribution from the rich to the poor, such as by examining changes in after-tax income. By those measures, Washington’s tax code is less redistributive than other nations’ tax systems because it has a smaller footprint. America does not raise enough taxes to redistribute as much money as some other nations do. However, for the amount of tax revenue that Washington does collect, it is overwhelmingly dependent on the top-earning 20% of taxpayers, and it shields lower-earning families from nearly all taxes except payroll taxes. This means that there is likely more fiscal space to raise taxes on non-wealthy earners than the wealthy, even if upper-income taxes may be a popular place to start.[12]

How Much Tax Revenue Can Be Raised from the Wealthy?

The following section calculates how much tax revenue can be raised from the wealthy through income, payroll, investment, corporate, estate, and wealth taxes. In most instances, each tax is first modeled to show the total amount of untaxed income above the wealthy thresholds—which approximates the theoretical amount that could be raised with 100% tax rates. The next step incorporates consensus economic research on the revenue-maximizing tax rates when incorporating economic and behavioral responses. From there, the amount of revenue from those tax rates is estimated, as well as any additional revenue that can be raised from plausible reforms to close the tax gap (the amount of unpaid taxes) and pare back tax preferences. For individuals, “wealthy” is typically defined as families with earnings in the top 1% ($686,100 for a family of two in 2023), although, in some cases, the income threshold falls to $400,000. Ultimately, this section will show that taxing the rich at revenue-maximizing rates would raise, at most, 2% of GDP—but that, after accounting for macroeconomic responses, the real figure is likely 1%–2% of GDP. (see Figures 4 and 5).

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(Originally published by the Manhattan Institute

The recent enactment of statutory discretionary spending caps for FY 2024 and FY 2025 has revived the debate over the importance, efficacy, and design of discretionary spending caps. Within the next two years, Congress will debate whether to revise and extend those spending caps in order to address annual budget deficits that have doubled to nearly $1.5 trillion since 2018 and are projected to approach $3 trillion within a decade.[1] Discretionary spending, which has gradually fallen to 27% of total federal spending, is not the main driver of runaway deficits. But nonemergency discretionary appropriations have jumped by 23.4% in the past two years, adding $300 billion to current spending levels and raising the ten-year discretionary spending baseline by nearly $3 trillion.

The 2021 expiration of the discretionary spending caps of the Budget Control Act (BCA) has clearly led to a surge in “regular” (i.e., nonemergency) discretionary spending. However, even before expiring, BCA’s effectiveness was gradually weakened, as lawmakers repeatedly increased the caps. Additionally, the new 2024 and 2025 caps were accompanied by a concurrent bipartisan agreement to evade their spending levels in the later appropriations bills.[2] Therefore, future reimpositions of multiyear discretionary spending caps must be informed by the successes and failures of earlier caps.

History has shown that, paradoxically, overly ambitious discretionary spending caps that attempt to constrain spending too tightly will ultimately backfire and bring larger spending increases than less tight caps. Modest spending caps that accommodate realistic appropriations growth rates have sustainably reduced discretionary spending as a share of the economy. By contrast, caps requiring drastic cuts, or little to no annual spending growth, have typically been disregarded by Congress (or abused through loopholes) and replaced with appropriations hikes exceeding 10%. Because spending caps can be easily repealed at any time, they cannot force spending cuts beyond the political system’s capacity. They can only enforce an existing broad commitment to constrain spending.

Discretionary spending is not the lead driver of deficits, but it is typically the first place that Congress looks for deficit reduction. In fact, the six largest deficit-reduction laws since 1983 have cumulatively produced 53% of their savings from discretionary spending.[3] Preventing discretionary spending from growing faster than the economy is a necessary piece of the deficit-reduction puzzle. This report shows how Congress can best design sustainable caps on discretionary appropriations.

Discretionary Spending Background

Virtually all federal spending programs are classified as either discretionary or mandatory. The spending levels for discretionary programs are set directly by Congress and the president through the annual appropriations process. Defense constitutes nearly half of discretionary spending, which also includes most spending on veterans’ health, K–12 education, health research, NASA, international assistance, and justice (Figure 1).

By contrast, spending levels for mandatory programs (mostly entitlement programs) are set by occasional authorizing legislation. For programs such as Social Security, Medicare, farm subsidies, and most antipoverty spending, Congress sets eligibility and benefit formulas, and then spending levels are determined by how many people enroll and where they fit into the benefit formula. Social Security, Medicare, and Medicaid have permanent authorizations, meaning that their underlying parameters never expire and are changed only when Congress and the president so desire, while other mandatory spending programs—as well as their eligibility and benefit formulas—are typically reauthorized by Congress on a schedule between two and seven years.

Because Congress does not set mandatory program spending levels (with a few minor exceptions),[4] these programs are often described as “uncontrollable” or “on autopilot.” Costs rise rapidly with program participation because of eligible population growth. At the same time, benefit formulas automatically rise each year; and occasionally, Congress passes legislation further expanding eligibility and benefit parameters. Because mandatory programs are not appropriated annually, Congress has little reason to provide oversight, address waste, or subject these programs to broader budget targets. Overall mandatory spending—excluding net interest costs on federal debt—has leaped from 5% to 15% of GDP since 1962.[5] And it is projected to continue rising indefinitely, driven entirely by escalating Social Security, Medicare, and Medicaid costs.

Discretionary spending levels, on the other hand, must be reappropriated annually and are subject to regular oversight when there is a spending target to meet. Increasingly crowded out by mandatory spending growth, discretionary spending has fallen from 67% to 27% of federal outlays since 1962.[6] During this period, discretionary outlays as a share of GDP decreased from 12.3% to 6.6%, bottoming out at 6.0% in 1999.[7]

The decline in discretionary spending has been driven by defense spending. Its share of the economy gradually fell from 9% in the early 1960s, to 3% shortly before the 9/11 attacks, which brought a rebound to 4.6% by 2010, before falling back to 3% by 2023 (Figure 2).

Nondefense discretionary spending levels have remained steadier, typically ranging between 3.0% and 4.5% of GDP, with a current level of 3.6% of GDP. Still, since 1990, nondefense discretionary spending (after inflation) has expanded by 154%, versus 35% for defense.[8]

Thus, while discretionary spending has not been the driver of rising long-term deficits—and cannot realistically be cut deeply enough to accommodate surging mandatory costs—Congress should still approach this spending with a “do no harm” principle, ensuring that it does not rise as a share of the economy and further deepen the surging baseline budget deficits.

The Modern History of Discretionary Spending Caps

Statutory discretionary spending caps were born from the failure of broader deficit-reduction targets. In 1985, rising deficits led Congress and President Ronald Reagan to enact the Balanced Budget and Emergency Deficit Control Act of 1985 (nicknamed “Gramm-Rudman-Hollings” [GRH], after its lead Senate authors). The law set declining annual deficit targets—enforced by automatic cuts of any overages, known as “sequestrations”—that aimed to eliminate the budget deficit by 1991. A Supreme Court decision forced Congress to rewrite the law in 1987, which pushed the target balanced-budget date to 1993.[9]

GRH modestly restrained spending and deficits. However, the law was also sabotaged by typical congressional and White House shenanigans: exempting certain policies, tweaking economic assumptions, and blocking enforcement of deficit targets. More damaging, however, was GRH’s lack of flexibility to accommodate temporary deficit increases brought on by non-legislative changes such as a recession.[10]

In late 1990, with a weakening economy pushing up deficits and threatening a large sequestration, President George H. W. Bush and congressional leaders replaced GRH with the Budget Enforcement Act (BEA), as well as new legislation to raise taxes and trim mandatory spending.[11] BEA imposed multiyear caps on discretionary appropriations and imposed Pay-as-You-Go (PAYGO) rules blocking, via sequestration, new mandatory spending or tax legislation that would collectively widen projected budget deficits.

BEA represented a different approach from GRH in two key ways. First, while GRH was designed to spur future legislation to reduce baseline deficits, BEA was intended to protect concurrent deficit-reducing legislation from future repeal. PAYGO would limit Congress’s ability to repeal the budget deal’s tax increases and mandatory spending savings (or hike deficits through other tax cuts or mandatory expansions). The five-year discretionary spending caps would codify the existing bipartisan commitment to pare back the growth of appropriations. In short, while GRH was offensive (motivating future deficit reforms), BEA was defensive (protecting past deficit reforms).

Second, by limiting only new deficit-expanding legislation—PAYGO applied only to newly legislated expansions—BEA did nothing to limit the automatic baseline growth of mandatory spending due to pre-1990 program rules. Nor did BEA impose any constraints on automatic deficit fluctuations resulting from booms, recessions, and the business cycle.

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Introduction

Despite the persistence of a strong job market, the conventional wisdom among business and academic economists forecasts a recession in 2023. Even as supply-chain disruptions fade, other inflationary pressures are proving more durable, most notably a tight labor market that has contributed to an acceleration in wage growth. Given the Federal Reserve’s stated commitment to lowering inflation, it is not unreasonable to anticipate that it will continue raising interest rates, even if that means sparking an economic contraction. The question for Congress, then, is how exactly to prepare for the next economic downturn.

In recent years, Congress has followed a straightforward playbook for fighting recessions: unleash a flood of federal spending. In the aftermath of the 2007–08 global financial crisis, Congress enacted $1.8 trillion in fiscal stimulus, disbursed gradually from 2008 to 2012. During the Covid-19 crisis, Congress passed a series of federal stimulus measures that in total added $5 trillion to federal deficits, much of it spent over a much shorter interval. While this extraordinary infusion of federal funds may have helped avert a sharper, more prolonged downturn, there is little doubt that it contributed to the recent sharp increase in inflation.

The current inflationary environment means many in Congress are reluctant to revisit the post-crisis playbook of the recent past. For one thing, it’s not at all obvious that a surge in federal spending would be well-advised in light of the Fed’s anti-inflationary efforts. Moreover, rising interest rates have forced lawmakers to confront the rising cost of servicing surging federal debt, a challenge that will only grow more pronounced in the years to come as entitlement shortfalls mount.

Congress needs a fresh approach to tackling the next recession, one that limits deficit spending in favor of a supply-side approach that would help mitigate inflation rather than exacerbate it. In this study, we offer a series of incremental policy measures that could foster economic growth in the face of a looming recession, all at relatively low cost to the taxpayer. This is not, to be clear, a comprehensive agenda for fiscal consolidation or revitalizing long-run economic growth, but it does aim to point lawmakers in the right direction as the U.S. economy enters what could be a painful downturn.

Investment Tax Reform

Despite recent reforms, burdensome taxes are still one of the greatest barriers to U.S. dynamism and growth. To avert the upcoming economic downturn, Congress must remove taxes that penalize investment and productivity. Stimulus bills in the 2008 crisis and the 2020 pandemic provided large tax rebates and credits to individuals, which increased spending but did not change incentives or spur production. In this crisis, the need for supply-side tax reform is obvious.

Business Equipment and Expenses

The most important supply-side stimulus would be to return to the full expensing of business equipment and research investment. The 2017 Tax Cuts and Jobs Act allowed businesses to deduct 100% of their qualified equipment purchases.[1] That, however, decreased to 80% in 2023, and it will keep decreasing 20 percentage points a year until the ability to expense is eliminated in 2026. Also beginning in 2022, businesses no longer receive a 100% deduction equal to their research and development expenses in the year the expenditure took place. Instead, research expenses are amortized over five years. Slower depreciation schedules for both types of investment are particularly painful for businesses in inflationary times when the costs of delayed income are higher.

To incentivize investment, and to bring future investment into the present, Congress should keep full expensing at 100% of qualified purchases for at least 2023 and 2024. It can also, at least for those same two years, return to the full expensing of research and development, which is especially important for increasing productivity.

Incentivize Construction

Finally, Congress should accelerate the depreciation of building structures. Real property depreciation saw little reform in the 2017 tax act, and real estate still has very long depreciation schedules. Commercial property is depreciated over 39 years, and residential rental properties are depreciated over 27.5 years.[2] To incentivize more building, these schedules should be reduced by 10 years, which would help increase construction in a period when that industry is particularly hard hit.

Full expensing is one of the most powerful options imaginable for spurring the economy. The Tax Foundation estimates that a complete and permanent expensing of all equipment, research, and buildings (a more expansive reform than proposed here) would increase Gross Domestic Product by over 5% and lead to over 1 million new jobs.[3]

Such expensing carries revenue costs for the federal government, but many of these costs are bringing forward future deductions into the present. To pay for the upfront costs of reform, there are several options. Congress can continue the ceiling on the State and Local Tax (SALT) deduction at $10,000 beyond the current end date of 2025. Congress could also reduce the high capital gains exemption for housing sales, cutting the present $500,000 exemption maximum in half. Both of these tax deductions largely benefit wealthy individuals in a few expensive states. They also encourage states and local governments to increase taxes on their own citizens and place restrictive regulations on home building to incur more capital gains. Such negative, anti-growth incentives are exactly what the economy does not need now.

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Progressives built a national movement around enacting items like Medicare for All, the Green New Deal, drastic defense cuts, and massive tax increases on corporations and upper-income families. Yet they have not been able to develop serious legislative proposals to enact such policies. Instead, leading legislative proposals typically announce an unrealistic, utopian goal, and then simply declare that a future commission, office, or agency will come up with a plan to do the impossible.

The whole purpose of public policy is to turn aspirations into implementable outcomes. Relying heavily on slogans and vague (yet often aggressive) rhetoric, progressive leaders fail to do their homework and provide even basic information on how their proposals would work—likely because they cannot work. Congress cannot enact empty slogans, and it is self-defeating to build a national movement demanding the enactment of policies that do not even exist in any serious, implementable manner.

Introduction

Progressives built a massive national movement hoping to enact single-payer health care (dubbed “Medicare for All”). Senator Bernie Sanders of Vermont has made it the centerpiece of two presidential campaigns. Senator Elizabeth Warren of Massachusetts endorsed it in her presidential campaign, as have at least 13 other Democratic senators and 122 House members.[1] Medicare for All has been endorsed by 300 organizations, including NAACP, National Organization for Women, and several AFL-CIO state chapters.[2] It has spawned groups such as Physicians for a National Health Program and gained a rabid following on Twitter among progressive activists and leaders. This movement has invested massive resources into enacting Medicare for All. Yet there remains one minor oversight:

No comprehensive Medicare for All proposal even exists.

This may surprise Medicare for All activists. The oft-cited bills authored by Senator Sanders and Representative Pramila Jayapal (D-WA) are vague skeleton bills that punt the difficult decisions and are too incomplete even to be implemented, if enacted. Consequently, it is fair to classify Medicare for All more as an aspirational talking point than an implementable proposal. Nor is this proposal failure unique to health care. Many policy promises that unite the progressive movement—including the Green New Deal, drastic defense cuts, and “tax the rich” plans large enough to finance their spending ambitions—do not actually exist beyond generic talking points. This is not a random oversight. A movement filled with millions of committed activists and led by ambitious academics, economists, scientists, think-tank fellows, and politicians did not simply forget to turn their bold aspirations into serious legislative proposals. Rather, the policy professionals surely dived into the policy specifics and then likely gave up after realizing that these progressive policy goals collapse under the weight of their internal contradictions, operational unworkability, political infeasibility, and even lack of basic arithmetic. Consequently, progressive experts consistently fail to produce specific legislation or even detailed non-legislative blueprints, instead writing bills and campaign plans that simply assign others to figure out a proposal later. This leaves the progressive agenda to exist primarily as rhetoric and talking points that could never be enacted and implemented, no matter how many elections their candidates may win.

This report dives into four of the leading pillars of progressivism—Medicare for All; large tax increases on the wealthy; substantial defense cuts; and the Green New Deal—and shows that there is nothing behind the curtain.

Medicare for All: Partial Proposals Punt on Key Specifics

The Medicare for All movement is led less by economists or health-care technocrats than by grassroots advocates endlessly repeating something like: Europe and Canada have shown that the single-payer model provides better health care at a lower cost, and we will replicate that.[3] It is certainly debatable whether other countries truly provide better health care than America does. However, American proposals promising virtually unlimited access to a vast array of health procedures and technologies that are completely free at the point of service are based on a caricature that reflects no actual national health system in the world. Every universal health-care system imposes some combination of care rationing, technology limitations, notable out-of-pocket expenses, and major coverage exclusions such as prescription drugs. American proposals are vastly more generous and therefore cannot be accurately portrayed as simply adopting the successful systems abroad.

Furthermore, America’s health-care infrastructure is not compatible with single-payer health care. Nations such as the United Kingdom nationalized health care when it was a small portion of the economy, and then contained costs by building a modest health infrastructure over several decades. No country first built a massive, sprawling health system that consumes nearly 20% of the economy—with large and roomy hospitals, widespread expensive technologies, and an extensive drug research sector—and then decided to save money by drastically reducing payments below the cost to run this extensive system.

A parallel would be demanding that Americans pay the same price for housing as Europeans, without taking account of the American housing infrastructure consisting of much larger, roomier homes than its European counterparts. The point is not that American health care is necessarily better than that of other countries. It is that we are constrained by the health infrastructure that has been built and relentlessly expanded over the past half-century. We cannot simply pay European prices for the more vast American health infrastructure that exists.

This presents a quandary for Medicare for All advocates. In theory, the increased utilization costs of promising “free” health coverage to everyone is supposed to be more than offset by the (claimed) substantial efficiency savings of limiting profits and overhead costs. Yet study after study has shown that the huge reduction in payments to health providers that would be needed to offset the increased utilization far exceed what many hospitals, clinics, and doctors can absorb.[4] This would constrain supply at the moment that demand is soaring, resulting in shortages and widespread rationing. In reality, the savings from reducing provider payments would be modest and may not even offset the higher utilization costs. Total national health expenditures would not fall significantly, and might even rise.

This brings up another challenge. Because America’s health system is so large—roughly one-fifth of its GDP—and large net savings seem unlikely, financing the nationalization of such an enormous industry is extraordinarily difficult. Essentially, America would have to shift the $32 trillion scheduled to be spent over the next decade on private health-care premiums, out-of-pocket expenses, and state health programs into a federal “single-payer” tax.[5] Even if one accounts for the private-sector savings from no longer paying health premiums, designing a $32 trillion tax far exceeds any tax that has been considered in modern times. It would also create major winners and losers. And the losers would include the 80.5 million Americans currently on Medicaid,[6] who would continue receiving (mostly) free health care but would now be subject to staggeringly large and broad “single-payer” taxes. The Committee for a Responsible Federal Budget has calculated that financing a generous, Sanders-style Medicare for All system would require choosing between a new 32% payroll tax, 25% income surtax, 42% value-added tax (VAT), $12,000 per-capita premium for those currently not on government plans, or more than doubling all individual and corporate income-tax rates.[7] It turns out that “free” health care is quite expensive.

In short, single-payer proposals are very specific about all the new health benefits that Americans should receive but face potentially fatal challenges in the two areas that would supposedly produce savings and finance the system: 1) the provider payment reductions that would supposedly provide most of the savings are not realistic under America’s health infrastructure; and 2) designing a tax to replace private health premiums that is realistic, efficient, and equitable is nearly impossible.

So how do America’s leading Medicare for All proposals answer the two fundamental questions of provider payment rates and financing? They have no answer. They punt. On challenge No. 1, the bills authored by Sanders and Jayapal simply direct the Department of Health and Human Services to come up with a payment system. This system could ultimately pay providers at Medicare rates, or more, or less. So on the central issue of whether Medicare for All would raise or reduce national health-care spending—whether it could actually squeeze out significant efficiencies—the most detailed congressional proposals are silent.

On challenge No. 2, how do these proposals pay for the $32 trillion cost of Medicare for All? How do they shift all the spending on premiums and out-of-pocket spending into a single-payer tax that is realistic and equitable? Again, they punt. The bills have no financing section whatsoever. Which means that, as written, the leading single-payer legislation proposes that the bulk of the American health system would not be funded by the private sector or with federal taxes. The entire $32 trillion cost of this new health-care system would be added to the budget deficit.

The Sanders and Jayapal bills are basically skeleton bills. They guarantee significant new health benefits to the American people but do not even show how much to pay providers (and whether it would actually save money over the current system) and provide no system to shift the financing of health care to the federal government. The bills are so vague and incomplete that the Congressional Budget Office (CBO) cannot even score their budgetary effects, and the Department of Health and Human Services would almost surely be unable even to implement these bills if enacted.

For example, a Health Affairs analysis notes that while the Jayapal bill promises countless new benefits, it simply defers to the implementing agencies to come up with “policies, procedures, guidelines, and requirements related to eligibility, enrollment, long-term care eligibility, provider participation standards and qualifications, levels of funding, provider payment rates, planning for capital expenditures and health professional education, and regional planning mechanisms.”[8] In other words, the bill distributes new benefits like candy, with scant consideration for how to actually operate or finance this generous new health-care system.

Similarly, the Sanders bill promises enormous new health benefits at no new cost, and then simply tells the secretary of the Department of Health and Human Services to figure out how to make it all work. The phrase “The Secretary shall…” appears 62 times in the Sanders bill (and 58 times in the Jayapal bill).[9]

This punting of the difficult decisions extends beyond the Sanders and Jayapal bills. In my years of research, I have never seen a single tax proposal that would cover the “premiums-to-taxes” shift in order to finance single-payer health care. In 2020, Sanders offered a campaign proposal that would finance only $13 trillion of the $32 trillion cost—while using up tax proposals that had also been promoted to finance other spending items.[10] Senator Warren’s Medicare for All proposal also includes taxes that come up approximately $20 trillion short of the new spending over the decade.[11] Progressive think tanks, economists, lawmakers, and activists have all failed to come up with a specific financing plan. And that is surely not because no one thought to try to design one.

In 2011, Vermont became the first state to enact legislation mandating the creation of a state-level single-payer health system. In 2014, the state gave up and repealed the law because it could not design a tax financing system that was remotely acceptable to voters, even in this deep-blue state that elected Bernie Sanders to the Senate.[12]

With progressives failing to answer basic questions on how single-payer health care would work and be financed, CBO, Urban Institute, and others had to create their own single-payer health-care models to analyze.[13] They found that, with realistic payment rates, the savings in national health expenditures would be marginal, at best. For example, CBO determined that national health expenditures might actually rise instead of falling and that “the increase in demand for personal health care would exceed the increase in supply, resulting in greater unmet demand than the amount under current law” that “would correspond to increased congestion in the health care system, including delays and forgone care.”[14] A separate CBO economic analysis found that a Sanders-style single-payer system—when including the financing needs—would reduce the projected 2030 GDP by 6%–10%, depending on the tax structure implemented. That means an annual GDP $3 trillion smaller than otherwise by 2030.[15]

These complications are not minor, pedantic details. The whole idea of Medicare for All is to pay for a more generous health system by significantly reducing provider payments and then financing the remaining costs with new taxes instead of private premiums and out-of-pocket costs. Yet the entire movement has failed to provide a plan to do either.

Essentially, the vast Medicare for All movement is demanding congressional enactment of a proposal that does not even exist—and likely cannot exist. All the rallies, letters, endorsements, and public campaigns are ultimately irrelevant until advocates can design a comprehensive proposal that overcomes its own contradictions and answers basic implementation questions. Until then, Medicare for All will continue to be just another empty talking point.

Yet the bill text provides no specific, creative blueprint to achieve any such savings. It simply directs the Department of Health and Human Services to figure out a new payment system. Similarly, the bill provides no tax or mechanism to finance the $32 trillion 10-year cost of nationalizing health care.

SEC. 612. PAYMENTS TO INDIVIDUAL PROVIDERS THROUGH FEE-FOR-SERVICE[16]

(a) Medicare for All Fee Schedule.

(1) ESTABLISHMENT.—Not later than 1 year after the date of the enactment of this Act, and in consultation with providers and regional office directors, the Secretary shall establish and annually update a national fee schedule that establishes amounts for items and services payable under this Act, furnished by—

(A) individual providers;

(B) providers in group practices who are not receiving payments on a salaried basis described in section 611(a)(3);

(C) providers of home- and community-based services; and

(D) any other provider not described in section 611.

(2) AMOUNTS. In establishing the fee schedule under paragraph (1), the Secretary shall take into account—

(A) the amounts payable for such items and services under title XVIII of the Social Security Act and other Federal health programs; and

(B) the expertise of providers and the value of items and services furnished by such providers.

Taxing the Rich: Basic Math Always Wins

Perhaps no economic issue unites the progressive movement like its support for dramatic tax increases on upper-income families and corporations. More than a stand-alone issue of economic justice, the extensive cost of progressive spending ambitions requires enormous new tax revenues. Promising to limit the bulk of new taxes to millionaires and major corporations allows progressives to tell the middle class that they can have European-size social welfare benefits as a free lunch.

Such promises are required because polls[17] have long shown that less than half (and sometimes far less)[18] of Americans are willing to pay much higher taxes, even for more government services. And when the new taxes are specified, support often drops further. For example, despite the general popularity of fighting climate change, a 2019 survey showed that less than half of Americans are willing to pay even $2 per month in new taxes or utility costs as part of a climate agenda (and only a quarter of Americans would pay $10 per month).[19] Polls by the Associated Press and Reuters produced nearly identical results.[20] In fact, the mere possibility of new taxes has reduced support for spending trillions on the Green New Deal to 30%.[21] Similarly, support for Medicare for All falls when respondents are reminded that it would require massive new taxes to replace private health premiums and copays.[22]

This tax resistance is not limited to conservatives and moderates. Even two-thirds of Bernie Sanders supporters would not be willing to accept more than $1,000 in new taxes to ensure universal health coverage or free public-college tuition (66% and 64%, respectively).[23] The revolution is acceptable only if funded by “the billionayas,” not “the people.”

However, this promised “tax-the-rich” utopia has no basis in mathematical reality. Which is why most progressive spenders never back up the “tax the rich” rhetoric with specific, scored tax proposals. Sanders’s most recent presidential campaign promised $97 trillion[24] in new spending over the decade, with taxes that would barely cover one-quarter[25] of the costs. Sanders’s Medicare for All legislation simply excludes all necessary taxes, and his campaign proposal showed taxes financing just $13 trillion of the $32 trillion 10-year cost. Similarly, Senator Elizabeth Warren’s 2020 tax proposals came up far short of her spending promises.[26] Even President Biden’s promise of paying for the more ambitious $4–$5 trillion version of Build Back Better was never backed up by that degree of specific tax proposals.

A common progressive sleight-of-hand is recycling the same tax proposals to finance various new expenditures. One week, marginal tax rates would be maximized to close the Social Security funding gap. The next week, those same taxes are proposed to finance Medicare for All or the Green New Deal.

Let’s do the math. Over the next decade, the projected baseline budget deficit totals $15 trillion.[27] This budget deficit—and the need to pay for current promises before adding new ones—deserves the first claim on any new taxes. Beyond that, progressive proposals include Medicare for All ($32 trillion over 10 years, as shown in the previous section), Green New Deal (as much as $16 trillion depending on the proposal),[28] free public college tuition and full student loan forgiveness ($3 trillion), Social Security expansion ($1 trillion), extending the recent child credit expansion ($1 trillion), and various funding expansions for K–12 education, preschool and child care, welfare benefits, housing, infrastructure, and family/medical leave (up to $3 trillion).[29] In total, that is a $15 trillion baseline deficit and more than $50 trillion in progressive 10-year costs.

Now let’s add up the progressive “tax the rich” proposals using data from CBO and other nonpartisan sources (Table 1).[30] On the individual side, eliminating the wage cap for Social Security taxes ($2.2 trillion),31[31] imposing a 50% income-tax bracket on singles earning over $200,000 and couples earning more than $400,000 ($1.6 trillion), and eliminating all itemized tax deductions ($1.7 trillion), would altogether raise $5.5 trillion—while pushing the combined federal, state, and payroll marginal tax rate to approximately 70% (depending on the state) for families earning more than $200,000 (single) and $400,000 (married). For investors and corporations, taxing millionaire capital gains as ordinary income, including taxing unrealized capital gains at death ($370 billion), restoring the 35% corporate tax rate ($1.4 trillion), imposing a tax on financial transactions ($750 billion), and a “bank tax” on large corporations ($100 billion), would altogether raise $2.6 trillion while imposing the highest business and investor tax rates in the developed world. Sanders’s proposed 8% wealth tax—widely considered unworkable and long abandoned across much of Europe[32]—would bring in $2.3 trillion, while his proposed 77% estate tax would raise $380 billion over a decade.

Table 1

The Full Roster of Progressive Tax Hikes Could Not Even Balance the 10-Year Budget

Under this scenario, the U.S. would combine nearly every progressive tax proposal and build the highest individual, investor, corporate, wealth, and estate tax rates in the developed world. The total revenue? Just $10.8 trillion over the decade, which is not even enough to close the more than $15 trillion baseline deficit, much less the $50 trillion in promised new spending. Moreover, the actual revenues would come in far below these estimates because of the economic and revenue losses that result from layering so many new taxes on top of one another. Families facing 70% tax rates would reduce work or hide income, investors facing similar tax rates on their inflation-adjusted gains would invest less, corporations facing 35% tax rates (plus the base-broadening that paid for much of the 2017 corporate rate reductions) would move abroad, and the (likely unconstitutional) wealth tax may be avoided by moving wealth overseas or into difficult-to-value assets, as occurred in Europe.

We can go a step further (Figure 1). Even seizing every asset of billionaire wealth (a one-time collection that also means liquidating much of the stock market) and imposing a 100% tax rate for millionaires—while implausibly assuming that they continue working, investing, and happily paying this tax rate—would raise $11.4 trillion over the decade, which is not enough to balance the budget, much less pay for current federal promises.

Figure 1

Cost of Progressive Wish List Far Exceeds Potential Funding Sources

The massive gap between progressive rhetoric and reality is political as well as mathematical. Today’s unified Democratic government has proved unable to raise income taxes on wealthy individuals and has achieved just under $300 billion in 10-year tax hikes on corporations (much of which was given back in new business-tax cuts).[33] Progressive lawmakers, with very few exceptions, remain vague on their tax agenda, unveiling most proposed taxes in a piecemeal fashion, in order to avoid the staggering cumulative tax burden. Progressives brag that new spending proposals can be financed by taxing the rich, yet the comprehensive tax proposals almost never appear.

The reality is that America already has—by far—the most progressive tax code in the entire OECD.[34] The highest-earning 20% of taxpayers will earn 60% of the income this year, yet pay 76% of all federal taxes, including 93% of all income taxes. The much-maligned top 1% of earners will earn 19% of the income, yet finance 29% of all federal taxes, including 43% of all income taxes, according to U.S. Treasury data.[35] Annual capital-gains tax revenues—which are disproportionately paid by high-earners—have doubled since 2016.

Many progressives still claim that the wealthy are undertaxed by citing the 91% income-tax rates of the 1950s. Yet that tax rate was easily avoided through tax deductions, income shifting, and income limiting. President Reagan told stories about leading 1950s actors working only two films annually because a third film would be taxed in the 91% bracket. Economist Lawrence Lindsey has noted that in 1960, only eight taxpayers in America actually paid the 91% tax rate.[36] Overall, Washington collected only 7.2% of the economy in income taxes in the “tax the rich” 1950s—the lowest of any post–World War II decade.[37] And data by left-wing economist Gabriel Zucman concede that the top 1% paid much lower effective income-tax rates in the 1950s than in subsequent decades.[38]

Progressives can always name a company or an individual who is undertaxed. But the cold mathematical reality is that their spending ambitions dramatically exceed the potential revenue that could be raised from upper-income families and corporations. Even the European nations that they claim to emulate fund their welfare states primarily through middle-class payroll and value-added taxes. Progressives continue to sell American socialism as a free lunch to be funded on the backs of the wealthy. However, this “tax the rich” utopia must inevitably remain an empty talking point because the math simply does not add up.

Large Defense Cuts: Pledges Without Proposals

Another leading progressive cause is decrying America’s “bloated” defense budget. Indeed, progressives regularly assert that Washington spends more on defense than the “next nine countries combined”[39] and that much of the progressive wish list could easily be financed by drastically paring back military expenditures. For example, over the past year, progressive activists and leaders asserted that trillions in Build Back Better spending could be financed out of the $9 trillion in defense spending that is projected over the next decade.

As background, defense spending is not driving America’s soaring budget deficits (Figure 2). In fact, defense has long been the slowest-growing major category of federal spending, declining from half of all federal spending in 1962 to just 13% in 2022.[40] Since the Soviet Union collapsed in 1991, annual defense spending has expanded by only $154 billion faster than inflation—compared with entitlement-program spending leaping $2.5 trillion faster than inflation. Even within discretionary spending, defense has risen by 26% since 1991, compared with a 139% surge in nondefense discretionary spending (again, these numbers are adjusted for inflation).[41] Nor did all these savings take place during the 1990s. According to CBO, inflation-adjusted spending on defense is set to remain essentially flat from 2008 through 2032.[42]

Figure 2

Decline of Defense Spending as a Share of Federal Spending

The perception of spiraling defense spending results from the occasional generous budget increase garnering much more media coverage than the more common years of modest increases and even reductions. Critics also regularly compare the total defense budget ($760 billion) against the proposed increases in social spending (hundreds of billions annually), even though total social spending dwarfs defense spending. Finally, America’s reported international dominance in military expenditures is partially influenced by factors such as America’s troop compensation (salary, health care, housing) median costs of $113,000 per enlisted service member, as well as purchasing power and currency differences between nations.[43] Measured as a share of national income, America’s 3% of GDP defense budget is lower than that of Russia’s 4% and somewhat above the (approximately) 2% of GDP spent by much of Europe, China, and Australia.[44]

Even those figures overstate America’s military spending dominance. China, Russia, and some other nations understate their reported defense spending by excluding major categories such as research and development, foreign weapons procurement, and entire categories of fighting forces. The U.S. defense budget reports not only all those costs but also includes nondefense policies such as environmental restoration, climate programs, security assistance, humanitarian aid, and troop recreation funding.[45] Many of these policies are championed by Democrats who otherwise criticize defense spending levels.

Because (inflation-adjusted) defense spending has already gradually declined for most of the past 15 years,[46] achieving steep additional savings is not a straightforward case of reversing recent increases. It requires fundamentally reorganizing, repurposing, and reimagining America’s military apparatus and national security strategy. Decisions such as whether to abandon full ground-war counterattack capabilities, skip a generation of weapons technology, revisit international security commitments, or eliminate the jobs of hundreds of thousands of active-duty personnel are not merely budgetary decisions to impose haphazardly in an appropriations bill. They require true national security and military expertise and planning, not to mention democratic buy-in from voters.

So where is the specific progressive proposal to achieve the promised defense savings of 10%, 20%, or 30%? It doesn’t exist. There is no proposal that specifies this degree of military savings or reforms in any level of implementable detail.

Consider the House Democrats’ “Defense Spending Reduction Caucus,” led by cochairs Barbara Lee (D-CA) and Mark Pocan (D-WI). Their People Over Pentagon Act of 2022 is nothing more than a 333-word bill setting the goal of an immediate $100 billion reduction in defense spending without a single instruction of where in the Pentagon to find such savings.[47] Instead, the bill merely instructs the secretary of defense to ask CBO for ideas. Needless to say, this is not how a serious nation overhauls its national security structure. Punting all reforms to the defense secretary also represents an extraordinary abandonment of Congress’s responsibility to determine how the Pentagon should allocate its resources, particularly when it involves crafting a new national defense strategy.

On the Senate side, in 2020 Sanders offered a proposal to immediately slash military spending by 10% and reallocate those funds to new social spending. Did the senator lay out an implementable proposal to reorganize the Pentagon and amend America’s national security framework to incorporate these new spending levels? Of course not. This fundamental entire defense overhaul was offered in a vague, 140-word instruction in an amendment to an appropriations bill.[48] Again, this is not a remotely serious, responsible, or plausible way to overhaul America’s national security apparatus. The amendment simply demanded that nearly every defense account endure an equal across-the-board reduction. Rather than reorganize and set new priorities (such as targeting a specific weapons system or operational strategy), every defense account would continue operating under the Pentagon’s current long-term strategic plan but with 14% less funding (a larger cut to balance Sanders’s exemption of personnel and health-care costs).

To explain and defend his proposal, Sanders penned an op-ed[49] and gave a nearly 3,300-word speech[50] on the Senate floor. Both presentations detailed all the benefits of new social spending while treating the required overhaul of the Pentagon as an afterthought. There was no serious exploration of the defense budget, how to cut it, or how to repurpose America’s national security to meet the ambitious budget target.

In response, Sanders’s liberal colleague Jack Reed (D-RI), Senate Armed Services Committee ranking member, chastised Sanders for his lazy and unserious amendment, telling him: “This across-the-board approach, it’s good for a headline, it’s good to make a point, but we’re here to make policy, and I hope we do make policy.”[51] Sanders’s amendment, as well as the House companion proposal, was soundly rejected in a bipartisan vote.[52]

Rather than provide any legislative substance to his own proposals, Sanders eventually asked CBO (rather than the Pentagon) to provide options to reduce defense spending by $1 trillion over the decade. CBO’s illustrative scenarios included policies such as laying off 400,000 members of the active military (25% of all active personnel)[53] and essentially abandoning America’s ability to repel an aggressor’s military forces with a full-scale counterattack—instead relying on deterrence, limited counterattacks, and diplomatic and economic sanctions in hopes of persuading the attacking nation to back down.[54] It is noteworthy that not even progressive lawmakers have publicly embraced these reforms that would result from their own savings targets.

On the think-tank side, the progressive Center for International Policy offered a 75-page report heavily critiquing American foreign policy and defense spending levels.[55] The report spent only 10 pages briskly walking through a series of recommendations, ranging from the modestly specific to the gimmicky, that would—even if all enacted—save, at most, 10% from the current defense baseline.

Other progressive think tanks are more realistic. The Center for American Progress (CAP) recommended immediately trimming the defense budget by merely 2.3%, or $16 billion from the previous year’s level.[56] CAP and the left-wing Economic Policy Institute proposed a defense budget that gradually declines to 2.0% and 2.3% of GDP, respectively, in 30 years.[57] Those figures correspond to (inflation-adjusted) annual spending increases of under 1%—a much more realistic and sustainable budget path than dramatic 10%, 20%, or 30% cuts.

Progressives regularly assert that America spends far too much on its military, and they offer detailed fantasies of the massive social expansions that could result from cutting defense spending by trillions of dollars over the decade. Yet the movement has abjectly failed to offer any specific blueprint for large defense cuts, or any vision for restructuring American national security to align with these cuts. Ultimately, progressive lawmakers and leaders have refused to do their homework and acquire the defense-policy expertise necessary to design such a massive overhaul. Instead, the U.S. military is treated as a budgetary black box, a piggy bank that can be raided for social programs with no concern over how to achieve the cuts or the resulting national security implications. America’s military may be able to absorb some degree of savings, but that requires an actual legislative blueprint, rather than empty progressive rhetoric.

The House Democrats’ “Defense Spending Reduction Caucus” brought together numerous lawmakers promising to fundamentally redesign the Defense Department to achieve major budget savings while preserving national security.

Below is the entire text[58] of the “People Over Pentagon Act of 2022 (H.R. 8040).” It contains no specific savings or reorganization directions. Instead, it asks the secretary of defense to overhaul America’s entire armed forces and national security strategy—including potentially laying off more than 20% of active troops—by reading a short CBO report.

SECTION 1. SHORT TITLE.

This Act may be cited as the “People Over Pentagon Act of 2022.”

SEC. 2. SENSE OF CONGRESS.

It is the sense of Congress that—

(1) many of the most urgent threats to the national security of the United States are not military in nature;

(2) the Federal budget should reflect the national priorities of the United States; and

(3) in order to better protect the security of all people and address the national priorities of the United States, the budget of the Department of Defense should be reduced and the associated savings should be reallocated.

SEC. 3. REDUCTION IN AMOUNTS AUTHORIZED TO BE APPROPRIATED FOR THE DEPARTMENT OF DEFENSE FOR FISCAL YEAR 2023.

(a) In General.—The amount authorized to be appropriated for the Department of Defense for 2023 is—

(1) the aggregate amount appropriated for the Department of Defense for fiscal year 2022 in division C of the Consolidated Appropriations Act, 2022 (Public Law 117–103), reduced by

(2) $100,000,000,000.

(b) Funding for Certain Accounts.—The amount authorized to be appropriated for each of the following accounts of the Department of Defense shall be the amount authorized to be appropriated for such account for fiscal year 2022:

(1) The Defense Health Program.

(2) Each military personnel account.

(3) Each account providing for pay and benefits for persons appointed into the civil service as defined in section 2101 of title 5, United States Code.

(c) Application of Funding Cuts.—In reducing funding for Department of Defense programs in accordance with subsection (a), the Secretary of Defense shall take into consideration the findings and recommendations contained in the CBO report entitled “Illustrative Options for National Defense Under a Smaller DefenseBudget” and dated October 2021.

Green New Deal: Promise to Plan a Proposal Later

While the climate crisis may be real, the progressive movement to combat it consists mostly of hot air. Progressive lawmakers, leaders, and activists can cite chapter and verse on climate doomsday scenarios and the need to slow the rise in global temperatures. Yet when pressed for specific solutions with three basic but fundamental questions—1) Which policies must be enacted? 2) How would families, businesses, and the economy incorporate these policies? and 3) How much temperature savings would be achieved from those policies?—the progressive movement is rarely able to provide a sufficient, detailed response. The “plan” is usually to assign someone to come up with a plan.

As background, man-made and natural factors have combined to increase global temperatures by 1.1 degree (Celsius) since the late 1800s.[59] The United Nations and other international organizations suggest that total warming could reach 4 degrees by the end of this century, without a substantial reduction in the projected carbon dioxide emitted into the atmosphere.[60] While the 2015 Paris Agreement[61] saw numerous nations pledge emissions restrictions, with the goal of limiting the total temperature rise to “well below 2 degrees,” the environmental movement has since settled on a 1.5-degree target, which is just 0.4 degrees above current levels. The United Nations’ Intergovernmental Panel on Climate Change claims that meeting this target—which is as much as 3 degrees below a baseline[62] of no climate reforms—requires steadily reducing global anthropogenic carbon dioxide emissions to net zero by 2050.[63]

A major challenge is that the U.S. is no longer the dominant driver of global carbon dioxide emissions moving forward. The U.S. today produces one-seventh of all global CO2 emissions, which is second to China and may eventually be passed by India as well.[64] While China, India, and many other developing nations have pledged to limit emissions moving forward, such economic restrictions may well prove to be a luxury that those developing nations cannot afford.

In other words, a coordinated global push to severely limit CO2 emissions is unlikely to be sustained. That means that—absent an international agreement to implement policies together—a full-scale reorganization of the U.S. economy around carbon emissions restrictions could significantly burden families, businesses, and the economy while slowing the growth of global temperatures by the year 2100 by 0.1–0.2 degrees Celsius—an estimate not statistically significant from zero, according to an American Enterprise Institute analysis of the EPA climate model.[65] If that is the case, the enormous economic and budgetary cost of climate restrictions may be better spent on other global priorities (such as eradicating poverty, malaria, or AIDS) until a more effective and comprehensive global approach to the climate emerges. For instance, investing in R&D to develop less economically painful climate solutions may make more sense than immediate, draconian restrictions within one nation or a limited group of nations.

But subjecting various climate approaches to these cost/benefit tests requires first developing comprehensive proposals and measuring their costs and benefits. And such proposals have been few and far between. The American people hear a lot of apocalyptic hysteria but few specific solutions.

The 2022 Inflation Reduction Act included climate-related provisions costing $391 billion over the decade,[66] making it perhaps the most significant environmental legislation in three decades. This legislation abandoned the typical approach of painful mandates and taxes by instead leading with tax credits and incentives for energy efficiency and pollution reduction.

However, very little modeling was released quantifying the reduction in carbon emissions and global temperatures from this new approach. Typical was a Department of Energy “fact sheet” promising significant carbon reductions from IRA “in combination with other enacted policies and past actions,” meaning that it did not include a stand-alone analysis of IRA.[67] Additionally, the fact sheet emphasized that its analysis was preliminary and its methodology portion was presented more as narrative than checkable databases. Still, this represents the peak of detail from climate legislation.

One of the most well-known and debated recent climate proposals was not even a bill but rather a nonbinding resolution. The “Green New Deal” resolution was authored by Representative Alexandria Ocasio-Cortez (D-NY) and Senator Ed Markey (D-MA) and cosponsored by 101 representatives and 14 senators.[68] The first five pages of this 14-page resolution merely offered a rhetorical case for addressing climate policy—with random digressions to unrelated issues like income inequality, gender pay equity, and health policy. From there, the resolution simply set vague goals such as reducing carbon emissions, upgrading building energy efficiency, and reducing transportation pollution—with additional digressions into unrelated progressive goals such as health reform, strengthening unions, retirement security, “democratic” reform, paid vacations, and family and medical leave. Nowhere does the legislation offer anything resembling a blueprint to accomplish any of its goals. It is simply a wish list.

Other leading bills include the “100% Clean Economy Act of 2019” authored by Representative Donald McEachin (D-VA) with 170 cosponsors,[69] and the similar “Clean Economy Act of 2020” authored by Senator Tom Carper (D-DE) with 33 cosponsors.[70] Both bills simply direct the federal government to come up with a plan to achieve net-zero emissions by 2050. They offer no substantive blueprint whatsoever.

In search of a more comprehensive blueprint, Congress in 2019 established the House Select Committee on the Climate Crisis to “investigate, study, make findings, and develop recommendations on policies, strategies, and innovations to solve the climate crisis.”[71] This 16-member bipartisan congressional committee has held dozens of hearings over the past three and a half years.[72] Surely, one would hope that a congressional committee with significant financial resources and the ability to summon the nation’s top experts could produce specific, implementable legislation to solve the climate crisis.

Instead of legislation, the committee wrote a report73[73]—just one more of the hundreds of annual congressional reports whose writers typically outnumber their eventual readers. This report’s lead recommendation was that “Congress should pass legislation to establish a national goal of achieving net-zero greenhouse gas emissions by no later than 2050.”[74] The recommendation called on the president to agree to ambitious emissions-reduction targets, develop a strategy to that end, and “assess the country’s progress.”

In other words, a select congressional committee spent three and a half years investigating legislative climate solutions. Rather than produce legislation to reduce emissions, it merely released a report—and that report’s main recommendation was for someone else to draft legislation. And that future legislation would simply set a nonbinding goal to reduce emissions. Then perhaps a federal agency would begin looking for ideas of exactly how to reduce emissions.

Essentially, Congress created a special committee that wrote a plan to assign someone to draft a legislative plan that would, in turn, ask someone else to come up with a plan.

In fairness. this legislative recommendation was included in a 547-page report analyzing the climate crisis and offering various approaches to curbing CO2 emissions across industries. Surely, many of those recommendations could become the basis for a comprehensive emissions-reduction bill (even if too many recommendations consist simply of giving money to a federal agency to develop a plan, and much of the report again digresses into unrelated progressive goals). However, after decades of environmental activism warning that sweeping measures are needed immediately, and with an entire industry of economists and climate scientists working on this issue, Congress should be past the initial brainstorming stage and able to craft a comprehensive legislative proposal that can be analyzed and enacted.

Again, progressives cannot ask voters to essentially redesign the industrial economy and endure massive costs and job shifts without knowing specifically what the program entails and how it will help the climate. This requires: 1) a specific and detailed proposal; 2) an economic and scientific analysis of what would replace the carbon-producing technology, how the transition would work, and how it would economically affect families, businesses, industries, and the overall economy; and 3) the ultimate effect on global temperature projections. Projections need not be exact, obviously. But the American people will require a basic understanding of the costs and benefits before they agree to this program.

It may be that progressives have determined that the specific steps necessary (such as banning the internal combustion engine, limiting air travel, and imposing extraordinarily expensive building regulations) must be hidden from congressional legislation lest they create a voter backlash. However, there is no getting around the democratic processes, and even agency-imposed restrictions are accountable to presidents and Congresses that will, in turn, be held accountable by voters.

Members of the climate movement lecture Americans that they must accept a full redesign of the industrial economy, or they will be responsible for “destroying the planet.” Yet when pressed for solutions, most progressive leaders cannot even provide a blueprint of the necessary reforms and the resulting effect on global temperatures. Progressive legislative proposals consist largely of promises to come up with a plan later. Critics should not be blamed for blocking comprehensive climate legislation that does not actually exist.

Congress in 2019 established the House Select Committee on the Climate Crisis to “investigate, study, make findings, and develop recommendations on policies, strategies, and innovations to solve the climate crisis.” One would hope that a 16-member bipartisan congressional committee with significant financial resources and the ability to summon the nation’s top experts could produce specific, implementable legislation to solve the climate crisis.

But after three and a half years and dozens of hearings, instead of writing an actual climate bill, this congressional committee’s main legislative recommendation[75] was for someone else in Congress to draft legislation that would, in turn, direct someone else to come up with legislation to reduce greenhouse emissions.

From page 30:

Recommendation: Congress should pass legislation to:

• Establish a national goal of achieving net-zero greenhouse gas emissions by no later than 2050;

• Direct the President to set ambitious interim targets for 2030 and 2040 and frontload emissions reductions as much as possible;

• Develop a strategy for climate restoration and net-negative greenhouse gas emissions for the second half of the century; and

• Direct the National Academies of Science, Engineering, and Medicine to continually assess the country’s progress toward meeting these climate goals; assess distributional impacts, including the impacts of climate policy on the cumulative effects of multiple pollution sources in environmental justice communities; and identify policy recommendations to remedy any unintended distributional impacts.

Conclusion: The Lure of Utopian Fantasies

Few would describe the market for public policy ideas as “efficient.” However, it is fair to assume that most “easy answer” policies that would dramatically help nearly everyone with no serious drawbacks have already been enacted by now. What remains on most issues is a menu of policy solutions that involve trade-offs between costs and benefits, and the relative popularity of each policy option depends on individual values in assessing those trade-offs. The progressive movement largely rejects this framing, selling astonishingly bold solutions as nearly utopian fantasies with virtually no drawbacks—solutions that are stopped only by a cabal of sinister, bad-faith actors.

Yet extraordinary claims require extraordinary evidence. When pressed for specifics on how all such trade-offs can be defeated—such as government providing virtually unlimited health-care treatments for “free” at the point of service, sharply reducing global temperature growth while protecting the economy, deeply slashing defense spending without compromising national security, or financing a European-size welfare state solely through upper-income taxes—progressives largely fail this basic test of detail and evidence. As a movement, progressives promise enormous benefits, and then wave away basic questions of how the programs would work or be financed. But Congress cannot enact empty slogans, and the movement’s leaders simply have not done their homework turning aspirations into workable legislative proposals, often because their promises are contradictory, unworkable, or mathematically impossible. Progressive proposals are not defeated by a cabal of sinister, bad-faith actors but rather by their own reliance on promising utopian solutions that even their leading advocates cannot turn into coherent legislation.

(CLICK HERE for the full report)

President Donald Trump’s tax, spending, and deficit legacy is still being defined. Critics point out that Trump’s tax cuts and spending increases led to a $3 trillion budget deficit. They note that Trump’s presidency saw the debt surpass 100% of the economy, even though he came into office with a healthy economy, declining interest rates, and relative peace after 15 years of global military conflict.

On the other hand, the president’s defenders respond that he inherited large budget deficits that were already projected to grow on autopilot due to escalating Social Security and Medicare costs. They argue that the 2017 tax cuts contributed heavily to the growing economy through 2019. Finally, they note that the president repeatedly proposed budgets with significant deficit reduction but was thwarted by a bipartisan congressional majority that aggressively supported expensive new initiatives, as well as by a global pandemic that virtually everyone agreed required a massive federal response.

The end of Trump’s presidency allows for a final assessment of his tax, spending, and deficit record. As the methodology section explains, this analysis begins with the 10-year budget baseline that President Trump inherited in January 2017 and measures all subsequent tax and spending changes through the February 2021 baseline, which was released as the president left office. The analysis is based on more than a dozen Congressional Budget Office (CBO) baseline updates over these four years, supplemented with the line-item scores of all notable bills signed into law by President Trump.[1]

• When President Trump entered the Oval Office, CBO projected the cumulative 2017–2027 budget deficits would be $10.0 trillion. When he left office four years later, CBO’s projected deficits for the same period were $13.9 trillion. The president signed or enacted $7.8 trillion in new initiatives, the costs of which were partially offset by $3.9 trillion saved from economic growth revenues and technical re-estimates of taxes and spending levels.
  

• Economic and technical factors produced a substantial $3.9 trillion in actual and projected savings over this period. Of this amount, $2.7 trillion comes from falling interest rate projections, which reduced the projected cost of net interest on the national debt. Another $1.3 trillion comes from higher tax revenues produced by faster economic growth projections. Technical re-estimates have reduced mandatory spending projections but also tax revenues. Most of these savings are projected to occur later in the 2017–2027 period and thus may not materialize if economic growth slows or interest rates rise.
  

• President Trump signed legislation and approved executive actions costing $7.8 trillion over the decade—compared to $5.0 trillion for President Obama and $6.9 trillion for President Bush, and he enacted these costs in just a single four-year presidential term, compared to his predecessors’ eight years in the Oval Office. The largest drivers were pandemic relief legislation ($3.9 trillion), the 2017 tax cuts ($2.0 trillion), and legislation raising the discretionary spending caps ($1.6 trillion).
  

• President Trump’s four annual budget proposals were scored as reducing budget deficits by $2.4 trillion over the subsequent 10 years. Nearly all proposed savings came from repealing and replacing Obamacare, as well as vague promises to cut domestic discretionary spending nearly in half. Outside of the budget documents, President Trump did not aggressively push either initiative after 2017.
  

• Trump left the White House with the largest peacetime budget deficit in American history and a national debt exceeding 100% of the economy for the first time since World War II. The failure to address unsustainable Social Security and Medicare costs leaves a projected 30-year baseline deficit of $112 trillion.

$3.9 Trillion in Additional Deficits

When President Trump took office in January 2017, he inherited a growing economy and budget deficits that had gradually fallen to 3% of GDP in the years since the Great Recession. At this time, the Congressional Budget Office (CBO) projected that the $585 billion budget deficit from 2016 would dip to $487 billion by 2018, before the baby boomer–driven rise in Social Security and Medicare costs would gradually push deficits up to $1.4 trillion by 2027. Overall, CBO projected that $10.0 trillion in deficits over the 2017–2027 period would drive the debt held by the public to $24.9 trillion (see Figures 1 and 2).[2]

Yet while running for president, Trump pledged to balance the budget and then pay off the entire national debt. He boasted to the Washington Post’s Bob Woodward, “we’ve got to get rid of the $19 trillion in debt … I think I could do it fairly quickly … I would say over a period of eight years.”[3] Of course, doing so would be virtually impossible—politically, economically, and mathematically—especially given his promise not to cut Social Security and Medicare, which drove virtually the entire projected rise in debt. Trump’s plan to achieve nearly $25 trillion in 10-year savings consisted of renegotiating trade deals, bringing overseas companies (and their taxes) back to America, repealing Obamacare, and growing the economy. While paying off the debt within a decade was an absurd promise, serious deficit reduction was possible given the growing economy, falling defense costs, and a unified Republican Congress that had long promoted significant entitlement reform.

Instead, as Trump left office, the 2017–2027 budget deficits were estimated at $13.9 trillion—$3.9 trillion higher than the inherited projection. During each of Trump’s four years in the White House, the actual deficit exceeded the original CBO’s projections by at least $100 billion. For the first time in American history, the deficit in fiscal year 2020—amid a massive bipartisan fiscal response to the pandemic—reached $3 trillion (accounting for 14.9% of GDP, a level that has been exceeded only during the height of World War II).

The president left office with a $2.3 trillion deficit projected for 2021. Potential budget savings forecast for the 2022 through 2027 period are driven by the expiration of expensive legislation as well as economic and technical re-estimates, not by any deficit-reduction legislation signed by President Trump.

(CLICK HERE for the full report)

(Originally appeared in National Affairs)

It has become a regular theme of op-eds and news analysis: Democratic presidents create economic booms and job gains, while Republican presidents bring recessions and job losses.

In 2016, economists Alan Blinder and Mark Watson released a study indicating higher average economic-growth rates under Democratic presidents. More recently, David Leonhardt of the New York Times wrote a column that ranked the last 14 presidents by jobs and economic growth during their administrations, with Democrats generally ranking higher than Republicans. Political commentators frequently post colorful charts on social media showing that Democrats Bill Clinton and Barack Obama oversaw faster job and economic growth than did Republicans George H. W. Bush, George W. Bush, and Donald Trump. They are already pointing to the 5.7% economic-growth rate in 2021 under President Joe Biden — coming on the heels of the previous year’s 3.4% contraction under Trump — as yet more evidence that Democratic presidents have superior economic policies. Most succinctly, critics note that 10 of the 11 recessions since 1950 began during a Republican presidency.

So is the case closed? Are Democratic presidents really better managers of the economy than their Republican counterparts?

The short answer is no. We’re all taught never to confuse correlation with causation, especially when small data sets are involved. After all, the past 125 years have shown a strong correlation between short-term stock-market performance and the position of Mars in the sky. There is also a strong yearly correlation between the number of accidental swimming-pool drownings and the number of movies featuring actor Nicolas Cage. Empty correlations represent the beginning of an investigation, not the conclusion.

And of course, misleading partisan correlations can go in both directions. For instance, more than 97% of America’s war deaths over the past 150 years have come from four wars (World War I, World War II, the Korean War, and the Vietnam War) that either took place or saw America’s role heavily escalated under Democratic presidents. Yet it would be partisan nonsense to conclude that this figure somehow reflects a systematic failure of Democratic foreign policy, or that the party cannot be trusted on international affairs today. Presidents respond to the unique challenges of their times; they cannot control external events.

Along those same lines, several recessions during Republican terms have been driven by events beyond the reach of presidential policy, such as the Covid-19 pandemic. Other recessions were the product of timing. Perhaps most surprisingly, recent recessions have in part resulted from a relatively unexplored phenomenon that effectively flips the popular narrative on its head.

At bottom, the assertion that Democratic presidents bring booms and Republican presidents create recessions not only overinterprets a correlation from a small data set, it is rooted in a flawed view of the chief executive’s capacity to influence a complex world.

THE INHERITED ECONOMY

The best way to begin to consider partisan differences in presidential economic performance is to examine the five recessions that began between 1953 and 1976, all of which took place under Republican presidents.

Much of this GOP tilt is the natural result of Republicans holding the White House for 16 of these 23 years. And while the 1961-1968 Democratic presidencies were recession-free, the economic overheating toward the end of that period played a major role in the light recession that followed in 1969 — Richard Nixon’s first year in office. Other recessions of the era were largely driven by factors outside the president’s control, such as Federal Reserve policy and the OPEC oil embargo. These “Republican recessions” were also bookended by “Democratic recessions” in 1948 and 1980 under presidents Harry Truman and Jimmy Carter, respectively. In short, there is no real evidence that presidential policies significantly drove the recessions that took place during this period.

The post-1976 era is even more interesting. President Carter, a Democrat, oversaw a recession in 1980. The subsequent five recessions took place under Republican presidents. Again, some of these downturns were caused by discrete events lying largely outside of the president’s control — such as the housing-market crash and the global pandemic. Others were the product of timing. Ronald Reagan, for instance, found himself in a recession within six months of entering office following a Democratic term — well before his own policies could have been enacted, implemented, and caused a recession. Similarly, the recession that occurred during the first year of George W. Bush’s presidency began just weeks after Clinton’s term came to a close. Both of these recessions were driven by events that had taken shape before those presidents took office; they could have easily occurred a few months earlier under their Democratic predecessors. (In fact, the 1981 Reagan recession was in many ways a continuation of the 1980 recession under Carter.)

Indeed, Republican and Democratic presidents have entered office under vastly different economic circumstances — often at opposite ends of the business cycle — since the 1980s. More precisely, Republican presidents during this period have typically inherited economic booms, while Democrats have always entered the White House during or shortly after recessions. This pattern all but guarantees that Republicans will hold the White House when booms turn to recessions, while Democrats will hold office during recoveries.

Understanding this phenomenon requires abandoning the presumption that each new president inherits a steady-state economy that is expected to continue on its current rate of growth. This perspective leads many voters to blame presidents for declining economies and hail them as heroes for generating growth. It also leads to poor economic analysis that simply ranks presidents by economic growth or employment rates — which, again, are largely outside executive control.

A more rigorous analysis of the correlation would take into account the fact that new presidents inherit a spot in the business cycle. Traditional business-cycle analysis holds that economic expansions eventually overheat, slow down, or hit an exogenous shock that brings about a recession. These recessions then typically self-correct, transforming back into an economic expansion after a period of six to 18 months. Although the Federal Reserve can influence the business cycle (more so than stimulus legislation, which is often implemented after a recession has already ended), this cycle occurs largely independent of political actions.

A new president, therefore, inherits either an expanding economy that is likely to eventually slow down or a recessionary economy that is likely to recover relatively soon unless sabotaged by destructive policies. This points toward a paradoxical conclusion: While each presidency and each business cycle is different, history suggests that we should expect presidents who enter office during or shortly following a recession to oversee more job creation and economic growth than those who enter office well into a mature economic boom.

The job numbers bear this out. Since 1977, there have been 11 four-year presidential terms. Six of those terms began during a weak economy (with an unemployment rate between 7.3% and 8.0%), while five began during a strong economy (with an unemployment rate between 4.2% and 5.4%). Sure enough, the terms that inherited a weak economy saw an average of 7.7 million new jobs created, while the terms that inherited a strong economy saw an average of just 2.8 million.

This finding makes intuitive sense: Presidents who inherit a weak economy typically ride the natural recovery upward as millions of unemployed workers eagerly return to work, while presidents who inherit a strong economy have effectively run out of unemployed people to employ. In fact, an economy that has reached its peak may soon begin decelerating and shedding jobs of its own accord.

In a similar vein, the terms that inherited a weak economy saw an average of 2.8% economic growth annually, versus 2.4% for the terms that inherited a strong economy. This growth gap would be nearly three times as large if not for two outliers: Clinton’s second term, which overachieved with fast economic growth despite inheriting a strong economy, and Obama’s first term, which underachieved with slow economic growth despite inheriting a weak economy (more on these later).

Voters, of course, tend to valorize the presidents elected during a recession, who subsequently oversee the more or less inevitable recoveries, and look down on those elected during economic booms, who are held hostage to the inevitable deceleration. In reality, they are not judging presidential performance as much as they are judging the business cycle.

PARTISAN INHERITANCES

Why do Republican presidents typically inherit stronger economies while Democrats tend to inherit weaker ones?

As it turns out, over the past several decades, voters have consistently elected and re-elected Republican presidents during economic booms, then swapped in Democratic presidents during downturns. In other words, the causation described by the prevailing wisdom is at least partially reversed: Presidential parties do not drive economic performance; rather, economic performance appears to play a role in determining which party holds the presidency. The actions of the presidents themselves, meanwhile, have had surprisingly little to do with the economy’s performance.

Consider, for instance, Ronald Reagan’s 1980 election, which represents the last time a Republican president was elected shortly after a recession. Following a second downturn from 1981 to 1982, he oversaw the recovery that unfolded over his two terms in office. Republicans managed to hold the presidency for four additional years of strong economic performance until a slight recession likely played a part in motivating voters to elect Bill Clinton, a Democrat, in 1992.

Clinton subsequently presided over the economic recovery that occurred over the succeeding eight years. Then, as the 2000 economy boomed, voters elected Republican George W. Bush in the next open-seat election. Bush overcame a small recession in early 2001 to keep the presidency in Republican hands until another Democrat, Barack Obama, rode the deep 2008 recession into office.

Like Clinton and Reagan before him, Obama oversaw the recovery that occurred over the course of his two terms in office. Then, as the economy boomed through 2016, voters elected Republican Donald Trump in the next open-seat election. Trump inherited this economic boom but, in the midst of the pandemic-driven 2020 recession, was replaced by Democrat Joe Biden after only one term. As the pandemic has receded — albeit unevenly — the economy has largely rebounded.

In sum, whenever the economy has been booming in an open-seat presidential election (1988, 2000, 2016), voters elected Republicans, and continued re-electing them until a recession hit, at which point they elected Democrats (1992, 2008, 2020). Those Democrats were re-elected to a second term largely due to their overseeing the recovery, then Republicans won the next open seat.

Voters, of course, have not acted purely on the basis of their assessments of the economy; other factors have played significant roles in driving these elections as well. The point of highlighting the pattern is not to propose an alternative mode of economic determinism to explain recent elections, but to suggest that the familiar story underplays the significance of the business cycle.

Beyond that, this pattern has several implications. The first is that Democrats have generally benefitted from being elected at the point where the business cycle is about to turn upward. Thanks in part to this accident of timing, they are re-elected to a second term as a reward for the (largely inevitable) economic recovery.

The second, as noted above, is that if Republican presidents are elected during economic expansions (especially in the later stages), then by extension, they will be in office when the boom turns to recession, even if it takes a decade or more. Being elected in an economy that has reached the top of the business cycle and is poised to decelerate leads to a comparatively negative economic record.

Critics may still insist that Republican mismanagement, not the business cycle, drove the recessions, but they would be hard-pressed to match correlation with causation. The 1980s Reagan-Bush economy produced a historically strong recovery after the Carter recession before running out of gas in 1990, as the natural business cycle would predict was inevitable. Despite a short recession in early 2001, the economy held steady under George W. Bush until the housing market crashed — an event that was not rooted in any presidential act. (In fact, between 2001 and 2007, the Bush administration repeatedly implored Congress to rein in Fannie Mae and Freddie Mac before they contributed to a mortgage meltdown.) The Trump economy thrived until a global pandemic caused a largely unavoidable worldwide recession during his final year in office. None of these three recessions (or four, if one includes the 2001 downturn that occurred early in Bush’s term) were triggered by the policies of the president who happened to be in office at the time.

On the flip side, Biden is the third consecutive Democratic president to take office during or in the immediate aftermath of a recession. And like the previous two, he will likely ride the natural business cycle back up and receive credit for the recovery (aided by the fact that the vaccine required to disrupt the pandemic had been produced and was being distributed when he took office). By that point, the Federal Reserve and the Congressional Budget Office (CBO) were already projecting significant economic growth through 2021. The Biden economy has not performed markedly different from those original expectations.

In sum, it appears the best way to judge the economy under a given president is to consider its performance relative to the economic trajectory that president inherited. Over the past 44 years, there have been just three notable outliers — Clinton’s overachievement, Obama’s underachievement, and Trump’s overachievement, all relative to their inherited trajectories.

Clinton’s second term began with a booming economy and a 5.3% unemployment rate. But instead of decelerating, the economy added 9.5 million more jobs to further reduce the jobless rate to 4.2%. No other presidential term in the last 44 years that began with a strong economy saw even 2.5 million jobs created. And of the five presidential terms since 1976 that began with a sub-5.5% unemployment rate, Clinton’s second term was the only one that escaped a recession. In fact, the average annual economic-growth rate of 4.5% in those years was the highest of any presidential term during that era.

Obama’s first term was an outlier in the other direction. Since 1976, every presidential term that began with an unemployment rate between 7% and 8% ended up seeing the economy add between 6 and 10 million new jobs over the course of those four years. The only exception was Obama’s first term, during which just 1 million jobs were added; in fact, the unemployment rate rose slightly, from 7.8% to 8.0%. Even adjusting for the severity of the 2007-2008 recession, this was the weakest economic recovery since the Great Depression, widely missing the jobs and economic-growth benchmarks set by the White House as well as the CBO, Federal Reserve, and blue-chip forecasts. The economy grew at an average annual rate of just 1% over those four years, peaking at 2.6% in 2010.

Trump, meanwhile, inherited the second-lowest unemployment rate of any president since 1976. Yet his term saw that already low 4.7% rate plummet further, to a 50-year low of 3.5%, as 6.6 million jobs were created during his first three years in office. This performance blew away the projections of the CBO and economic forecasters, which had merely hoped for a “soft landing” rather than a full recession at that point in the business cycle. The pandemic, of course, caused the bottom to fall out in 2020. Though Trump arguably mishandled the response, even the most competent policy could not have kept America’s economy out of the attendant global recession.

The economic performances of the other eight presidential terms since 1977 were generally in line with the pattern described earlier. When the inherited jobless rate was 7% or above, the rate eventually rebounded, and the economy posted a strong recovery. When it was 5.4% or below, job creation slowed down and the unemployment rate rose, with an 80% chance of a recession at some point during the term. Both economics and history, therefore, suggest that the recession inherited by President Biden should transform into a healthy economic recovery, almost regardless of any decision his administration makes. Nevertheless, the president will surely be given credit for the strong recovery, contributing to the narrative that Democratic presidents have some sort of Midas touch when it comes to economic policy.

In reality, the Democrats’ touch appears to be a matter of timing: The public elects Republican presidents during the latter stages of economic expansions, waits however long it takes for the next recession, and then hands the White House to a Democrat just in time for the economy to recover. And in politics, as in show business, timing is everything.

DEFICIT TRENDS

Along with growth and jobs, political observers like to compare presidential economic records by pointing to budget deficits as measures of fiscal responsibility. In reality, just as with jobs and economic growth, the largest determinant of a president’s budget-deficit record is what he inherits from his predecessor.

Each president inherits a 10-year budget baseline showing the default annual projected levels of tax revenues, spending, and deficits. Over the past two decades, these baselines have ranged from a cumulative $5.6 trillion surplus to a $12.3 trillion deficit.

Presidents have limited power to significantly alter spending, revenue, and deficit levels from these baselines, as fully two-thirds of all spending, along with nearly the entire tax code, are on long-term autopilot; they can be changed only to the extent that Congress acts to alter programs and rates. The remaining third of spending (so-called “discretionary” appropriations) are negotiated annually between the White House and Congress, but they rarely shift enough to drastically alter budget deficits. Even the budget-deficit baseline itself is filled with false expirations and unrealistic assumptions that make it a flawed starting point for analysis. And of course, significant events like wars and recessions require some presidents to spend more than others. The natural business cycle described above plays a large role in automatically increasing and reducing deficits as well. Thus, total budget deficits during a presidential term — or even their trajectory — tell us little about a president’s commitment to fiscal responsibility.

In fact, much of the narrative claiming that Democrats tend to reduce the deficit more so than Republicans reflects the same economic story described above, with national-security developments sprinkled in. The rising budget deficits under George H. W. Bush, for instance, were largely a function of the 1990-1991 recession that was driven by Middle East conflicts and American corporate restructuring. The fiscal improvement that followed was largely unrelated to the policies of President Clinton (or House Speaker Newt Gingrich). Between 1992 and 2000, the federal budget improved from a deficit of 4.5% to a surplus of 2.3% of GDP. More than 80% of this fiscal improvement was directly attributable to either the end of the 1991 recession and the late 1990s economic bubble or the defense-budget savings from the end of the Cold War.

The remaining 20% is more attributable to policy choices, most notably Clinton’s 1993 tax increases and the spending cuts championed by the Republican Congress to which Clinton agreed. While these choices mattered, crediting Clinton for the historic budget improvement would require also giving him credit for America’s victory over the Soviet Union, an economic recovery that began before he took office, and a technological boom that few would argue was driven by his administration’s policies. Both economically and in terms of national security, Clinton was in the right place at the right time.

The same factors that drove the late 1990s budget surpluses — a bubble economy and significantly reduced defense costs — reversed in 2000-2001, plunging Washington back into deficit as George W. Bush’s presidency was gearing up in 2002. No reasonable analyst would blame Bush for the technological bubble bursting in 2000, the 9/11 attacks the following year, or the housing crash and recession of 2007-2008. Yet those factors drove much of the budget decline during his presidency.

To be sure, Bush owns the 2001 and 2003 tax cuts, as well as the increased defense spending on the War on Terror. Yet without the bubble bursting and the housing crash, the budget would have remained roughly balanced, even with the Bush tax cuts and the war. None of this is to suggest that Bush’s fiscal policies were particularly responsible, only that much of the fiscal decline was driven by developments beyond his control.

While Bush presided over the declining business cycle, Obama caught the rebound. Those who highlight the budget deficit falling from $1.4 trillion to $585 billion between 2009 and 2016 overlook the fact that Obama’s own stimulus law inflated the 2009 starting point. Additionally, by January 2009, the CBO had already projected that even if the new president were to do nothing, the recession economy would recover and drive the deficit back down to $264 billion by 2012. Instead, Obama signed legislation cumulatively adding $5 trillion in debt over the decade, inflating annual deficits well above the long-term baseline levels that the CBO projected in January 2009 and slowing the deficit reduction that should have come from the economic recovery.

Similarly, after Trump was elected in 2016, he added to the deficit with tax cuts and discretionary-spending increases. However, he also confronted a massive 2020 budget deficit brought on by the global pandemic — an event that did not originate with his actions — and the bipartisan legislative response.

Republican presidents George H. W. Bush, George W. Bush, and Donald Trump, therefore, each saw massive final-year budget deficits driven by external factors (a recession, a housing crash, and a global pandemic) over which they had essentially no control. Yet those inflated final-year figures fed the misleading narrative that Republican presidents’ rising deficits were the result of tax cuts and unjustified defense-spending increases. Meanwhile, Democratic presidents Bill Clinton, Barack Obama, and Joe Biden inherited deficits inflated by these temporary factors. They were then able to claim credit for the deficit reductions that would have occurred on their own.

To be sure, neither Republican nor Democratic presidents have been particularly responsible on budget issues. Yet the general trend of deficits falling under Democratic presidents and rising under Republican ones has not been a function of partisan differences in economic-policy approaches, but rather of chance events occurring in the final year of Republican administrations, leaving new Democratic administrations to take credit for those short-term events concluding on their own. Measured purely by the cost of legislation signed into law across their presidencies, Obama and George W. Bush had comparable impacts on the deficit. President Biden’s spending is on pace to exceed both.

Accurately assessing blame for long-term budget deficits requires looking past temporary economic fluctuations, national-security emergencies, and public-health crises that presidents have little control over. The evidence suggests that the growth of the deficit since the mid-1970s has been largely a function of decisions made before these events occurred. Economist Charles Blahous has written that long-term budget deficits have been driven primarily by a series of entitlement creations and expansions enacted between 1965 and 1972, which resulted in social-welfare spending leaping from 5.3% to 13.3% of GDP between 1965 and 2019. Because much of this increase occurred on autopilot as part of the budget baseline, presidents were largely powerless to stop rising costs without congressional action. They could only (partially) control discretionary spending, which fell from 11% to 6.3% of GDP during this period — mostly due to defense cuts following the ends of the Vietnam War, the Cold War, and the wars in Afghanistan and Iraq.

Democratic presidents were the strongest opponents of reining in this 8% of GDP growth in entitlements. However, they championed the 4% GDP decline in defense spending. On the opposite side of the ledger, tax revenues generally remained close to the 17.3% of GDP average, as Republican tax cuts every 15 to 20 years offset real bracket creep (the automatic growth in tax revenues as a share of the economy that results from real-income growth pushing families into higher marginal tax brackets). In short, both parties played a key role in expanded structural deficits: Democrats blocked nearly every attempt to prevent the automatic growth of entitlements, while Republicans refused to let tax revenues rise as a share of the economy to finance the higher spending levels.

PRESIDENTS AND THE ECONOMY

Purely partisan narratives are often wrong; the familiar cliché that the economy is stronger when Democrats are elected president is no exception. Pointing to a simple correlation over a small number of presidential terms to assert that Democratic presidents are better stewards of the economy is as lazy as assuming that Democrats are worse on foreign policy because the vast majority of post-1865 war casualties have occurred on their watch.

In exploring the question of partisan differences in presidential management of the economy, it is important to emphasize the small degree of control federal policymakers really have in this arena. The U.S. economy is a $23 trillion machine powered by 330 million Americans and influenced by billions of people around the world. The effect of most federal policies on short-term economic performance is, at best, marginal.

What’s more, presidents do not control the business cycle, even if the business cycle plays a part in the outcomes of presidential elections. Since 1990, their economic records have instead been dominated by four events: the 1990-1991 recession, the late-1990s bubble bursting, the 2007-2008 housing crash, and the 2020 pandemic. None of these events was fundamentally a function of presidential policy, yet all four occurred at times that fed the perception that Democrats bring better economic news than Republicans. With the pandemic economy sure to recede, President Biden is set to become the next beneficiary of this accident of timing.

Ultimately, the notion that there is a simple partisan pattern to the health of the economy is an extension of the exaggerated politicization of our understanding of contemporary American life. Presidents are chief executives of the federal government; they are not masters of the universe. They can play a role in setting the direction of public policy, and can shape how our government responds to events. In short, presidents matter, but partisan narratives are no substitute for economic analysis.

CLICK HERE for the article at National Affairs

(Originally published by the Manhattan Institute)

(NOTE: When this report was released in 2021, the economic commentariat responded with overwhelming dismissal and even mockery. Critics asserted that 15 years of low interest rates would surely continue, so there was no reason to constrain Washington’s deficit-spending appetite. Needless to say, subsequent events have vindicated this report).

Today’s trendy economic argument asserts that the current debt-to-GDP ratio of 100% has not harmed the economy, and therefore Congress can easily afford large new government expansions. But that argument has two fatal flaws. First, it fails to acknowledge that over the next few decades—even without new legislation—the debt is already projected to reach levels that even debt doves would likely consider unsustainable. Second, this argument assumes that interest rates will forever remain near today’s low levels, thus minimizing Washington’s cost of servicing this debt. However, economic trends rarely remain linear indefinitely, and interest-rate movements have rarely followed forecaster projections. Indeed, several realistic economic scenarios could easily push interest rates back up to 4%–5% within a few decades—which would coincide with a projected debt surge to greatly increase federal budget interest costs. Debt doves have no backup plan for this possibility. Policymakers should now enact reforms that scale back the escalating long-term debt projections in order to limit the federal government’s risk exposure to a fiscal crisis.

Introduction

Congress and the White House are engaging in the largest borrow-and-spending spree since World War II. The $3 trillion legislative response to the pandemic was largely justified but nonetheless staggering in its size: at 15% of GDP, it exceeded the 1930s New Deal response to the Great Depression. Yet this deficit spending was just a warm-up to President Biden and Congress’s even more ambitious agenda. They have already enacted a $1.9 trillion stimulus bill and a $550 billion infrastructure bill, and adding proposals like Build Back Better ($3 trillion in deficits assuming Congress repeals the fake expiration dates), [1] and new discretionary spending ($1 trillion over the decade) would add up to $6.5 trillion in additional ten-year debt from one year of legislation. This is quadruple the cost of the 2017 tax cuts, and it exceeds 20 years of domestic and international costs related to the war on terrorism. Nor are Democrats finished yet, as President Biden still has campaign pledges related to health care, Social Security, education, and other areas that would add an additional $3 trillion in debt. [2]

This deficit spending would take place on top of growing baseline deficits and push the national debt—less than $17 trillion before the pandemic—past $44 trillion a decade from now. And the debt would continue growing thereafter as the result of $112 trillion in 30-year baseline deficits, driven largely by deepening Social Security and Medicare shortfalls. [3] In other words, the U.S. government is in the early stages of what is projected to be the largest government debt binge in world history.

Yet there has been no widespread backlash. There is no tea party movement, or Ross Perot– style political candidate warning America about unrestrained red ink. Congressional Republicans have gone largely silent on this historic borrowing spree, and polling by the Pew Research Center shows the public’s budget deficit concerns plummeting over the past decade. [4] Financial markets have shrugged off this surging debt. Most surprisingly, even economists have heralded this new era of red ink. Leading mainstream Democratic economists Jason Furman and Lawrence Summers have written: “Washington should end its debt obsession,” [5] while Trump economic advisor and noted conservative tax cutter Lawrence Kudlow has called the debt “quite manageable” and not “a huge problem right now at all.” [6]

This newfound acceptance of surging government debt is largely based on two highly questionable assumptions.

First, economists have asserted that fiscal consolidation is unnecessary because Washington’s current debt level of 100% of GDP has not proved unaffordable or economically damaging. Leading economists have asserted that expensive new fiscal expansions are justified until the debt reaches 150% of GDP. [7] Yet this framework fails to take into account that Washington is already projected by the Congressional Budget Office (CBO) to run $112 trillion in additional baseline deficits over the next three decades, which will push the debt past 200% of GDP. At that point, annual deficits are projected to top 13% of the economy (the equivalent of nearly $3 trillion today), and interest payments on the debt would be the largest federal expenditure, consuming nearly half of all tax revenues. [8] Adding all of President Biden’s budget proposals would push the debt past 250% of the economy in three decades. And instead of leveling off, the baseline debt would continue expanding by 80% of GDP per decade. In short, the baseline debt is already projected to grow to unsustainable levels even before any new proposals are enacted.

The second questionable assumption that the debt doves make is that today’s low interest rates paid on this debt will continue forever. The average interest rate paid on the national debt has fallen from 8.4% to 1.4% since 1990. [9] This decline was not forecast by economists, and many disagree on its specific cause. Yet many economic commentators have expressed an unshakable confidence that relatively low interest rates will essentially continue forever. If they are wrong, the combustible combination of surging debt and rising interest rates at any point in the future would risk a debt crisis. Even interest rates of 5% could push the national debt toward 300% of GDP within three decades, if paired with modest new fiscal expansions in the meantime. Both the poor historical record of economic forecasters as well as the tendency of economic variables like interest rates to fluctuate over the long term should give pause to policymakers, taxpayers, and economists when examining Washington’s rapidly rising debt projections.

The purpose of this report is to more deeply examine the threat that higher interest rates would pose on Washington’s long-term fiscal sustainability. First, it examines the causes of the post- 1990 decline in interest rates and the factors likely to push interest rates upward over the next few decades. Next, it analyzes Washington’s steeply rising debt levels over the next several decades and how rising interest rates risk pushing government interest costs, annual budget deficits, and total government debt to unsustainable levels. The report concludes by calling on lawmakers to gradually pare back these baseline deficits and thus limit the likelihood of a future debt crisis.

I. The Interest-Rate Outlook

Nominal interest rates are the sum of the demanded real rate of return and a premium to account for inflation risk. After remaining steady during the 1950s through the late 1960s, interest rates accelerated in the 1970s but fell below zero in real terms because the actual inflation rates far exceeded the expected inflation rates that were built in to the nominal rates (see Figure 1). By the early 1980s, investors had learned their lesson and began demanding exorbitant nominal interest rates to compensate for high expected inflation and a premium to account for inflation risk. The Federal Reserve’s subsequent taming of inflation left 1980s real interest rates at historically high levels. A key lesson is that low and stable interest rates require market confidence in low inflation rates.

Figure 1

After the higher real and nominal rates of the 1980s, the federal government by 1990 had paid an 8.4% average interest rate on the debt held by the public. The average rate had gradually declined to 4.9% by 2006, before the housing collapse and financial crisis dropped rates further, to approximately 2.0%, where they remained until a recession and a wave of short-term pandemic borrowing decreased average debt maturities and dropped the average federal rate to its current level of 1.4%. [10] Although the Treasury has occasionally altered the average maturity of its debt, the average interest rate has closely tracked the average rate on the 10-year Treasury bond. AAA corporate bonds and mortgage rates have followed a similar path.

A key question is, what caused this steep 30-year decline in interest rates? Private economic forecasters as well as federal government forecasts produced by CBO and the White House Office of Management and Budget (OMB) have consistently failed to predict the interest-rate decline and, in fact, regularly predicted that rates would increase. In hindsight, economists have converged on some combination of several factors to explain the three-decade decline in interest rates: [11]

• Demographics. The 74 million baby boomers began saving more for retirement in their 40s, 50s, and early 60s. At the same time, the population growth of younger adults in their prime borrowing years slowed down. Additionally, the general population growth slowdown in both the U.S. and abroad likely reduced productivity rates, incentives for research and development, and the need for expensive new investments to equip this smaller workforce.

• Declining Productivity. The surprising decline in productivity, particularly since 2006, has reduced interest rates by reducing demand to borrow now against future (assumed) wealth, as well as by reducing the marginal product of capital and demand for new investments in the economy. A related possible factor has been the reduced need for physical capital investments brought on by the technology revolution (i.e., more Facebooks, fewer huge manufacturing factories) and better management techniques, helping companies become more efficient with existing capital.

• Global Savings Glut. Former Federal Reserve Chairman Ben Bernanke has observed that global savings and investment soared in the early 2000s, collapsed after the financial crisis of 2007–09, and then resumed growth. [12] The decline in interest rates suggests that excess savings—rather than growing demand for investments—fueled this growth. However, much of the additional savings came from Asia and oil-exporting countries, and their glut seems to be slowing in recent years. [13]

• Global Flight to Safety. Historic stock- and financial-market crashes in 2000, 2007–09, and again in early 2020 drove savers in the U.S. and abroad to seek out the safety and predictability (albeit with low returns) of U.S. Treasury bonds and related investments, such as AAA corporate bonds. Investment safety has been especially important for baby boomers approaching retirement and international investors worried about global market instability.

• Global Economic Trends. The increasingly interconnected global economy has caused interest rates across countries to converge more than ever before. And the cross-nation replication of factors such as an aging population, global savings, and declining productivity has reinforced these interest-rate declines in most advanced economies.

• Inflation Anchoring and Federal Reserve Policy. As stated above, central banks in the U.S. and abroad have taken a stronger, and more consistent, push for low inflation and monetary stability since the 1980s, which has reduced the inflation-risk premium in interest rates. Over the past 13 years, aggressive low-interest-rate policies and quantitative easing have further pushed short-term interest rates downward.

• Private-Sector Deleveraging. After the 2007–09 financial crisis, many overextended families and businesses took steps to minimize their debt exposure. This has meant households increasing their savings and paying down debt, businesses shoring up their balance sheets, and lenders imposing tighter loan requirements. This deleveraging increased savings and reduced consumption and borrowing. It was also broadly disinflationary, further contributing to lower nominal interest rates.

Government Debt Still Raises Interest Rates

This three-decade reduction in interest rates may create the impression that rising government debt no longer puts upward pressure on interest rates. Standard economic theory has long held that government borrowing reduces the amount of savings available for the private sector to borrow and invest—which, in turn, raises the price of savings, or the interest rate. However, U.S. interest rates fell during a period in which the federal debt held by the public increased from 40% to 100% of GDP. Does that disprove the link between government debt and interest rates?

Extensive economic research maintains that the link still exists. In 2003 and again in 2007, Federal Reserve economist Thomas Laubach determined that, all else equal, a 1-percentage-point increase in the debt-to-GDP ratio increases interest rates by three or four basis points. [14] In 2004, economists Eric Engen and Glenn Hubbard calculated that “an increase in government debt equivalent to 1% of GDP would likely increase the real interest rate by about two to three basis points.” [15] More recently, a 2019 CBO study coauthored by Edward Gamber and John Seliski employed methodologies similar to those of Laubach and Engen/Hubbard to find a persistent two- to three-basis-point effect. [16] A 2019 analysis by current Biden administration economist Ernie Tedeschi found that “each percentage point increase in debt-to-GDP raises the 10-year yield by 4.2 basis points, all else equal.” [17]

This analysis suggests that the post-1990 increase in the federal debt ratio from 40% to 100% of GDP should have raised interest rates by 1.2–2.4 percentage points. Instead, real interest rates fell by 2.5 points. Squaring this circle lies in the final words of the previous paragraph: “all else equal.” The positive link between government debt and interest rates has not been eliminated but rather offset by other economic factors reducing interest rates. Jason Furman and Lawrence Summers concede that interest rates have been pushed upward by factors such as rising government debt and lower tax rates on capital investment. [18] So why have overall interest rates fallen? Because, citing earlier estimates by Summers and Lukasz Rachel, those offsetting factors reducing real interest rates across nations “declined by about 700 basis points.” [19] Tedeschi’s analysis also finds that many of the interest rate–dampening factors detailed above simply overwhelmed the upward pressure on interest rates caused by rising government borrowing.

Will Rising Debt’s Interest-Rate Effects Continue to Be Canceled Out?

It is tempting to conclude that—even if rising debt pushes interest rates upward—those offsetting factors will continue to hold down interest rates, liberating lawmakers to borrow without worry. Instead, these offsetting factors should be a source of caution because there is no guarantee that they will last. The federal government has much more long-term control over rising federal debt—which raises interest rates—than it does over the broader economic and global trends that have recently pushed interest rates downward. [20] These broader interest-rate trends (and resulting lower budget interest costs) have served as a substantial, accidental, and possibly temporary subsidy to heavy-borrowing federal lawmakers. It is dangerous to assume that these offsetting trends will continue forever.

Here’s a key point. Assuming that each percentage-point increase in the debt continues to raise interest rates by 3 basis points, the projected 100% debt-to-GDP increase over the next three decades should, all else equal, push interest rates up by 3 percentage points. [21] To maintain today’s low interest rates, therefore, it would not be enough for those offsetting factors to remain constant; they would have to accelerate even further, in order to drive an additional 3 percentage- point interest-rate decline.

An analogy would be a football team that managed to improve its overall win–loss record over several seasons—despite a rapidly worsening defense—because its offense kept improving enough to barely outscore its opponents. Claiming that the wins prove that defense no longer matters, or should be allowed to continue declining on the assumption that the offense will simply continue to improve even faster, is obviously unwise.

Other Factors May Also Raise Interest Rates

Is it wise to assume that offsetting factors can accelerate enough to overcome the factors that will push interest rates higher in the future? Should we assume, for example, that productivity growth rates will continue to fall closer to zero? Or that the global savings glut accelerates? The Federal Reserve already faces a zero lower bound on short-term interest rates. It is not clear from where such an additional 3-percentage-point decline in the offsetting factors will come.

In fact, it is quite plausible that some of the factors that have reduced interest rates in previous decades could begin to reverse and nudge interest rates even further upward.

• Demographics. The large population of baby boomers who aggressively saved for retirement in their 40s, 50s, and early 60s have begun moving into retirement, where they will be expected to begin drawing down those savings. As will be discussed later, this is already happening in Japan, which has an older population than the U.S. [22]

• Productivity. The rapid rise of computing technology represents the largest technological revolution in a century. Productivity initially soared in the 1990s as the technology became widespread, and has since lagged. This nonlinear productivity growth resulting from new technology should not be surprising, as the world continues to innovate, adapt, and learn new ways to apply these new resources. However, as long as research and development continue, the long-term productivity outlook should be positive. Relatedly, the contention that the world simply needs less capital investment is also questionable. Emerging economies are growing, and their expanded middle classes will require capital investments. Even in the U.S., new technologies will require regular upgrades, and even a gradual shift from fossil fuels to green technology will require significant new capital investments. Nor are traditional physical infrastructure needs going away.

• Other Transitory Savings Factors. The global savings glut seems to have peaked in the mid- 2010s and is slowly receding. [23] The rate of private-sector deleveraging must also eventually slow down and stabilize.

• Flight to Safety Weakens. Low interest rates on Treasury securities could induce borrowers to chase stronger returns elsewhere, such as the stock market or emerging economies.

• Federal Reserve Policy. The Federal Reserve could be expected to raise short-term interest rates over time because of faster economic growth or any uptick in inflation. On the flip side, if central banks weaken their commitment to containing inflation, the resulting price volatility could induce borrowers to demand a higher inflation-risk premium. [24] Rising inflation rates can be difficult to reverse and can raise long-term market expectations of inflation. Such developments would reduce the “flight to safety” appeal of holding Treasury bonds.

• “Unknown Unknowns.” The past two decades have included a major market crash, a housing crash and deep recession, and a global pandemic. Markets have long underestimated the probability of tail risks and “black swan events” that can roil markets. Wars, financial crises, pandemics, environmental catastrophes, cyberterrorism, or any number of unanticipated events can drive the economy in unanticipated directions, including raising or lowering interest rates.

Any of the variables above could conceivably push interest rates in either direction. However, it is worth reiterating that, as long as the projected doubling of the national debt (as a share of the economy) is likely to push interest rates upward by approximately 3 percentage points, the offsetting factors above would need to continue pushing interest rates downward by an additional 3 percentage points to maintain current interest rates.

Some of the factors affecting interest rates—Federal Reserve policy, quantitative easing, private- sector deleveraging, and the dampening effect of the pandemic recession—are likely transitory. Others, such as productivity, demographics, and the demand for capital investment, are longer-term structural factors—but there is no guarantee that they will continue on their current trends indefinitely.

According to the aforementioned economist Thomas Laubach, in an economy operating at its potential and with stable inflation rates, interest rates should revert to a natural equilibrium level (known as the R-star) that is largely related to output growth. Laubach noted that the R-star dropped over the past few decades because of changes in productivity, demographics, and global factors. If those variables reverse, so can the R-star. [25]

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Members of Congress have increasingly demanded large tax hikes on upper-income families to finance large spending increases on top of soaring baseline deficits. But even the most aggressive tax hikes on the rich would make only a small dent in the long-term budget deficits, and they would significantly harm the economy. Before considering any new taxes, lawmakers should first reduce federal spending benefits for high-income families. This bipartisan strategy would achieve both the redistributive goals of the left and the spending restraint goals of the right.

Such upper-income spending cuts have several advantages over new taxes: 1) they will not harm economic growth, 2) they increase future policy flexibility, 3) they are better targeted, and 4) they promote political compromise.

Several programs target spending to wealthy Americans. This report focuses on three of the largest: Social Security, Medicare, and farm subsidies, where basic reforms could save upward of $1 trillion in the first decade, and substantially more in future decades.

Introduction

As structural budget deficits grow to trillions of dollars and politicians promise even more spending, taxing the rich has become a popular solution to finance expanded government. But large tax increases on high earners not only are insufficient to close much of these budget gaps; they would also reduce economic growth and kill jobs. Additionally, they are often poorly targeted, build expectations of higher government benefit levels later, and reduce Congress’s flexibility to tax these families for other purposes down the road.

The goal of redistributing income down the ladder can be accomplished not only by taxing the rich but also by cutting federal spending that disproportionately benefits them. This approach is more pro-growth and better targeted. It also represents a plausible bipartisan compromise between progressives who want the wealthy to bear more of the costs of government and conservatives who prefer to simply reduce its size.

The federal budget is growing rapidly. The national debt held by the public has increased from $5 trillion to $22 trillion since 2007, as a result of two deep recessions, $6 trillion in stimulus legislation (across both recessions), and $3 trillion in tax cuts, as well as annual (inflation-adjusted) increases in the cost of Social Security, Medicare, and Medicaid of just under $1 trillion per year.

The national debt held by the public is projected to soar to $35 trillion by 2030[1]—or $42 trillion, if President Biden’s entire campaign agenda is enacted.[2] This would leave the national debt at 130% of GDP, or one-quarter higher than at the end of World War II.

Even without any new legislation, the Congressional Budget Office (CBO) projects $104 trillion in new borrowing over the next 30 years, bringing the national debt to 195% of GDP.[3] Nearly all this debt will result from general revenue transfers into the Social Security and Medicare systems to close their widening shortfalls, as well as the added interest costs on the national debt created by these shortfalls.[4]

Some new taxes on the rich will likely be part of any realistic plan to substantially close this gap.[5] But these taxes alone won’t come close to stabilizing the national debt. Hypothetically seizing all annual household income earned in America above the $1 million threshold would not even balance the short-term budget, much less address growing long-term budget gaps or finance new spending programs.[6 ]Even if we were to double the top two income-tax rates to 70% and 74%, impose the world’s largest wealth tax, tax capital gains as ordinary income, impose a 77% estate tax, and apply the Social Security payroll taxes all the way up the income ladder—bringing marginal income-tax rates of nearly 100% and savings taxed at similar rates—it would still not fully finance President Biden’s spending agenda, much less the underlying $100 trillion in borrowing that is scheduled in the baseline.[7]

Lawmakers should take a stronger look at cutting spending on the rich. While most federal benefits go to the middle class (particularly in the Social Security and Medicare programs) and federal antipoverty spending has steadily grown to 4% of GDP, Washington continues to distribute cash and in-kind federal benefits to wealthy families. Cutting this spending brings several advantages over upper-income tax hikes.

Economic Growth. While economists debate the magnitude of these effects on the margin, the general consensus is that steep tax-rate increases reduce incentives to work, save, invest, and be productive. They distort economic decision-making, incentivize expensive avoidance and evasion schemes, and often drive income away from the jurisdictions doing the taxing. Even if, as many economists believe, these costs can be outweighed by the benefits of federal redistribution programs or public goods, it would still be best to minimize those costs as much as possible. Reducing upper-income spending benefits can enhance redistribution yet avoid many of the broader negative macroeconomic effects of large new taxes.

Policy Flexibility. High taxes reduce policy flexibility in two ways. First, tax rates can rise only so high before the economic harm becomes overwhelming and new revenues fall away. For example, applying the 12.4% Social Security tax to all wages would close roughly half the long-term Social Security shortfall.[8] It would also raise combined marginal tax rates (including federal income, state income, and payroll taxes) on upper-income families past 60% in many states, which approaches the revenue-maximizing tax rate, and thus leaves little room for taxes on the wealthy to close the much larger Medicare shortfall or to finance new government initiatives on such things as climate, infrastructure, health, the safety net, K–12 education, and college student debt relief.

Second, exorbitant tax increases create expectations of large future government benefits, especially for social insurance programs. And the more that government locks in these large benefits, the more politically difficult it will be to unwind or repeal those benefits down the road as costs escalate. Maximizing tax rates and locking in unaffordable spending promises would paralyze future governments.

Better Targeting. The person paying the high tax rates today may not be around to collect the earned government benefits later. This problem would not apply to paring back spending benefits.

Political Compromise. Spending cuts are never popular. Yet many wealthy families would surely accept smaller current and future government benefits in return for limiting the substantial tax increases that they may otherwise face. Additionally, conservatives wary of tax increases may be willing to accept the progressive goals of expanding redistribution through this alternative route.

Critics of these cuts will contend that programs like Social Security and Medicare enjoy broad support because they are universal, and thus any means-testing will render them as unpopular (and prone to cuts) as welfare. But means-tested programs have proved extraordinarily politically resilient. Since 1965, federal antipoverty spending has steadily risen from 0.5%–4.0% of GDP[9]—across Republican- and Democratic-led governments—and programs like Medicaid have been expanded with the strong support of state referenda. Nor is it true that these programs are entirely universal; Medicare benefits, for example, have been income-related, without undermining program support. It is not true that means-testing will lead to drastic, across-the-board cuts.

Furthermore, there is no reason to believe that large tax increases would not undermine program support among wealthy families just as much as benefit cuts. If wealthy people support Social Security because their taxes finance their future benefits, then doubling their Social Security taxes (by eliminating the payroll-tax wage limit) without a corresponding benefit increase will break that tax-to-benefit link just as much as cutting their future benefits. Social Security expert Andrew Biggs states: “It is not clear why large benefit cuts for high earners would reduce their support for entitlement programs, as the left believes, but even larger tax increases would not—unless we assume that the best-educated and hardest-working Americans are extremely bad at math.”[10] Once it is agreed that wealthy families should bear a larger burden of redistribution, higher taxes and smaller benefits both accomplish the same goal.

Several programs disproportionately benefit wealthy Americans. This report focuses on three of the largest: Social Security, Medicare, and farm subsidies, where basic reforms could save upward of $1 trillion in the first decade, and substantially more in future decades.

Why Subsidies to Wealthy Seniors Should Be Targeted

Social Security and Medicare were created in eras in which most senior citizens endured low incomes and little savings. By contrast, today’s seniors are the wealthiest cohort in the wealthiest country in its wealthiest era.[11] While some seniors still struggle, average household retiree income grew more than twice as fast as working-age salaries between 1979 and 2016 (the latest data available).[12] And the wealthiest 10%–20% of seniors are doing remarkably well. Four million retiree households hold more than $1 million in investable assets, and 1.1 million households hold more than $3.5 million.[13] Relatedly, CBO data show that 6.3 million elderly Americans live in households that currently earn annual market incomes of at least $87,200 for someone living alone or $123,400 for a two-person household—including 2 million seniors in households earning more than $174,100 (one person) or $246,200 (two people) annually (Figure 1). To the extent that such high post-retirement incomes derive from annuities or 401(k)-style investments, they suggest investment portfolios that are well into the millions of dollars.

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America’s population has grown to 330 million—the third-largest in the world—and the nation spans an entire continent, 3,000 miles from coast to coast. Yet the federal government in Washington, D.C., decides which sidewalks to pave, which community centers require renovation, how teachers in local schools everywhere interact with children, and a fair price for kidney dialysis in Wichita.

Meanwhile, the U.S. Constitution was designed to require a large degree of cooperation and consensus in enacting large national reforms—yet partisan politics and a growing ideological chasm between Republicans and Democrats have made cooperation increasingly difficult.

For example, populist rage over Washington’s health-care debates caused control of Congress to flip in 1994 and again between 2010 and 2014. Yet this 30-year war resulted in just two major, transformational health reforms: the 2003 creation of the Medicare prescription drug benefit; and the 2010 Affordable Care Act (ACA). ACA saw a disastrous rollout, and a push to repeal the law dominated domestic politics for the next decade. Much of the 2020 Democratic presidential primary was riven by an intraparty war over whether to support Medicare for All, which has no chance whatsoever of congressional passage anytime soon.

And divisive battles are not just about health care; similar partisan wars are regularly fought on issues such as welfare, taxes, the minimum wage, transportation, and education.

This paper asks: Does Washington have to decide all these issues? Did Vermont voters elect Bernie Sanders to the Senate so that he could impose his socialist vision on Texas? Did Texas voters send Ted Cruz to the Senate so that he could bring conservative policies to Vermont? Some subjects and areas are under Washington’s sole control, such as national defense, international relations, regulating commerce among the states, coining money, and immigration and naturalization. In others, it has a leading, though not exclusive, role, such as pollution and the protection of individual rights and liberties. But the U.S. Constitution establishes a federalist structure; it assumes that state and local governments will retain significant power.

Nevertheless, Washington has steadily assumed greater and greater control over many areas, though its performance leaves much to be desired. The No Child Left Behind Act (2001) dramatically increased funding and regulations for public education; yet student performance continued to stagnate, and a bipartisan majority reversed its key provisions in 2015. Infrastructure improvement has remained largely underfunded, stagnant, and subject to expensive delays driven by Washington micromanagement. ACA had the aforementioned failed rollout, exchange enrollment has remained far below projections, the law has required emergency (and possibly illegal) repairs, and key parts of the law were declared unconstitutional. The welfare system remains expensive, fragmented, and lacking any comprehensive vision or goals. Washington’s college-student financial-aid programs lead to higher tuition increases rather than student affordability.

In short, the federal government inspires little confidence in its ability to solve problems. Congress remains largely paralyzed and unfocused, and the federal bureaucracy remains largely distant and unaccountable to the local communities that it is charged with managing. Perhaps it is time to seriously consider moving decision-making in some areas from Washington to the states. This paper does not claim that decentralization—more commonly referred to as “devolution”—is a panacea for every social, economic, and political ill afflicting the country; nor does it ignore the reality that the national government has a necessary, active role to play in the country’s affairs. Nevertheless, it offers four areas where state and local governments can and should play a significantly stronger role than they now have, and where devolution can lead to better outcomes and lower levels of political strife. These areas are transportation, K–12 education, welfare, and health care.

The Disunited States of America

In the summer of 2019, state governors had a collective approval/disapproval rating of 51/32. By contrast, President Donald Trump’s rating was 43/54, and Congress held a 13/84 approval/disapproval rating.[1] More broadly, a 2016 Gallup poll revealed that 55% of respondents preferred that power be concentrated in state governments, versus 37% preferring the federal government.[2] This preference is long-standing. A series of surveys compiled by the Cato Institute found that a majority of Americans prefer that the federal government lead in areas such as defense, immigration, Social Security, protection of civil liberties and civil rights, food safety, and cancer research. However, Americans strongly preferred state and local governments to lead on health insurance (62% versus 38% preferring federal leadership), welfare (68/31), unemployment (55/26), education (75/25), prekindergarten education (71/25), transportation (78/22), law enforcement (73/20), job training (75/20), housing (83/18), and paving roads (77/9). Surveys show that these preferences are driven by the widely shared beliefs that state and local governments are much more competent, fairer, and less wasteful than the federal government.[3] Simply put, voters want more power to devolve to state and local governments.

Voters’ preference for state and local governments has likely been influenced by decades of geographic partisan sorting. Over the past few decades, America has politically, culturally, and religiously sorted itself into different communities. Political commentator David French has noted that the number (and geographic clustering) of evangelicals is growing—yet so is the number and clustering of nonbelievers. Many workplaces and industries—from the technology sector to colleges and universities—are increasingly politically homogenous. Social media have increasingly walled Americans into like-minded communities that seemingly inhabit completely different worlds.[4] Republicans and Democrats get their news from different sources, read different books, and watch different television shows.

Geographic sorting has accelerated as people have chosen to move to like-minded communities, and even longtime residents have increasingly converged politically. While 27 states split their U.S. senators between different parties in 1979, only six did so in 2021.[5] Despite being just eight years apart, 43 states voted for a different presidential party in 1972 than in 1964—with these states swinging from an average of supporting the Democratic nominee by a 23-point margin to supporting the Republican by 26 points. By contrast, in the six presidential elections since 2000, 35 states (and the District Columbia) have each voted for the same party—and nine more states flipped parties just once. At the congressional district level, according to the Cook Political Report, the number of House “swing districts” (defined as between R+5 and D+5, compared with the national average) declined from 164 to 72 over the past 20 years. That means that more than 80% of districts are firmly Democrat or Republican. From 1997 to 2017, the median Democratic House seat went from D+7 to D+14, while the median Republican seat went from R+7 to R+11.[6]

At the county level, 2,474 of America’s 3,113 counties in 2016 showed a presidential candidate win by at least 20 percentage points. These “landslide counties” include 193 million people and 60% of all votes.[7] Since 1992, the number of “extreme landslide counties” (with margins exceeding 50 percentage points) has risen from 93 to 1,196, more than a third of America’s 3,113 counties. Meanwhile, just 303 counties had a 2016 presidential winning margin in the single digits.[8]

This partisan sorting is also reflected in the electorate. A national survey by the Pew Research Center showed that, from 1994 to 2014, the percentage of Democrats whose political values were to the left of the median Republican increased from 64% to 92%. Similarly, the percentage of Republicans whose political values were to the right of the median Democrat increased from 70% to 94%. In that time, the percentage of Democrats whose views were “consistently liberal” rose from 5% to 23%, while the percentage of Republicans who were “consistently conservative” rose from 13% to 20%.[9]

While America has sorted itself into like-minded communities with shared values and political views, Washington has increasingly imposed one-size-fits-all solutions. This has led to political warfare: lawmakers from California and Alabama battle over which side gets to impose its national solution on the other side. Centralization has also encouraged poor policies: there is little reason that Brooklyn and Alaska require similar approaches on poverty or education policy. Nor is there any rational reason that Hawaii and South Dakota must have similar health-care systems.

Local communities should be allowed to tailor local solutions based on their values and preferences. Instead, we have a rhetorical and partisan civil war. Southern Republicans aim their vitriol at House Speaker Nancy Pelosi and her “San Francisco values,” while California Democrats see their policy preferences thwarted by Senate Republican Leader Mitch McConnell, based on Kentucky values.

In a 2017 reaction to Trump’s election, a short-lived “CalExit” movement saw 44% of California Democrats express support for their state seceding from the United States and forming a separate country.[10] While secession is obviously unrealistic, it was legitimate for left-wing California to question its micromanagement by a federal government run by a president antithetical to the state’s politics.

State and Local Advantages

The long-term trend toward increasing Washington centralization raises the question: Are states merely the administrative divisions of the federal government? In reality, state and local government flexibility and experimentation serve three purposes.

First, state and local governments better understand local needs and can tailor local solutions to local problems. What works in Miami, Florida, may not be the best policy for Grand Forks, North Dakota. Relatedly, governments closer to the people provide more accountability and information. Local leaders work with local stakeholders, and if they impose the wrong solutions for the community, they can be more easily replaced by the affected constituents.

Second, state and local governments are generally more bipartisan and compromising than Washington. Local lawmakers often have smaller ideological differences, as the gap between relatively conservative and liberal politicians is much smaller in state and local governments than in Washington. Liberal states like Massachusetts and Maryland nevertheless often elect Republican governors because those states’ political center of gravity is already to the left, and successful Republicans are typically only slightly to the right of that median level. Similarly, conservative states like Louisiana have recently elected Democratic governors who are more conservative than national Democrats. These smaller partisan gaps make bipartisanship more likely.

Third, state and local control emphasizes the importance of experimentation. States have regularly been called “laboratories of democracy,” where new policy approaches can be test-driven in individual states. Over time, successful policies can be replicated in other states, while failed approaches can be abandoned after harming only one state instead of 50.

Why Not Federalism?

Despite unhappiness with the central government, calls to transfer more power to state and local governments often meet resistance, particularly among the most politically engaged citizens. Devolution is, first of all, unsatisfying to ideologues so convinced of the superiority of their policies that nothing less than their implementation from sea to shining sea is acceptable. Partisans of both parties believe that a wave election will sweep the other party aside and provide them with full control of Washington’s levers of power, from which they can impose their tax, health-care, and safety-net agenda on all 50 states. This approach is usually accompanied by a belief that the other party’s policy approach is so destructive that no American should live with its consequences, even if local voters unwisely choose to vote for it.

On one level, advocating devolution requires humility, modesty, gradualism, and acceptance of other parts of the country choosing a policy direction that one may find harmful. However, on another level, discussed later, devolution is dynamic and confident. Rather than continue with fossilized debates in the nation’s capital, devolution empowers state experimentation with new approaches—and the confidence that one’s own policy approach will work successfully enough to be replicated in others.

Another criticism raises the question of competence. In this view, state governments are the minor leagues: amateurish, lacking expertise, and unwilling to provide minimum safeguards to protect families from extreme policies. Of course, the first question one must ask when assessing state government competence is: compared with what?

The federal government failed to anticipate the 9/11 attacks and the 2008 housing crash, failed to run a competent health system for returning veterans, and failed to build a successful health-care enrollment website for the ACA in 2014. Federal programs waste billions of dollars annually, cannot pass an audit, and are filled with hundreds of overlapping, duplicative, and contradictory programs. The federal tax code is more complicated than ever, incentivizes tax-gaming rather than efficiency, and fails to collect $500 billion in owed taxes each year.[11] Despite long-term warnings that it was only a matter of time before a serious pandemic might occur, Washington was caught unprepared for the coronavirus, and the early response was marred by failures and incompetence, such as the CDC’s erroneous diagnostic tests.[12]

While competence levels do vary, the large majority of state governments are no less competent than the federal government. Many U.S. states have economies, populations, and geographic sizes that are comparable with those of European countries. If all states were divided into separate countries, California would be the world’s fourth-largest economy, while Texas would be ninth and New York eleventh. Moving down the list, the size of Virginia’s economy roughly matches that of Poland, Louisiana’s roughly matches Finland’s, Montana’s matches Serbia’s, and the state with the smallest economy—Vermont—approximates the Baltic states of Latvia and Estonia in their economies. If those countries are large enough to determine their own policies, so are American states.

European comparisons are especially relevant to American liberals. Political scientists and economists have pointed out that larger welfare states and social democracies are more likely to flourish in smaller, more homogenous countries with higher degrees of social trust.[13] Sweden’s policies were enacted in a country with a population similar in size to Georgia’s, and many of its policies have proved more popular and enduring when imposed on this scale. Put differently, national health care is highly unlikely to be imposed on a diverse nation of 330 million people but could be much more plausibly enacted on a state-by-state basis.

States such as Illinois, Mississippi, and Louisiana have traditionally been exposed for wasteful, illegal, or irresponsible policies and politicians. But that is no reason to give Washington suffocating power over all 50 states. Instead, Washington’s primary role for many policy functions that it provides funding for should be to guarantee basic safeguards and accountability standards—as well as protect individual civil liberties and civil rights—across all 50 states. Beyond that, some states will make mistakes or have different policy approaches from other states. Nevertheless, in a democracy, states should be accountable to their voters and their policy preferences. Those who desire their state to reflect local consensus views must grant other states that same opportunity.

Surely not all federal policies should be devolved to states, and those with significant spillover effects to other states—such as pollution, interstate communications, and interstate crime—should remain federal. Washington should also maintain control of obvious national policies such as defense, international relations, homeland security, space exploration, macroeconomic stabilization, the Federal Reserve, broad financial regulation, health and safety regulation, federal research, and the federal tax code. Federal minimum standards can avoid “races to the bottom,” whereby states drastically cut their welfare systems to motivate their caseloads to move to neighboring states. Many other policies can be devolved with the help of federal offices of interstate coordination across various policy areas. For example, with the federal highway system having been completed in the 1980s, states can maintain their portion of the interstates (as required by Washington) and use a federal office of interstate transportation coordination to collaborate on cross-state projects. Health-insurance markets already work well within states.

Critics can come up with countless reasons that certain state and local governments might make mistakes on a given policy. The more important question is whether the 50 states would perform worse than the federal government on a given policy, or with less accountability to their constituents. If each European nation is capable of running its education, health, transportation, and safety-net programs, shouldn’t we be able to trust California, Wisconsin, Florida, and Massachusetts, as well?

Devolution in Transportation

The federal highway system is the easiest and most obvious candidate for devolution. States today control two-thirds of all gasoline tax revenue and surface transportation spending without any federal involvement.

Nonetheless, states also collect and send to Washington the 18.4-cent-per-gallon federal gas tax—which, in turn, sends most of that money back to the states, with numerous strings attached. A commonsense solution would eliminate the federal middleman and allow states to retain and spend those gas tax revenues on transportation projects of their own choosing.

In 1956, Washington passed the Federal Aid Highway Act—aka the National Interstate and Defense Highways Act—which authorized the creation of a 41,000-mile network of highways that would stretch from coast to coast and be funded by a 3-cent-per-gallon federal gas tax (the network was later expanded to nearly 47,000 miles). Originally, the system was to be completed by the early 1970s, at which point, the federal program and its taxes would end, and states would take over.[14]

Instead, Congress expanded the program to include state highways and roads, maintenance of all types of roads, mass transit, nature trails, bike lanes, sidewalks, parking lots, museums, landscaping, flower plantings, safety grants, metropolitan planning, university research, historic preservation, and environmental initiatives.[15] Today, more than a third of federal taxes paid by motorists are diverted from general-purpose roads to other uses.[16] This has allowed Washington politicians to take credit for a wide array of projects well outside the creation of the interstate system—and to abandon the original plans to dramatically scale back the federal role after the (delayed) 1980s completion of the federal highway system.

Washington’s micromanagement of local transportation decisions peaked in the 1990s and 2000s. Congress began overruling U.S. Department of Transportation (DOT) decisions, as well as those of state and local governments, using legislative earmarks to direct funds for specific projects. By 2006, Congress was earmarking 8,000 projects, thus dictating which intersections would have a streetlight and which town sidewalks to pave—leaving many to ponder the remaining purpose of mayors and city councils. Congress banned earmarks in 2011, although they are staging a comeback.[17]

Washington’s transportation meddling surely contributed to a survey showing that two-thirds of Americans believe that the government does not spend transportation dollars efficiently.[18] This lack of faith in Washington has driven the opposition to raise the federal gas tax over the past 27 years—though voters during those years nonetheless frequently raised their state gas taxes.[19]

The federal highway and transit system suffers from many shortcomings. Among them are:

Large Deficits. Today, Washington imposes an 18.4-cent-per-gallon gas tax (plus a 6-cent surtax for diesel)—of which 2.86 cents is earmarked for transit (such as buses, subways, and commuter rail). Altogether, the federal highway and transit trust funds collect approximately $43 billion annually and spend $57 billion. The gap is made up by general fund bailouts of the highway program that have topped $140 billion since 2008. Over the next decade, the Congressional Budget Office (CBO) projects that the highway and transit trust funds face a $190 billion shortfall—and even that spending level would be insufficient to maintain highway conditions and performance.[20]

Mission Creep. Although the interstate system was completed in the 1980s, the federal highway program has expanded its jurisdiction to cover 1,077,777 route-miles—meaning that 95% of the federal highway program’s jurisdiction is over state highways and roads that are outside the interstate highway system.[21] Washington owns less than 1% of all public roads—yet it enjoys spending jurisdiction over 85% of all vehicle miles of travel (VMT).[22] There is no proper federal role to micromanage in-state roads and highways, and even improvements on existing interstate highways can be financed by the states themselves.

Political Meddling. After states collect and send the federal gas tax revenues to Washington, getting these tax dollars back requires crafting state transportation plans that must be approved by federal bureaucrats in Washington—at which point the typical project will receive an 80% reimbursement. It is unclear why state departments of transportation—which also manage their own large state highway and road programs with state gas tax revenues—should need the permission of a federal agency to get back their state’s federal gas tax revenues to spend on projects of their choosing.

State Inequities. After Washington collects the federal gas tax revenue from each state, it redistributes those funds based on a complicated formula that does not adequately reflect state gas tax contributions.[23] For example, over the first 54 years of the federal highway program, Texas received 80 cents back for each dollar of federal gas taxes sent to Washington, and Florida received 87 cents—despite each state’s growing populations and rising transportation needs.[24] More broadly, the Highway Trust Fund has historically redistributed money from low-income to high-income states.[25] Even the current requirement that states receive at least 95 cents on the dollar nevertheless deprives several states of hundreds of millions of dollars. Transit dollars are distributed even more inequitably, as the 2.86-cent-per-gallon transit gas tax largely redistributes money from middle America to the coasts, especially to the Northeast.[26]

Red Tape. One reason that American infrastructure is much more expensive and more slowly built than the rest of the world is because of federal regulations. The Davis-Bacon Act, which requires contractors to pay the local prevailing (i.e., union) wage on public works, raises wage costs by as much as 22%.[27] Buy America regulations raise costs, too. Boston’s infamous “Big Dig”—whose cost exceeded the initial estimate by 500%—was mostly federally funded.[28] Federal Environmental Impact Statements—which were typically 22 pages long in the 1970s—now commonly exceed 1,000 pages and require seven years to complete (compared with one to two years in Canada and 3.5 years in the European Union).[29] Congress has also threatened to block states from receiving back their own federal gas tax contributions unless they obey Washington diktats on drinking ages, drunk driving laws, and other matters. If states want to join the rest of the developed world by raising transportation funds with creative approaches such as tolls or public-private partnerships, they run into federal restrictions.

Misaligned Incentives. The formula that Washington will fund 80% and states will fund 20% of the typical federal highway project produces poor incentives. Because the federal reimbursement feels like “free money” (even as it is funded by state motorists), states may determine expensive transportation to be worth its cost as long as their citizens value the project above 20% of its national cost. This encourages states to be more cavalier in spending federal transportation dollars than they are with their own funds. Each state feels as though it is free-riding off its neighbors. The result is projects like Alaska’s notorious “Bridge to Nowhere.”

Another example of misaligned incentives is that, according to Chris Edwards, “Federal aid for urban transit covers about 40% of capital costs, on average, but just 6% of operating costs. That bias has induced local governments to buy expensive rail systems rather than more-flexible and efficient bus systems.”[30] States are obviously capable of managing transportation. They collect gas taxes that average 36 cents per gallon and spend $131 billion annually on surface transportation.[31] State and local governments currently finance a slight majority of capital spending and nearly all operations and maintenance of national highway spending within their borders.[32] They are well equipped to take over much of the federal share of running the highway program.

Washington can devolve its role in surface transportation over several years by gradually reducing the federal gas tax from 18.4 cents per gallon to approximately 3 cents; states can, of course, raise their gas tax accordingly. The remaining 3-cent federal gas tax would finance federal lands and Indian reservations, federal safety programs, and highway or transit projects that truly require national leadership. The federal DOT could establish an office of interstate coordination to help states plan projects that cross borders.

In return, states would be required to maintain the interstate highways that pass through their jurisdictions. Also, states should receive an $80 billion payment from Washington to cover the existing multiyear transportation commitments that the federal DOT has already made.[33]

States would also benefit financially from a reduction in federal red tape and expensive mandates (although the Clean Air Act, Clean Water Act, and Endangered Species Act mandates would still apply). Washington should remove restrictions and encourage states to implement creative financing mechanisms for building and maintaining roads—such as the public-private partnerships (P3), tax credit bonds, expanded tolls, and infrastructure banks that have become widespread throughout Canada, Europe, and Australia.[34]

Some proposals would automatically devolve the highway program, while others would provide states the choice to opt out of the system and retain the gas tax.

Modest challenges remain. States like Alaska that receive very large transportation funding would require a much higher state gas tax to replace this funding. States would need to provide some level of assurance that their interstate highways would be maintained.

The proposal to “turn back” federal gas taxes is not far-fetched. The original interstate highway system enacted in 1956 was intended to sunset by the early 1970s. When the interstate highway system was finally completed in the 1980s, President Reagan’s Advisory Commission on Intergovernmental Relations endorsed “turn back.” Since 1996, Congress has seen regular proposals to devolve the highway program, including a 2002 proposal by Senator James Inhofe (R-OK), who later became chairman of the Senate Environment and Public Works Committee, which oversees the federal highway program (he later abandoned the proposal).[35]

Transportation experts agree. According to the Reason Foundation’s Robert Poole, “a key rationale for devolution is that the funding approach developed to build the Interstate system is now obsolete. That approach transfers large sums from larger and faster-growing states to smaller and slower-growing states…. That is exactly backward of what a real user- fee system would do—which is to generate and spend large sums in the places with huge problems of congestion and insufficient highway capacity.”[36] Even former transportation secretary Mary Peters has argued forcefully for drastically reducing Washington’s role in surface transportation.[37]

Washington is paralyzed regarding highways and transit: the gas tax has been frozen since 1993 (and lost 44% of its purchasing power), highway reauthorization bills are regularly delayed, and federal micromanagement and red tape have stalled America’s infrastructure growth and created highway trust fund shortfalls. While the rest of the world innovates, Washington blocks new approaches.

Devolution in K–12 Education

K–12 education is a rare policy area where many Republicans and Democrats have begun acknowledging the failures of Washington’s centralization and returning some power to state and local governments. The bipartisan backlash against the No Child Left Behind law and other federal interventions of the past few decades have exposed the ineptitude of Congress’s attempts to serve as the school board for 100,000 public schools.

Empowering state and local governments to run K–12 education is vital because the educational needs of America’s schools and children are far too diverse for one-size-fits-all mandates. Governors, school boards, and principals better understand local needs and, crucially, can be held more accountable to parents and the local community. Innovation, compromise, and more realistic goals tend to move more easily from the ground up than from the top down. While local control is far from perfect—teachers’ unions often have far too much power, school boards can be parochial, and local approaches can become rigid and stale—the promise of a federal cure-all is fool’s gold.

America’s schools have faced long-term mediocrity. International testing shows that the U.S. ranks 23rd (tied) in reading and 24th in science and is tied for an abysmal 39th in math. These scores compare particularly poorly against the other 36 developed countries of the Organisation for Economic Co-operation and Development.[38]

The federal National Assessment of Educational Progress (NAEP) test also confirms this mediocrity. Among 12th-graders, reading scores have continued on a slight downward trend since the modern test began in 1992 (with only 37% of students achieving proficiency), while math scores have remained mostly flat since the modern test began in 2005 (with 25% achieving proficiency).[39]

Along the way, fourth- and eighth-graders saw modest mathematical gains in the early 2000s (with most still scoring below proficient), while reading scores in those grades have remained stagnant and only one-third score as proficient. That said, NAEP scores have shown modest gains among racial minorities over this period.[40]

The modern federal role in education widened with the 1954 Brown v. Board of Education Supreme Court ruling that banned racial segregation in schools, and accelerated with the 1958 National Defense Education Act, a Cold War measure to keep up with the Soviet Union, which began pouring hundreds of millions of dollars into public education with an explicit goal to “[e]nsure trained manpower of sufficient quality and quantity to meet the national defense needs of the United States.”[41] Seven years later, the Elementary and Secondary Education Act authorized federal spending to local public schools with a high percentage of students from low-income families. Over the years, Washington expanded mandates and funding that targeted aid to low-income school districts, disabled kids, and recent immigrants—yet was content to let state and local governments drive education policy.[42]

In 1983, the National Commission on Excellence in Education issued “A Nation at Risk,” a report warning that U.S. schools were falling behind and required drastic reform. Governors responded with more standards, accountability, and rigorous course requirements (and later signed legislation authorizing charter schools and private school vouchers). However, most traditional public schools continued to graduate students whose test results were mediocre. As the years passed, Washington took increasing ownership over broad education outcomes, leading to higher funding levels and a new consensus that K–12 education was a key federal responsibility. The result was Republican President George W. Bush teaming up with Democratic Senator Ted Kennedy to enact the No Child Left Behind Act (NCLB) in 2001.

NCLB significantly increased federal funding to public schools; it also required them to annually test all students in grades three through eight (and one time in high school) in reading and math, with test scores broken down by race, ethnicity, income, disability status, and limited English proficiency. The law decreed that schools make “adequate yearly progress” toward the goal of 100% student “proficiency” in English and math by 2014—or face a cascade of sanctions that could eventually lead to state takeovers or shutdowns. Additionally, NCLB added two large new federal mandates: 1) that every teacher be “highly qualified” (which generally meant a college degree and state certification in the subject taught); and 2) that schools employ “scientifically” based teaching standards.[43] As Michael Petrilli of the Hoover Institution and Chester Finn of the Thomas B. Fordham Foundation point out, even these seemingly justifiable mandates saddled states with red tape and also limited innovation, inducing compliance games with federal regulators.[44]

The utopian commandment that schools achieve 100% student proficiency in English and math backfired badly. In the first place, it was designed backward. Instead of setting uniform accountability standards and letting states determine how to meet those standards, NCLB micromanaged the classroom approaches but allowed states to define “proficiency.” Not surprisingly, states simply dumbed down the tests and the meaning of “proficiency,” while also gaming the accountability standards. One notorious episode: after test scores in Atlanta rose sharply, 178 educators were implicated (of whom 35 were indicted) in a massive scandal that involved changing incorrect student test answers into the correct ones.[45] On the national level, NAEP test scores remained relatively stagnant, but many states exploited loopholes to show the required adequate yearly progress toward “proficiency.”

Despite the gamesmanship, more than one-third of public schools missed their annual NCLB testing benchmarks. By 2011, 82% of schools were in danger of coming up short.[46] Faced with the reality that no school could achieve 100% student proficiency by 2014, the Obama administration began granting waivers to states exempting them from NCLB’s punitive enforcement on the condition that governors impose the preferred policies of the Department of Education (ED). As Frederick Hess of the American Enterprise Institute has written, “[ED’s] conditions—including federally preferred teacher-evaluation systems and adoption of the Common Core or a federally approved alternative—had no statutory basis.”[47] The ineffectiveness of Congress in controlling schools had given way to unelected federal bureaucrats imposing their vision.

Washington’s hammer swung even harder in 2013 when the Obama administration sued Louisiana’s school voucher program on the basis that allowing a handful of African-American elementary school students to enroll in local private schools would alter the racial composition of the schools that they left. A federal judge ruled that the program may continue.[48]

By 2015, the NAEP test showed most average scores slightly falling in grades four and eight.[49] Funding has not been the problem. Public schools now spend $15,424 per student annually, which is up 280% since 1960, and up 79% since “A Nation at Risk” was released (all figures are adjusted for inflation).[50] The City of Washington D.C. is estimated to spend as much as $27,000 per student annually, with disappointing results, including one-third of students not completing high school.[51]

NCLB burdened school districts with mandates and a standard of student achievement that led states to focus obsessively on math and reading tests, game the proficiency standards, and then accept even more federal oversight.

Next up: the Great Recession’s 2009 economic “stimulus” legislation created the $4.35 billion “Race to the Top” program. The first $350 million went to fund tests for what later developed into “Common Core” teaching methods; the rest was set aside as a competitive grant process for states that promised to invest in a series of specific educational goals laid out by ED, much of which encouraged adopting Common Core standards. State applications were exceedingly sloppy and error-ridden, filled with empty jargon and vague promises meant to win over Washington’s educrats (the federal application process was so complicated that the Gates Foundation spent millions helping states navigate it). One ED review remarked: “We knew the states were lying. The trick was figuring out who was lying the least.”[52] Ultimately, both the Government Accountability Office and the liberal Center for American Progress reported that not a single state successfully implemented their Race to the Top plan as described in the application, much less achieved the promised results. Washington’s attempt to dictate and control innovation failed.[53]

The $4 billion in “Race to the Top” grants was exceeded by another $7 billion spent between 2010 and 2014 on federal School Improvement Grants (SIGs) that targeted failing schools. President Bush was responsible for this program; President Obama expanded it to offer grants to low-performing schools that promised to adopt specific education reforms laid out by his administration.[54] A few years later, ED’s evaluation admitted that “across all grades, we found that implementing any SIG-funded model had no significant impacts on math or reading test scores, high school graduation, or college enrollment.”[55] In fact, the department could not even show that SIG caused schools to alter their existing educational plans at all.[56]

In 2015, a bipartisan majority in Congress—after hearing years of complaints from parents, teachers, school boards, and governors—replaced NCLB with the Every Student Succeeds Act (ESSA), which eliminated the requirement that states show “adequately yearly progress” toward 100% student proficiency. ESSA also eliminated federal mandates in areas like teacher evaluation and addressing low-performing schools and restricted ED’s authority to use waivers and grants to regulate classrooms. However, in the interest of accountability, the new law retained NCLB’s requirement that students be tested annually in math and reading in grades three through eight and once again in high school (a science test was also added). ESSA was premised on the observation that testing was necessary for accountability, but schools should be freer to decide how to improve their performance.

ESSA was a step in the direction of devolution, but more could be done. Michael Petrilli and Chester Finn have proposed that the federal government be limited to four roles in K–12 education: 1) measuring schools with testing; 2) funding data and research to disseminate test results and best practices; 3) distributing federal funds by formula; and 4) protecting civil rights.[57] Federal student tests should be broadly uniform across the country so that results can be compared across schools, districts, and states, at present and over time. The $190 million budget for ED’s Office of Innovation and Improvement could be significantly increased to ensure that all schools have access to the most successful ideas and blueprints from elsewhere. This includes promising reforms like the “Colorado Growth Model,” which provides superior data on student progress, and the “Florida Formula,” which bans social promotion for children who are significantly deficient in reading and includes school vouchers.[58] Several of the remaining small educational grant programs could be consolidated and distributed to states by formula.[59] Charter schools and private school vouchers should be entirely in the domain of state and local governments.\

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The initial priorities of the new government must be to ensure that vaccines are widely distributed in order to end the pandemic and target relief to families and businesses that are struggling to stay afloat. Once the economy has strengthened, however, the country needs to confront serious and growing budget problems. Annual budget deficits are projected, under current conditions, to rise toward $2 trillion within a decade and bring $104 trillion in new debt over the next three decades. Financing that debt will consume 44% of all federal tax revenues—a crippling burden.[1] To avoid this outcome, the top three budget priorities should be:

*This issue brief was completed before the inauguration and updated as of January 26.

1. Short-term relief

Congress and the Biden administration should not overstuff a relief bill or burden the weak economy with tax increases.

Washington has already committed $3.4 trillion to protect health and relieve widespread economic distress. In addition to supporting the health-care system and distributing vaccines, vulnerable families need relief from government-ordered shutdowns of the economy. This means continuing supplemental unemployment benefits of $300 per week, which, combined with regular unemployment benefits, will cover approximately 100% of a typical worker’s lost wages.[2] Lawmakers should also ensure grants and loans to keep struggling businesses afloat, including assistance to maintain payrolls and prevent layoffs. Finally, modest assistance of perhaps $100 billion can aid state and local governments that are suffering the deepest revenue losses.

The proposed $2,000 relief checks are unnecessary for most families who have lost no income. House proposals to provide state and local governments with $1 trillion in aid and restore the full state-and-local tax deduction for high-income earners fail to target those who need relief from the pandemic. Although the economy remains weak, the falling unemployment rate and stronger than expected recovery mean that another $2 trillion–$3 trillion “stimulus” spending is unnecessary—especially given the past failure of broad Keynesian demand management—and will only add to the government’s rising deficits.[3] Of course, Washington should not sabotage the economic recovery by even considering Biden’s trillions in proposed new taxes[4] until the economy has returned to full strength.

2. Taxes and spending

Biden and Congress should “pay for” all post-recovery spending.

Given the country’s economic condition, it is self-defeating to immediately offset stimulus provisions with large tax increases or spending cuts. But after the economy recovers, the escalating national debt cannot be ignored. This debt—which was just under $17 trillion at the end of 2019—is now projected by the Congressional Budget Office (CBO) to rise by an additional $16 trillion through 2030, and by $104 trillion over three decades (assuming no new spending, the scheduled expiration of most of the 2017 tax cuts, and low interest rates). The result: a national debt that is 195% of GDP. Financing that debt would swallow almost half of all federal tax revenues.

A binge of new federal spending not balanced by additional tax revenue, or even a slight increase in interest rates above the baseline, could send the debt much higher, further imperiling the economy. In this context, Biden’s proposed $11 trillion in new spending over the decade—only partially offset by $3 trillion in new taxes—is extremely ill-advised.[5] Instead, Congress should offset any new non-Covid, “stimulus” legislation with tax changes or, preferably, spending cuts. The better option is not to add new initiatives at all so that the limited universe of plausible spending cuts and tax increases can remain available to close the underlying $104 trillion in new deficits that are already projected. Biden and Congress should also reimpose statutory caps on discretionary spending that were enacted in 2011 but that will expire in 2021.

Finally, lawmakers should not classify normal spending programs as antirecession stimulus in order to avoid paying for them. While Democrats and some Republicans have proposed trillions in infrastructure spending, there is widespread agreement among economists that infrastructure is among the least effective stimulus approaches, in part because the projects require several years of planning before the first shovelful of dirt is moved.[6]

3. Entitlement reform

Congress and the new administration should begin the difficult task of reforming the finances of Social Security and Medicare.

Offsetting new spending with added tax revenue or spending cuts elsewhere will avoid digging the debt hole deeper, but it still leaves the $104 trillion in new deficits that are already baked in to the 30-year budget baseline. These deficits are driven almost entirely by escalating Social Security and Medicare shortfalls because payroll taxes and premiums are already insufficient to fully fund benefits.

The funds (raised by new debt) transferred from the U.S. Treasury to cover annual Social Security and Medicare shortfalls will rise from $400 billion to $1.5 trillion between 2018 and 2030—nearly the entire (non-pandemic) increase in annual budget deficits over that period. By 2050, the Social Security and Medicare systems will collect 6% of GDP in payroll taxes and other dedicated revenues and yet will spend 20% of GDP on benefits (and the additional interest costs from the new debt).

Reform is imperative: there are no plausible tax increases or other spending reductions large enough to cover Social Security and Medicare shortfalls. Lawmakers should begin designing reforms that can be gradually phased in after the economy recovers. There are a number of ways to bring Social Security deficits under control, including raising the eligibility age, raising the payroll tax rate, trimming the benefits of highest-income retirees, raising the limit on the wages subject to the tax, or some combination of all of the above. Medicare reforms might include measures such as further raising premiums for retirees with higher incomes, adjusting the payroll tax rate, or moving to a premium support model that provides seniors with more options to shop around for competing private plans.[7]

Regardless of the approach ultimately taken, it is not too early for the White House and Congress to begin working toward a solution. They can start by establishing bipartisan commissions to produce legislation addressing the increasingly dire finances of each entitlement program.

READ MORE
Jessica Riedl, “A Comprehensive Federal Budget Plan to Avert a Debt Crisis,” Manhattan Institute, October 2018
Riedl, “Spending, Taxes, and Deficits: A Book of Charts,” Manhattan Institute, October 2020
Riedl, “Joe Biden Has an $11 Trillion Spending Plan. Can He Enact It?” The Dispatch, Sept. 3, 2020
Peter Ganong, Pascal Noel, and Joseph Vavra, “US Unemployment Insurance Replacement Rates During the Pandemic,” University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-62, August 2020

Endnotes

1. Unless otherwise specified, national debt projections in this paper come from the Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” Sept. 21, 2020, and “An Update to the Budget Outlook: 2020 to 2030,” Sept. 2, 2020. Figure 9 (p. 18) of the Long-Term Budget Outlook projects that, by 2050, interest payments will cost 8.1% of GDP, or 44% of the 18.6% of GDP collected in federal taxes.

2. Peter Ganong, Pascal Noel, and Joseph Vavra, “US Unemployment Insurance Replacement Rates During the Pandemic,” University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-62, August 2020.

3. For an overview of failed Keynesian approaches, see Jessica Riedl, “How Effective Would a New Fiscal Stimulus Be?” National Review Online, Mar. 11, 2020.

4. Jessica Riedl, “Joe Biden Has an $11 Trillion Spending Plan. Can He Enact It?” The Dispatch, Sept. 3, 2020.

5. Ibid.

6. Jessica Riedl, “The Case Against an Infrastructure ‘Stimulus,’” National Review, Apr. 15, 2020.

7. CBO, “A Premium Support System for Medicare: Updated Analysis of Illustrative Options,” Oct. 5, 2017. CBO projects that premium support would reduce costs for government and seniors without reducing the quality of coverage.

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(Originally published by the Manhattan Institute)

The Narrative

“We have a fundamental issue, and that is: Who is our government going to work for? Is it going to just keep working for the rich and the powerful … or are we going to have a government that works for everyone else?”[1]
— Elizabeth Warren

“Poverty...is the one thing that can bring this country down.”[2]
— Joe Biden

“Let’s be clear, it is a national disgrace that 46.5 million Americans are living in poverty today, the largest number on record.”[3]
— Bernie Sanders

Reality

Liberal candidates in 2020 have argued that America should raise taxes on the wealthiest Americans by as much as $10 trillion over the decade and redistribute those resources toward the most vulnerable members of society. Yet the benefits of the new programs they have proposed, from Medicare for All to student debt forgiveness and free college, would flow predominantly to the professional class—upper-middle-class, highly educated households. Many of their tax proposals, meanwhile, would disproportionately burden low-income households or benefit high-income taxpayers.

Free public college and student loan forgiveness, as well as repealing the $10,000 cap on the state and local tax (SALT) deduction, would send more than $1.5 trillion in benefits to higher-earning households versus less than $300 billion for their lower-earning counterparts.[4] Medicare for All offers almost no benefit to poorer households, which are more likely to have government-sponsored coverage through Medicaid already. Those families likely would, however, pay new, broad-based taxes to fund “free” health care for families much higher up the income distribution ladder.

Key Findings

1. The most expensive line item in most progressive agendas, Medicare for All or some form of public subsidy for health insurance, does little for the poorest quintile of Americans, who already receive Medicaid.

• Approximately 75 million Americans are enrolled in Medicaid, 80% of whom are children and working-age, able-bodied adults. Most states offer coverage to families and individuals earning up to at least 138% of the federal poverty level.

• Medicaid enrollees earning less than 150% of the federal poverty level may not be charged premiums (with limited exceptions), and the copays for most drugs and medical services may not exceed $8.[5] This means that Medicare for All would save them very little in premiums or copays.

• However, Medicare for All will likely include broad-based taxes that low-income households must also pay, leaving them to help cover the cost of providing health insurance to higher-income households.

2. Most Americans still do not complete college degrees or accumulate college debt—and those who do land overwhelmingly in the top-earning two income quintiles. College-educated millennials earn a median salary of $56,605.[6]

• Two-thirds of millennials did not attend college or did so without loans. Roughly half of universal loan forgiveness would go to those with graduate degrees, such as doctors, attorneys, and MBA business executives.

• Pell grants, student loans, state aid to universities, and university-based aid already finance the tuition of most college students from families earning under $35,000. Thus, only 8% of the benefits from a free public school tuition program would reach them. Families earning more than $120,000 would capture 38% of the benefits.

3. Transparently regressive tax proposals would also leave lower-income households paying more for an agenda that does not benefit them.

• Funding the $30 trillion cost of Medicare for All would likely require a new payroll tax and may also include a value-added tax (VAT).

• Carbon taxes are among the most regressive taxes imaginable, landing disproportionately on the lowest-income households, which must allocate the highest share of their spending toward energy—households would see their electricity bills spike by 14% and natural gas bills by 32%. Mandates for zero-emissions cars and homes likewise raise prices that low-income families can least afford.

• Repealing the new $10,000 cap on the state and local tax (SALT) deduction—perhaps the most progressive part of the 2017 tax cuts—would tilt those tax cuts further to Americans with higher incomes. Of the $620 billion realized from the full restoration of this deduction, 96% would flow to the top-earning quintile and 57% to the top 1% (saving this group $34,000 annually on average).

On the Record

“Many of the 2020 presidential candidates have focused their campaigns on attacking inequality and redistributing income from the wealthy to the most vulnerable. Yet on issues including health care, college, climate, and even taxes, the main beneficiaries of their proposals would be the professional class. Low-income communities would receive few of the new benefits but would face tax increases and higher energy costs.”

—Jessica Riedl, senior fellow, Manhattan Institute

Progressive Programs Prioritize the Professional Class

Proponents of single-payer health care have long asserted that this system is necessary to cover the uninsured and address the high cost of health care for vulnerable populations. And some form of Medicare for All has become the leading proposal of most Democratic presidential candidates. But shifting health-care costs to the government would save money only for families whose health-care savings (from no longer paying insurance premiums and out-of-pocket expenses) exceed the cost of their new taxes that would finance the program. Most of the 75 million lower-income recipients of Medicaid currently pay no health premiums and would not see premium savings under Medicare for All.

For low-income families with private health insurance, the effect of Medicare for All would depend on its financing mechanism. Realistic estimates suggest that Medicare for All would not likely reduce national health expenditures, as the cost of higher utilization (estimated at $7 trillion over the decade)[7] would eat up any administrative or provider payment savings. In that case, replacing health premiums with more progressive federal taxes would likely redistribute income from the highest-income households to the middle class. Working Medicaid recipients would likely be included in any new payroll (and other) taxes that would be necessary to finance this $30 trillion federal takeover of health care.[8] In other words, most Medicaid families would face higher taxes without any offsetting health-premium savings.

“Free college” and student loan forgiveness programs face a similar challenge. Bernie Sanders has proposed having the federal government pay off the entire $1.6 trillion in outstanding student loan debt.[9] Elizabeth Warren has offered a scaled-back loan forgiveness program that would cancel up to $50,000 in student debt for individuals and include families with incomes up to $250,000. Both have also proposed shifting all public college tuition costs to taxpayers.[10] These benefits would accrue almost entirely to households whose children attend college and borrow to pay for it—that is, the upper middle class.

Manhattan Institute senior fellow Beth Akers has noted that two-thirds of millennials carry no student debt because they did not attend college or were able to avoid loans. Of those who did borrow, the typical $28,500 student loan for a four-year-degree graduate translates into a $200 monthly payment, or 4% of these individuals’ monthly earnings. Nearly half of all student loan debt is held by individuals with graduate degrees—including doctors, attorneys, and MBA business executives[11]—men and women who borrowed as an investment in high future incomes that make the debt affordable. Meanwhile, loan forgiveness and other assistance programs are already available for those who truly cannot make their payments.[12] Student loan forgiveness would provide $544 billion in benefits to the top-earning quartile, versus $192 billion to the bottom-earning quartile.[13]

Pell grants, student loans, state aid to universities, and need-based institutional aid have made college accessible and affordable for the vast majority of low-income students who can earn admission. The Urban Institute reports that, among families earning less than $35,000 annually, financial aid already covers the entire cost of tuition for 81% of students at community colleges and 60% of students at public four-year colleges. These low-income students would receive only 8% of the benefits from a free public school tuition program, while 38% of the benefits would go to students from families earning more than $120,000.[14]

Tax Policies for the Top, Too

While insisting that wealthy households must pay their “fair share,” many progressives support giving high-income taxpayers a large tax cut, to be achieved by repealing the $10,000 cap on the state and local tax (SALT) deduction that was included in the 2017 Tax Cuts and Jobs Act (TCJA). According to the Tax Policy Center (TPC), repealing the SALT cap would reduce federal revenues over a decade by $620 billion, 96% of which would flow to the top-earning quintile and 57% of which would flow to the top 1% (an average of $34,000 annually).[15]

Presidential candidates Amy Klobuchar and Tulsi Gabbard recently joined nearly all other congressional Democrats in voting for bills and resolutions supporting the SALT cap repeal (Warren and Sanders missed the vote).[16] The House legislation would have partially offset full SALT deduction restoration by raising the top income-tax bracket back to 39.6%. That bill would essentially raise taxes on the top 1% and redistribute the money within the top 20%.

Notably, lawmakers critical of the “regressive” TCJA have made little effort to repeal the portions of the law that most benefited upper-income earners, such as the pass-through deduction, corporate tax-rate cuts, and relief from the estate tax and the Alternative Minimum Tax (AMT). Instead, they target the most progressive part of the law, the SALT cap, which raised taxes on upper-income earners. Or they call for repealing the 2017 tax cuts entirely, which would mean eliminating the expanded child tax credit, the 10% income-tax bracket, and other changes that produced an average of $450 in annual savings for families outside the highest 40% of income earners.[17] While $450 may seem negligible for the professional class, it is not negligible for struggling families.

New tax proposals, meanwhile, often land squarely on struggling households. The long-term centerpiece of the climate agenda has been an aggressive carbon tax that would, according to TPC, raise household electricity bills by 14% and natural gas bills by 32%.[18] Hardest hit would be the bottom-earning quintile, who spend the highest portion of their income on energy bills and would, therefore, pay the highest tax as a share of their income—2.0%, as compared with 1.0% for the top-earning quintile. TPC reports that rebating the carbon tax’s revenue to households on a per-capita basis would be necessary to mitigate this regressivity—not even a payroll tax cut would be sufficient—but momentum is moving toward allocating the revenue to green investments rather than to families.[19]

Finally, it is virtually impossible to finance Medicare for All without a broad-based payroll tax or a value-added tax—as every other country with a universal health-care system has learned. While taxing the rich is a common slogan, the reality is that seizing all currently untaxed income earned above $1 million would raise just $9 trillion over the decade—far short of the (lower-bound) $30 trillion Medicare for All price tag.[20] Thus, Sanders’s menu of tax options for his Medicare for All proposal—which funds only half the proposal’s cost—relies heavily on a new payroll tax.[21] Warren’s Medicare for All plan lacks these taxes—yet is perhaps $10 trillion short of funding.[22] If any Medicare for All proponent actually produces a fully funded plan, basic math will require that it include these broad-based taxes. And Medicaid families that are not paying health premiums will receive no offsetting savings from which to pay this new tax.

Conclusion

Redistribution is a zero-sum game. An agenda built to transfer society’s resources to upper-middle-class professionals cannot help but do so at the expense of lower-income households. To be sure, some smaller proposals aim more squarely at struggling families. Common promises to raise the minimum wage and increase spending for family leave, child care, public housing, and K–12 education are intended to primarily benefit lower-income households (whether the policies would have that effect is another question). But the largest initiatives would essentially tax billionaires as well as lower-income Americans to benefit high-income, highly educated Americans—the professional class. Lower-income families may receive some modest benefits, but they will also be saddled with higher taxes and energy bills.

The proposed spending spree will eventually result in much higher taxes for the middle and working class. This is because the Congressional Budget Office projects a $103 trillion Social Security and Medicare cash shortfall over the next 30 years, which many experts have assumed will eventually require historic tax rates on the wealthy. If those tax increases are taken now to fund a spending spree on comparatively well-off Americans that could well exceed $50 trillion in just the first decade, middle-class and working-class people will be left with the tab when they must shore up entitlement programs themselves or watch their retirement benefits dwindle. Even 100% taxes on the wealthy could not finance both the underlying, growing budget deficits and this deluge of new spending.[23] Lawmakers will have to prioritize. Thus far, 2020 candidates are prioritizing the upper middle class.

CLICK HERE for the report at the Manhattan Institute

(Originally published by the Manhattan Institute)

The case for a bipartisan “grand deal” to address the rising national debt is evident from annual budget deficits that are projected to exceed $2 trillion within a decade. Over the next 30 years, Social Security and Medicare’s shortfalls are projected to drive $84 trillion in new government debt. Yet increasing partisanship and polarization—both in Washington and among voters—have significantly diminished the likelihood of bipartisan cooperation to avoid a fiscal calamity.

This report examines 14 major deficit-reduction negotiations since 1980 to determine why some succeeded and others failed. The analysis reveals what I call three “primary ingredients,” some combination of which is necessary to achieve a successful budget deal: 1) a penalty default, or a painful policy that would be automatically implemented if a deal is not enacted by a certain date; 2) general public support for deficit-reduction across parties, with some common ground on the necessary reforms; and 3) healthy negotiations—presidents and lawmakers of both parties establishing positive working relationships based on trust, good faith, and a focus on compromise—seeking “win-win” solutions. The existence of at least two of these primary ingredients has always resulted in a successful deficit-reduction deal. Negotiations that took place with only one, or none, of them has almost always failed.

Secondary ingredients that help to close a successful a deal include an optimal mix of negotiators, an agreement on the problem, a reliance on neutral experts, a united communications front, a divided government, and, at times, a bipartisan commission.

Most successful budget deals over this period were enacted in the 1980s and 1990s. The 2000s have seen mostly failure due to the increasing inability of Republicans and Democrats to overcome their hostility and engage in healthy negotiations. At the same time, there has been an increasing public acceptance of deficits, and an unwillingness of the public to unite around deficit-reduction approaches.

Nearly all the projected growth in budget deficits over the next 30 years comes from Social Security and federal health benefits (particularly Medicare and Medicaid). Yet past deficit-reduction deals relied mostly on cuts to discretionary spending and payments to Medicare providers, which may not be able to sustain additional large reductions. Tax increases on the wealthy have played a modest role in past deals yet cannot fully close more than a small fraction of the fiscal gap. Most deficit reduction in coming years will need to come from entitlements—such as Social Security and Medicare (beyond more provider cuts)—that have often proved resistant to reform.

However, there is a path forward. Lawmakers will have to rebuild new penalty defaults that create an incentive for anti-deficit legislation. Advocates need to better educate the public on causes of consequences of ever increasing deficits. And lawmakers must overcome their mutual distrust of each other, and bring back an integrative negotiating approach that focuses on building win-win solutions rather than relying on deceptive tactics that attempt to take the most of a fixed pie.

Introduction

Budget deficits are set to exceed $1 trillion in the next year, on their way past $2 trillion within a decade if current policies continue (Figure 1). Over the next three decades, the Congressional Budget Office (CBO) forecasts $84 trillion in new deficits, which will bring the federal debt to 150% of GDP. And that is the rosy scenario—it assumes peace, prosperity, low interest rates, no new government programs, and the expiration of most of the 2017 tax cuts. More realistically, the debt could surpass 200% of GDP (Figure 2).

While much has been written about the dangers of the ever-growing debt—and the need for a bipartisan “grand deal” to avert a fiscal calamity—the reality is that Congress and the White House are moving in the wrong direction. Republicans are cutting taxes, while Democrats are promising massive new spending. Even if both parties were to finally agree that reducing the flow of red ink is a top priority, there is little reason to believe that they could successfully negotiate a deficit-reduction deal.

This report analyzes 14 budget negotiations during the past three decades to determine what lessons can be applied to future negotiations. Over this period, there were several successful deals between 1983 and 1997 (which, together with strong economic growth, culminated in budget surpluses between 1998 and 2001) and several mostly unsuccessful negotiations since 1998.

The analysis reveals what I call three “primary ingredients,” some combination of which is necessary to achieve a successful budget deal: 1) a penalty default, or a painful policy that would be automatically implemented if a deal is not enacted by a certain date; 2) general public support for deficit reduction across parties, with some common ground on the necessary reforms; and 3) healthy negotiations—presidents and lawmakers of both parties establishing positive working relationships based on trust, good faith, and a focus on compromise—seeking win-win solutions. The existence of at least two of these primary ingredients has always resulted in a successful deficit-reduction deal. Negotiations that took place with only one, or none, of them have almost always failed.

The Case for a Bipartisan “Grand Deal”

The case for deficit reduction is growing even as Congress generally ignores the issue. CBO projects that the budget deficit will rise to 9.5% of GDP over the next 30 years, and that assumes peace, prosperity, low interest rates, and the expiration of most of the 2017 tax cuts.[1]

The driver of this red ink is no mystery. According to CBO, between 2018 and 2048 Medicare will run a $41 trillion cash deficit, Social Security will run an $18 trillion cash deficit, and the interest payments necessary to finance these Social Security and Medicare deficits will cost $41 trillion. In short, over and above payroll taxes and premiums, these two programs alone are set to add $100 trillion to the national debt. Over that 30-year span, the rest of the federal budget is projected to run a $16 trillion surplus.[2] However, unlike the temporary, recession-driven budget deficits a decade ago, Social Security- and Medicare-based deficits will expand permanently (see Figure 3).

There is another way of showing the long-term fiscal dangers. By 2048, the Social Security and Medicare systems are projected to run an annual budget deficit of 12.6% of GDP (including the resulting interest on the debt). Even a projected 3.1% of GDP surplus across the rest of the budget in 2048 will not close that gap.[3]

A national debt that grows to 150% of GDP—which CBO projects in the rosy scenario (i.e., continuing low interest rates, no new spending programs, and the 2017 tax cuts expiring on schedule)—would have severe negative consequences. The interest cost would match Social Security as the largest annual federal expenditure, requiring significant tax increases and spending cuts to finance. In reality, such a large debt would surely raise interest rates from their recent and current low levels, depriving the economy of growth-creating investment. This is especially true, given this country’s low domestic savings rate and the limited ability of other countries to finance such a large U.S. debt.

Primary Ingredients for a Successful Budget Deal

These growing deficits make clear that a new “grand deal” on deficit reduction is absolutely necessary. Yet increased voter polarization, Washington partisanship, and institutional breakdowns have made deficit-reduction deals much more rare over the past 20 years. Is there a plausible path forward toward a deal? This study addresses the question by analyzing 14 major deficit-reduction negotiations since the early 1980s.

An examination of these case studies—which includes both direct research and interviews with participants and experts—reveals several trends that delineate the successes from the failures. Specifically, nearly all successful deficit-reduction deals have included at least two of the following three primary ingredients: 1) a penalty default that lawmakers sought to avoid; 2) public support for the broad elements of a deal; and 3) lawmakers who trust one another and take a good-faith, integrative approach to negotiating. It is possible to secure a deal without two of these ingredients—there is always a human element—but the chances of success substantially increase when they are present.

Primary Ingredient #1: A penalty default. A penalty default occurs if the failure to enact a deal by a certain time will result in the automatic implementation of a policy that the negotiators wish to avoid. In short, the default policy would penalize both parties. In 1983, the White House and Congress moved quickly to enact Social Security reforms because its trust fund was a few months away from insolvency, which would have reduced Social Security checks. The 2013 “fiscal cliff” tax deal was motivated by the upcoming expiration of the “Bush tax cuts,” which would have imposed large across-the-board tax increases that neither party wanted. Past deficit-reduction deals have been tied to legislation raising the debt limit, preventing a government shutdown, or canceling a large spending sequestration. The existence of penalty defaults often results in “must-pass” legislation to avoid the penalty.

Penalty defaults are a key ingredient to overcoming the strategic disagreement that has resulted from increasing partisanship and polarization. While lawmakers usually have a political incentive to reject compromise, stand with their base constituency, and exploit partisan differences for electoral gains, a penalty default can raise the cost of inaction to an unacceptable level. Neither side wants to risk blame for a government shutdown, debt-limit default, large automatic tax increases or benefit cuts.

While penalty defaults are seen as external factors forcing the hand of lawmakers, nearly all are created by previous laws. Congress and presidents have chosen to have debt limits. The expiration dates of the Bush tax cuts were written into law by previous Congresses (in part to comply with their own Byrd Rule, which prevents reconciliation bills from expanding budget deficits beyond a certain number of years). The inability of certain agencies to spend money in a government shutdown, or Social Security to issue benefits beyond the exhaustion of its trust fund, is based on previously enacted laws. The modern version of sequestration was created by Congress in 1985.

Thus, Congress and the president determine their own penalty defaults. That means that they can also repeal the defaults. Lawmakers in 1983 could simply have required that full Social Security checks continue after trust-fund exhaustion, funded by general revenues. In fact, many penalty defaults have lost their effectiveness. In recent years, Congress has essentially canceled the debt limit for one to two years at a time, and canceled spending sequestrations. While past threats of government shutdowns have been used to motivate deficit-reduction deals, the repeated failure of that approach—with negative political consequences for the party seen as forcing the shutdown—has rendered it ineffective.

Consequently, an effective penalty default must strike a balance. It needs to show a real negative outcome that neither side would want. Yet it also needs at least one side of a divided government that is willing to risk that outcome occurring if a deal is not made. If the penalty is too weak, it will not motivate lawmakers to overcome their strategic disagreement. If the penalty is too strong, the parties are more likely to repeal its enforcement without adding a deficit-reduction deal. The hostage must be valuable, and at least one side of the negotiation must be willing to shoot the hostage if no deal is made.

Primary Ingredient #2: Public support. A second, more obvious, ingredient in a deficit-reduction deal is sufficient public support across both parties. The challenge is that voters typically prioritize deficit reduction in theory yet oppose nearly all tax increases and spending cuts that would significantly accomplish that objective.[4]

Public support for deficit-reduction efforts was notably higher and more bipartisan in the 1980s and 1990s than in the 2000s.[5] After a brief Tea Party interlude between 2009 and 2012, significantly rising budget deficits are no longer seen by conservatives as an impediment to tax cuts, or by liberals as an impediment to single-payer health care, a government jobs guarantee, free college, student loan forgiveness, or a Green New Deal.[6] Some economists argue that low interest rates make rising debt affordable,[7] while adherents to Modern Monetary Theory (MMT) believe that Washington can essentially fund surging deficits with the printing press.

Deficit-reduction deals are less popular today in part because the required solutions are more painful. Deficit deals in the 1980s and 1990s (other than the 1983 Social Security deal) generally focused on significant discretionary spending limits (mostly in defense), smaller mandatory reforms such as some Medicare provider cuts, and occasionally more modest tax increases. Yet discretionary spending is already near historical lows, and rising budget deficits are now driven almost entirely by Social Security and health entitlements—which are much more politically difficult to reform.[8] Democrats (and many Republicans) draw a line at reducing these benefits, while the alternative of substantial across-the-board tax increases—merely taxing the rich is not enough—is a deal-breaker for Republicans (and many Democrats).

Overcoming public opposition to the pain of deficit reduction requires bipartisan credibility and a tangible, understandable payoff for the public. Bipartisan credibility requires bipartisan negotiation and compromise. President Reagan’s initial attempt to offer his own reforms to save Social Security in 1981 encountered strong Democratic opposition, who ran against those reforms in the 1982 elections. Proposals by President Bush to save Social Security in 2005, and by Rep. Paul Ryan (R., Wisconsin) to balance the long-term budget in later years, failed to rally the public partly because Democrats refused to participate. President Clinton’s 1993 deficit-reduction act also remained controversial partly because of unanimous Republican opposition. Deficit-reduction deals often impose large costs on taxpayers, and skepticism among taxpayers that they are shouldering a disproportionate burden can be assuaged only by bipartisan assurances that the burden is distributed fairly and equitably. The last two times a party tried to do a major deficit-reduction deal on its own under unified government—in 1993 and 2005—that party lost the congressional majority the following year.

Beyond bipartisan credibility, popular deals also require an understandable, tangible public payoff. Sometimes simply averting a penalty default is the payoff—Social Security checks will continue, or the government will stay open. In 1997, the payoff was the promise of balancing the budget for the first time since the 1960s. In 1990, President George H. W. Bush emphasized that a deficit-reduction deal would finally encourage the Federal Reserve to lower interest rates, which would save money for families and businesses while also creating jobs.

Unfortunately, sometimes the payoff is not immediately obvious. The current budget deficit is too large to achieve a balanced budget. Keeping the deficit small enough to avert a future fiscal calamity may be seen as too theoretical by voters. Other economic factors are maintaining relatively low interest rates even as the national debt rises steeply. Thus, it may be helpful for lawmakers to emphasize other benefits of deficit-reduction reforms. In 2005, President George W. Bush argued that his Social Security reforms would lead to a better system with possibly even higher benefits. Republicans often emphasize that Medicare premium support would encourage choice and competition. Democrats assert that taxing the rich can reduce inequality and that cutting defense may lead to a more modest foreign policy. The 1996 welfare reforms were promoted as a way to end the cycle of poverty, rather than as a budget-saving exercise.

Primary Ingredient #3: Personal Relationships, Trust, and Integrative Negotiations. Hardened partisans regularly dismiss the importance of building bipartisan trust and relationships as “kumbaya nonsense,” yet the history of bipartisan negotiations shows that it is extraordinarily important. Indeed, the collapse of trust and relationships is perhaps the most important factor in the lack of successful bipartisan deals over the past 20 years.

There are two elements to this ingredient. The first is both sides entering the negotiation in good faith by:

• Maintaining civility and honesty and respecting the other side’s interests as legitimate;

• Bringing a good-faith willingness to compromise for a deal, while recognizing that nothing is agreed to until everything is agreed to;

• Not dominating the discussions, condescending, relitigating the past, or trying to dictate the other side’s interests; and

• Not leaking or publicly undermining the other side’s position.

The second element is utilizing an integrative negotiating strategy—whereby both sides work together to build a win-win deal—rather than a pure distributive negotiation (where both sides begin with extreme positions and then try to bargain the other down), or a negotiation based on deceptive or hardball tactics. Elements of integrative negotiations include:

• Beginning by defining the problem together, expressing each side’s desired outcome (which is not necessarily a legislative position), and exploring creative legislative options to achieve those outcomes;

• After all reasonable options have been defined, both sides listing their “must-haves” and “unacceptables,” and even ranking priorities in order to set the stage for concessions and compromises;

• Seeking trade-offs and compromises with the specific goal of each side’s victories; and

• When facing an impasse, expanding the negotiation by bringing in outside issues that can break the deadlock.

A certain degree of hardball tactics and deception is inevitable in all negotiations (and may provide limited benefits to the side employing them), but a heavy reliance on them will often destroy the negotiations.

Political scientists and social psychologists agree that building the necessary trust for good-faith negotiations usually requires repeated interactions—both personal and professional.[9] Simply getting to know each other leads to increased mutual respect and more honest and trustworthy negotiations. Thus, Presidents Reagan and George H. W. Bush spent considerable time inviting congressional Democrats to the White House for social events as well as calling them to learn their policy concerns (President Clinton reached out to Republicans later in his presidency as well). The importance of repeated interactions also shows the harm of Congress’s more recent evolution of flying into Washington, D.C., on Monday nights and flying out after the final weekly votes on Thursday nights. Finally, this is why seniority (especially on committees) is so important in successful negotiations. It is difficult to act deceptively—or to dismiss the other side’s interests as totally unworthy—when the two sides have gotten to know each other well, both personally and professionally.

Positive budgetary examples include Reagan and House Speaker Tip O’Neill (D., Massachusetts) beginning the 1982–83 Social Security commission with a pledge not to publicly attack each other or the commission (which commission chairman Alan Greenspan called the lead factor in enacting a deal).[10] While the 1995–96 Clinton–Gingrich budget negotiations broke down almost exclusively over personal distrust, animosity, and deceptive negotiating, by 1997 they had won a major bipartisan balanced budget agreement simply by dropping the political warfare and deciding to sit down and build a win-win deal—what House Speaker Newt Gingrich (R., Georgia) called “the human touch.”[11] “We’re in this together” trumps the aim to embarrass the other side into unconditional surrender.

While looking back at the 1990 budget deal, former House Speaker Tom Foley (D., Washington) said, “I did have a very good relationship with President Bush. I felt very comfortable in talking with him about any matter related to the agreement. Honestly, I think that did help and made a difference for everyone.” Former Republican Rep. Bill Frenzel (R., Minnesota) added: “In those days, the bad guys were the opposition, not the enemy. There’s a world of difference between those two words. Yes, we had some distrust, but also we had some ability to work with each other, believe each other, and [that] made life easier at that time.”[12] After negotiating that 1990 budget deal, President Bush and Democratic leaders pledged to bypass all government shutdowns, fight unrelated amendments, and seek majority support in each other’s own party in order to ensure congressional passage.

Some budget negotiations have seen participants make additional concessions for the sake of unity. The 1983 Social Security commission probably had the votes to pass a party-line conservative solution on day one if they had wanted—but they continued negotiation and making concessions to win a bipartisan supermajority vote.[13] During the 1997 budget deal, Clinton reportedly gave Republicans additional concessions to ensure that the GOP could declare victory as well. Outside the budget, Republican authors of the 2001 USA PATRIOT Act made additional concessions to Democrats—whose votes were not required for passage—to build nearly unanimous support and bipartisan credibility with the public.[14]

Former high-ranking Rep. Henry Waxman (D., California), in his book The Waxman Report: How Congress Really Works, repeatedly endorses integrative negotiations as the path to most successful deals. Waxman recounts how he negotiated the 1996 Food Quality Protection Act with Rep. Tom Bliley (R., Virginia), chairman of the House Commerce Committee. “We implicitly trusted one another,” according to Waxman. The two lawmakers and their staffs engaged in numerous meetings where they listed their various priorities, sought win-win solutions, and helped each other satisfy their policy needs. Their legislation passed Congress unanimously and was signed into law. Waxman concludes: “The greatest misconception about making laws is the assumption that most problems have clear solutions, and reaching compromise mainly entails splitting the difference between partisan extremes.”[15]

The 1990 Clean Air Act provides another example of a successful integrative solution. “As an observer and a participant in that process,” writes American University political scientist Jeffry Burnam, “I can testify that there was very little bargaining in the sense of ‘horse trading’ in the Senate back room. The discussions there were based on efforts by key leaders to find mutually acceptable solutions that were right for them in accordance with [the] view that politicians have much to gain by seeking common ground and sharing credit for measures that are in their mutual interest to support.”[16]

The increasing utilization of bipartisan congressional “gangs” to negotiate deals is also based on trust and good-faith negotiations. Unlike the usual participants in negotiations—rigid committees, congressional leadership, and White House officials—gangs are self-selecting and private. This makes them more likely to trust one another and safeguard the privacy of negotiations.

Secondary Ingredients for a Deal

While the primary ingredients create substantial momentum for a deficit-reduction deal, secondary ingredients can also push Congress and the White House toward a deal:

An optimal mix of negotiators

Several budget deals over the past several decades have been heavily assisted, or nearly destroyed, by the decision of who is in the room doing the negotiating. All successful bipartisan deals except one—the 1985 Gramm-Rudman-Hollings law—began with private negotiations (or commissions) involving the White House and the congressional leaders of both parties.

Presidential leadership has been vital to all major deals, with the exception of the 1985 Gramm-Rudman-Hollings Act, which began as a popular amendment to a debt-limit bill. However, while White House leadership is extremely important, some dispute whether the president should be in the room negotiating the final deal. In his book recounting the 1997 budget deal, Clinton’s assistant for legislative affairs, John Hilley, writes that one key to success was limiting the president’s direct involvement in the initial meetings that set broad budget goals. While Clinton remained heavily engaged and in control of the negotiation details, “it was better to have the ultimate decisionmaker above the fray, one step removed from all the bumps and bruises that are part of the day-to-day engagements among strong-willed partisans. When things got rough, or a change of direction was required, it was always good to be able to ‘take it back to the president’—giving everyone time to assimilate, think anew, calm down.”[17]

Hilley adds that the earlier 1995 budget negotiations failed partly because Clinton was too directly engaged in the discussions. President Obama also directly led the detailed negotiations with congressional Republicans during the failed 2011 grand-deal negotiations (although he was able to negotiate the smaller Budget Control Act). Additionally, Reagan and George H. W. Bush had top aides negotiate the final details of the 1983 Social Security deal and 1990 Andrews Air Force Base deal. The president should surely direct the administration’s bargaining position, but he need not necessarily sit at the bargaining table.

A perennial challenge has been the trade-off between building a large group of negotiators that ensures that all interests are represented, versus having a smaller group that is more likely to build a consensus. In the 1983 Social Security reforms, a 15-member commission made progress, yet the final deal required breaking off into an informal “Gang of Nine” that began meeting at the home of James Baker, White House chief of staff. In the 1990 budget deal, Bush originally hosted a group of approximately two dozen at Andrews Air Force Base for 11 days to negotiate in private. Progress was made, yet the deal was sealed when a smaller group of eight top White House and congressional leaders met in the office of House Speaker Foley for several days after the Andrews negotiations broke up. The 1997 budget deal was negotiated by a small group of administration and congressional leaders who were open to compromise.

These examples suggest that a smaller group of six to nine negotiators is optimal. The problem is that limiting the number of congressional leaders at the table increases the pressure on those leaders to adequately represent the diverse factions of their conference. However, successful leaders must inspire loyal followers. A major reason the 2011 Obama–Boehner negotiations continued breaking down was that House Speaker John Boehner (R., Ohio) was not seen as someone who could bring the “Tea Party” Republican faction with him on a deal. House Majority Leader Eric Cantor’s (R., Virginia) presence was often considered a reflection of Tea Party opinion, yet Boehner was driving the Republican negotiations, and the two reportedly did not get along with each other.

Ultimately, a successful budget negotiation should consist of two negotiating factions, rather than several partisan sub-factions. This requires a minimum degree of party consensus before entering negotiations. The president and congressional leaders must also be able to deliver their rank-and-file lawmakers.

Two successful models have emerged. The 1983 and 1990 model begins with a larger group of negotiators (15–22) that includes the key administration aides, congressional leadership, relevant committee chairpersons, and top staff. Once the larger group has moved toward a general framework, they shrink the room to six to nine top congressional and administration leaders to finish the deal. Still, this approach is not perfect—by isolating the 22 members at Andrews Air Force Base, rank-and-file Republicans still felt left out, and ultimately voted against the deal.

The other model, from 1997, is to begin with a relatively small group of negotiators who also maintain contact with relevant factions and committee leaders—even cycling them into the negotiations when their issues of jurisdiction were addressed.

The choice of administration negotiators matters as well. In the chaotic 2011 negotiations, both Republican and Democratic members of Congress complained that Obama and his top negotiators were rarely on the same page, leading to repeatedly contradictory negotiating positions.

A united front to overcome outside interests and communicate to the public

Even a bipartisan agreement on an optimal set of policy reforms does not guarantee that the public or influential interest groups will support the deal. The president and congressional leaders may have the wind at their back when announcing a bipartisan agreement, but they still need to sell it to the rest of Congress and the voters. An obvious tactic is to emphasize the bipartisan nature of the deal. In the 1997 budget agreement, President Clinton made sure to include Republican leaders at the Rose Garden ceremony announcing the deal. The 1998 Social Security pact between Clinton and House Speaker Gingrich would have been rolled out in a series of coordinated speeches, commissions, and events (had it not collapsed because of the Lewinsky scandal). In 1983 and 1990, the White House and congressional leaders coordinated communications and pledged to work together knocking down political obstacles.

Addressing skeptical interest groups is trickier. The 1983 Social Security reforms reportedly enraged AARP—yet the parties simply chose to ignore the organization, whose own preference for a general revenue bailout was seen by negotiators as a wild overreach. AARP was more successful fighting President Bush’s 2005 Social Security reforms because Democrats joined their opposition from the start. Past deals that capped defense spending, reduced payments to health providers, and raised user fees had too much bipartisan momentum for the affected interests to block.

One approach is to bring the most important outside stakeholders into the process. Including them as part of a bipartisan commission to solve the problem alongside lawmakers can give these stakeholders a voice and an investment in seeing the problem solved. At minimum, keeping in close consultation during the policy process can build support from outside organizations that are acting in good faith.

An agreement on the scope of the problem, the data, and a reliance on neutral experts

One common aspect of failed negotiations is that neither side may agree on the exact nature of the problem to be solved, and both sides may bring their own contradictory experts and data. The most famous example is the 1995–96 Clinton–Gingrich budget negotiations that resulted in a 21-day government shutdown over whether to rely on Congressional Budget Office (CBO) or Office of Management and Budget (OMB) scoring of the budget proposals. During the 2011 Obama–Boehner negotiations, both sides also brought wildly divergent analyses of the budgetary savings and effects of various proposals.

Creating a bipartisan commission has been shown to address these issues. The 1983 Social Security commission was professionally staffed with technical experts who drafted a long series of memos explaining the scope of the problem and the savings and ramifications of various proposals. The 1998 Breaux-Thomas commission, 2010 Simpson-Bowles commission, and 2011 “Super Committee” also included highly trained, technical staff that helped both sides frame the problem, create reform options, and analyze their pros and cons. There is considerable nonpartisan technical expertise at CBO, OMB, Government Accountability Office (GAO), and across federal agencies. It is just a matter of negotiators agreeing on a group of experts, bringing them in, and accepting their expertise.

A bipartisan commission

A bipartisan deficit-reduction commission can serve several purposes. First, it can break the partisan logjam and focus both parties on finding a solution. For example, after a year of partisan warfare over the soon-to-be insolvent Social Security system, Reagan in late 1981 created a bipartisan Social Security commission that brought Republicans, Democrats, and outside experts together to define the policy challenge, focus on solutions, and craft reform options. Although the deal was finalized outside the official commission negotiations, the creation of a commission made those civil, bipartisan negotiations possible.

Second, a commission can bring bipartisan credibility to a deficit-reduction plan and thus encourage public support. The 1983 Social Security commission’s recommendations were much more widely accepted than previous Social Security reform proposals. The 2010 Simpson-Bowles commission gave some credibility to deficit-reduction efforts, even if the commission itself did not approve the final plan. In the 1980s and 1990s, a defense-base-closing commission was able to build support in Congress for closing more than 100 obsolete military bases—a solution that never could have occurred through regular congressional politics. A commission does not guarantee success, but it can break some of the partisan gridlock and get the ball rolling on reform. Furthermore, several “failed” commissions, such as the 1998 Breaux-Thomas commission and the 2010 Simpson-Bowles commission, had several of their key proposals enacted over the next five years.

Brookings Institution’s Stuart Butler and Timothy Higashi have noted that successful commissions require several factors.[18] First, they must be created by a White House and Congress that is truly dedicated to solving the problem at hand. A commission is a tool, yet it cannot motivate a disinterested Congress.

Second, a commission usually requires current members of Congress who have a direct stake in the politics. Lawmakers will not give credibility to a group of (only) outside experts who have no political skin in the game.

Third, commissions should reserve additional spots for respected former lawmakers and outside experts, as well as interest-group stakeholders whose support may ultimately be necessary for a deal. While membership should include a diversity of opinion, it helps to include individuals who are capable of working across the aisle.

Fourth, requiring a commission supermajority to approve the plan is wise because fiscal consolidation recommendations are unlikely to be approved by a partisan and polarized Congress unless they have successfully brought several diverse factions on board.

Finally, there should be some automatic mechanism to bring the approved commission recommendations to the House and Senate floor for a guaranteed vote, so that the report does not simply collect dust on a shelf.

Commissions have historically been more successful when used for discrete issues, such as Social Security solvency or closing military bases. Broader budget agreements usually require more direct congressional and White House involvement. Stuart Butler and Maya MacGuineas have proposed having a commission initiate the deficit-reduction planning and craft default proposals to meet the long-term budget targets, while also empowering Congress and the White House to replace those reforms with alternatives that can achieve equal savings.[19]

Divided government

It may be counterintuitive to observe that deficit-reduction deals are more likely to occur under divided government than unified control. As difficult as forging bipartisan agreement can be, unified party control of the White House, House, and Senate is even less likely to result in deficit-reduction legislation. One reason is lack of interest. When one party has finally achieved the long-dreamed-of trifecta of the White House combined with a House and Senate majority, fiscal consolidations are often not on the priority list (1993 Democrats are an exception). Republicans typically seek to cut taxes and enact other popular parts of the conservative agenda. Democrats typically aim to create and expand government programs and enact other popular parts of the Democratic agenda. Also, during the last two periods of unified government, the party in power focused on alleviating a national crisis (the terrorist attacks for the 2001–06 Republican trifecta[20] and the great recession for the 2009–10 Democratic trifecta).

Unified government also fails to produce major bipartisan deals because the minority party sees little political benefit in helping the majority enact controversial policies. In that situation, the majority party may find it too risky to impose consolidations without the support of the minority party—and the minority party will see its aggressive opposition to these painful reforms as its key back into power. Thus, congressional Republicans unanimously opposed the 1993 Democratic tax increases, and congressional Democrats aggressively opposed Bush’s 2005 Social Security reforms. The minority party’s aggressive opposition rendered the reforms politically toxic; indeed, both parties lost their congressional majorities the following year. At this point, any major deficit-reduction deal is much more likely to be enacted under divided government.

Case Studies

The following 14 case studies constitute the largest grand-deal deficit negotiations since 1983. Six of them resulted in enacted legislation (summarized in Figure 4 and Figure 5), and eight did not. The vast majority of these case studies show that a large bipartisan deal requires at least two of the three primary ingredients described earlier.

1983 National Commission on Social Security Reform (“Greenspan Commission”)[21]

The Social Security system was heading toward insolvency, and by summer 1983 it would be unable to pay full benefits. Ronald Reagan came into office in 1981 proposing his own solvency reforms (mostly benefit savings) ran into bipartisan opposition and were harshly attacked as a war on seniors. Reagan responded with a new approach: the creation of a 15-member bipartisan commission in September 1981, which was chaired by Alan Greenspan and included lawmakers and outside experts appointed by both parties. The commission would report after the 1982 elections.

The commission’s main contributions were depoliticizing Social Security reform, collectively defining the problem in terms of solvency goals to be met without fundamentally altering the program’s structure—with a unanimous vote—and building reform options. However, after the commission deadlocked on solutions, an agreement was reached by a smaller “Gang of Nine” congressional leaders and administration leaders who met at the home of James Baker, the White House chief of staff. Their solution—which funded a short-term fix and approximately two-thirds of the 75-year long-term shortfall—was endorsed by the broader commission on a 12–3 vote. Congress then tweaked and even expanded the reforms (adding a future increase in the full retirement age from 65 to 67), before it passed with bipartisan support and was signed by the president in April 1983.

The final deal resulted in budget savings (estimated at the time of enactment) of $165 billion over seven years, consisting of $88 billion in taxes, $23 billion in revenues from bringing in new populations such as nonprofit and new federal employees, $39 billion in benefit savings from delaying an annual COLA by six months, and an estimated $15 billion in lower interest costs. An additional $18 billion transfer of general revenue into Social Security improved program solvency but did not alter the unified federal budget. Future benefit savings would come from raising the full retirement age to 67. In terms of the primary ingredients:

Penalty Default? Yes. Unless reforms were enacted, the Social Security system would stop paying full benefits in summer 1983.

Public Support? No. While the public understood that Social Security was facing a crunch that would render it unable to pay full benefits, most Americans still opposed the necessary reforms to save the system—even if the opposition was softer in 1983 than in previous years.[22] It is also worth noting that AARP opposed virtually all plausible reforms, a position that led to both parties dismissing their opposition.

Healthy Negotiations? Yes. At the time the commission was formed, Reagan and House Speaker Tip O’Neill privately pledged not to publicly oppose the commission’s recommendation—which Greenspan later declared the most important reason that the reforms were enacted.[23] Republicans put taxes on the table, and Democrats agreed to spending cuts. The “Gang of Nine” got along well, trusted one another, and tried to make both sides a winner. Leaks were minimized. Congress accepted most recommendations and even worked on a bipartisan basis to expand the savings. Bob Dole (R., Kansas) implored Senate colleagues not to oppose savings provisions unless they had better alternatives. Ultimately, the 1983 Social Security reforms showed how both parties can collaborate on a controversial issue in a manner that hurts neither party politically.

Result: With a penalty default and healthy negotiations, the result was the most ambitious entitlement reforms in more than three decades.

1985 Balanced Budget and Emergency Deficit Control Act (“Gramm-Rudman-Hollings”)[24]

Amid public concern over rising deficits, the Democratic House and Republican Senate both wanted a deficit-reduction deal. Reagan had pledged to veto any tax increases, and Democrats (seeking defense cuts) took Social Security reform off the table. After the negotiations within the regular budget process broke down, a bipartisan group of senators offered an amendment to a bill in September to increase the debt limit that would create annual (and declining) caps on the budget deficit, to be enforced by across-the-board spending cuts (aka sequestration).

To the surprise of most, the Senate passed the proposal 75–24. From there, congressional leaders of both parties—seeing the proposal’s momentum—set aside their concerns and worked together to make the caps acceptable to the rest of Congress. Democrats were able to exempt most mandatory spending from any sequestration and require that defense cuts would constitute half of any sequestration. Republicans kept tax increases out of the automatic reforms and received assurance that sequestrations would not occur until after the 1986 elections. While neither side loved the compromise, it passed the House and Senate overwhelmingly and was signed by the president on December 12, 1985 (the legislation as signed would be struck down by the Supreme Court).

In the final deal, yearly deficit-reduction targets spared both tax increases and major entitlement cuts. While the previous CBO baseline projected a budget deficit rising from $212 billion in 1986 to approximately $300 billion by 1991, this law required that the deficit fall incrementally from $172 billion in 1986 to zero by 1991. If Congress failed to stay within the targets, automatic across-the-board cuts (sequestrations) would take place—half from defense and the other half from nondefense discretionary spending (plus a small portion of non-exempt entitlement spending).

Penalty Default? No.

Public Support? Yes. Polls and lawmaker town halls showed that the public was increasingly concerned about rising deficits, which resulted in immediate legislative momentum for the proposal.[25] Democrats were especially interested in reining in the defense budget, and Republicans wanted to protect earlier tax cuts from falling prey to rising red ink.

Healthy Negotiations? Yes. The proposal originated with a bipartisan amendment to a bill. Congressional leaders who were skeptical decided that it would be more effective to shape the legislation—and remove what Democrats and Republicans separately regarded as its worst provisions—than to stand on the sidelines and vote no. Both sides were able to exempt key priorities from the final provisions governing sequesters.

Result: Public support and good-faith negotiations led to success. This was a rare bipartisan budget deal that began as regular legislation—rather than a commission or set of top-level negotiations—and gained momentum. In 1986, the Supreme Court declared the law unconstitutional (Bowsher v. Synar, 478 U.S. 714, 1986) on separation-of-powers grounds: the law transferred executive functions to the U.S. comptroller general (who is director of the General Accountability Office, an agency within the legislative branch). A tweaked (and constitutional) version of the law, 1987 Balanced Budget and Emergency Deficit Control Reaffirmation Act, was enacted in 1987.

1990 Omnibus Budget Reconciliation Act (“Andrews Air Force Base Summit”)[26]

In 1990, the mounting budget deficit again had the attention of both parties. An automatic sequestration was looming, the economy was weakening, and the Federal Reserve would not lower interest rates without a deficit-reduction deal.

Democrats had been drafting their own deficit-reduction plans when President George H. W. Bush announced on June 26, 1990, that he would be willing to break his “no new taxes” campaign promise as part of a bipartisan budget deal. From September 7 through September 18, Bush, his aides, and a bipartisan group of approximately a dozen congressional leaders negotiated at Andrews Air Force Base. Although progress was made, the final deal was not sealed until a smaller “Gang of Eight”—White House and congressional leaders—began meeting in House Speaker Tom Foley’s office in late September.

Despite pledging to work together to pass their budget deal through Congress, a Republican rebellion in the House defeated the plan. From there, negotiators moved the proposal leftward to win more Democratic support. It passed Congress in late October, and the president signed the bill on November 5, 1990.

The final deal projected deficit reductions of $495 billion over five years, consisting of $158 billion in new taxes, $197 billion in defense cuts, $80 billion in mandatory program savings (of which $33 billion was to be cut from reimbursement to Medicare providers), and $60 billion in interest savings. The act also replaced the Gramm-Rudman-Hollings sequester with five years of discretionary spending caps and new, pay-as-you-go (PAYGO) rules, requiring that new tax cuts or entitlement expansions be offset.[27]

Penalty Default? Yes. A spending sequestration was looming. Bush had threatened to veto a continuing resolution and shut down the government if no deal was struck by October 1. The president also wanted to persuade the Federal Reserve to lower interest rates on a fragile economy.

Public Support? Yes. The public was generally worried about the rising deficit. Both parties feared a public backlash if they failed to complete a deal.

Healthy Negotiations? Yes. Bush had long invested significant effort into building personal relationships with Democratic leaders. In addition, his OMB director, Richard Darman, had a particularly strong relationship with Democrats. The Andrews Air Force Base negotiations were generally collegial and suffered minimal leaks. After leaving Andrews, a smaller “Gang of Eight” finished the deal. Negotiators of both parties worked together to sell the deal to Congress and fight poison-pill amendments. However, rank-and-file Republicans felt excluded by the private negotiations at Andrews and generally opposed the deal.

Result: With all three primary ingredients secured, the bargain was sealed. Ironically, the income-tax rate increases were not in the original deal struck at Andrews and at Foley’s office. A rebellion of House Republicans against the bill ultimately led to more taxes, which was not their intention.[28] Major defense savings were made possible by the collapse of communism.

1993 Omnibus Budget Reconciliation Act (“Deficit Reduction Act of 1993”)[29]

After running for president on the promise of a middle-class tax cut, Bill Clinton quickly determined that rising deficits required both tax increases and spending cuts. With Democrats controlling the House and Senate, Republicans quickly made clear that they would oppose the president’s plan. This left the president needing the overwhelming support of congressional Democrats. Clinton’s congressional relations were rocky (with both parties), and Congress defeated a $16 billion stimulus plan that was attached to the deficit-reduction proposal. However, the rest of the deficit-reduction package was passed by a razor-thin margin of 218–216 in the House, 51–50 in the Senate (with Vice President Al Gore breaking the tie), and then signed into law on August 10, 1993.

Clinton was concerned about rising deficits, particularly the effect on interest rates and economic sluggishness. He also wanted to preempt more aggressive Republican deficit reforms.[30] As the debate heated up, the White House became more motivated to simply avoid an embarrassing legislative defeat. On the flip side, Republicans, fully out of power, opposed the tax increases but were also motivated to deny the president a major victory. Thus, moderate congressional Democrats—many of whom favored aggressive deficit reduction, including entitlement cuts—had the most leverage because their overwhelming support was required for passage.

At the time it was enacted, the new budget law was estimated to trim the budget deficit by $433 billion over five years. This included $241 billion in new tax increases, led by raising the highest income-tax rate from 31% to 39.6% ($115 billion), raising transportation fuel taxes by 4.3 cents per gallon ($31 billion), removing the earnings cap on Medicare payroll taxes ($29 billion), and raising the percentage of Social Security benefits (from 50% to 85%) subject to income taxes for upper-income seniors ($25 billion). It also saved $145 billion in federal spending by various measures, including extending the discretionary spending caps through 1998 ($69 billion), Medicare provider cuts ($48 billion), tweaking benefits for military and federal retirees ($12 billion), raising Medicare premiums ($8 billion), Medicaid reforms ($7 billion), and new spectrum auctions by the Federal Communications Commission ($7 billion). The bill included a $19 billion expansion of the Earned Income Tax Credit (EITC). Finally, the law saved an estimated $47 billion in lower interest costs on the national debt.[31]

Penalty Default? No.

Public Support? No. While the public supported the proposal by a 58%–27% margin when it was unveiled in February 1993, support continued to fall closer to an even split, with Republicans especially hostile.[32] Clinton’s approval rating also continued to fall throughout the summer of 1993 as the budget debate heated up.[33] Voters did not consider the bill a top priority, and even many Democratic lawmakers determined that opposing the bill was good politics.[34]

Healthy Negotiations? No. Most congressional Republicans initially made clear they would not support the plan.[35] Republicans who did reach out were dismissed by a White House that also demanded that congressional Democrats not work with (or even speak with) any Republicans regarding the bill.[36] Rather than involve congressional Democrats in drafting the proposal, the White House handed a complete plan to Congress with demands not to amend it.[37] A bipartisan Senate alternative proposal was dismissed.[38] The president and other White House officials—needing nearly unanimous Democratic votes for unpopular tax increases—relied heavily on bullying, intimidating, pleading, lying, and making legislative promises to fellow Democrats that were later broken after the votes were secured.[39]

Clinton repeatedly complained that he did not understand the rhythms and motivation of Congress.[40] The final deciding vote for the package came from Sen. Bob Kerrey (D., Nebraska), who endured verbal abuse from Clinton before reluctantly voting for the legislation to keep the new presidency from sinking (and in return for a promise to create a new commission to address entitlement spending growth).[41]

Result: This was the only deal in this study to have been enacted without two of the three primary ingredients for a successful negotiation. That was a luxury of single-party control of the House, Senate, and Congress that eliminated the requirement for bipartisan negotiations. Still, passing the unpopular reforms on a party-line vote played a role in the Democrats losing control of Congress the following year.

1994 Bipartisan Commission on Entitlement and Tax Reform (“Kerrey-Danforth”)[42]

A few months after the Deficit Reduction Act was enacted, the president fulfilled a promise to Kerrey and created the Bipartisan Commission on Entitlement and Tax Reform by executive order.[43] Cochaired by Kerrey and Republican senator John Danforth, the commission included 10 senators, 10 House members, 8 private-sector leaders, a governor, and a mayor, as well as 27 professional staffers. Of the 32 members, 30 voted for an interim report defining the budget challenge, and 24 voted for a set of broad principles supporting immediate action to limit long-term deficits. However, the commission deadlocked and was unable to issue a final report with any consensus recommendations. The commission staff created a computer game whereby the public could try to balance the budget.

As no recommendations reached the necessary three-fifths threshold for approval by the commission, Kerrey and Danforth instead issued a joint proposal, as did a few other members introduce proposals. Most of these proposals did not include detailed scoring.

The commission was created as a favor to Kerrey and had the strong support of Danforth. Neither the White House nor House or Senate leaders were significantly invested in the commission’s success—in fact, some opposed the commission’s purpose.

Penalty Default? No.

Public Support? No. Despite public outreach and hearings televised on C-SPAN, the commission received little broad media coverage or public engagement. And while most Americans generally supported deficit reduction, there was little demand for major entitlement cuts or tax increases. AFL-CIO, NAACP, and AARP publicly attacked draft plans to pare back entitlement spending.

Healthy Negotiations? No. The failure even to issue a report of consensus policy recommendations (despite a modest three-fifths threshold for approval) suggests that the members lacked either the motivation or capability to compromise. When Kerrey and Danforth issued a joint proposal that would reform Social Security and Medicare, commission member Rich Trumka (president of United Mine Workers) publicly shrieked that it was “the most fundamental attack on Social Security and Medicare since their beginning.”

Incoming House Speaker Newt Gingrich warned commission Republicans that any proposal to reform Social Security—a program whose future shortfalls the commission was created in part to address—would be unacceptable. In short, Congress and even commission members were openly hostile to the reforms that the commission was created to examine.

Result: The lesson of this experience is that successful commissions require, at the very least, a Congress and president committed to solving the underlying problem. Absent this commitment, commission members will not make the required investment or compromises. The lack of any requirement that Congress vote on a commission-approved proposal made the exercise relatively academic. Finally, the commission’s coverage of all tax and entitlement programs was too broad to make agreement realistic.

1995–96 Government Shutdown[44]

Emboldened by what it considered a voter mandate, the new Republican congressional majority passed a reconciliation bill in November 1995 that would balance the budget in seven years by cutting spending by $974 billion and taxes by $222 billion (for a net $752 billion in deficit reduction). Clinton opposed these reforms and vetoed bills to raise the debt limit that included many of the Republican provisions. The result was a government shutdown.

After finally pledging to negotiate a seven-year balanced budget, the president signed legislation reopening the government after five days. However, Republicans later determined that the president’s pledge was insincere, and this led to a second shutdown on December 16 that lasted 21 days. During that time, Clinton pushed a more modest budget blueprint and Republican leaders committed public gaffes (such as Senator Dole making comments that were construed as preferring that Medicare “wither on the vine”), culminating in the public moving toward the president’s position. In early January 1996, the Republicans surrendered and passed clean legislation, reopening the government. The budget talks ended soon after, without a balanced budget deal.

Figure 6 shows that H.R. 2491, the original budget reconciliation bill passed by the Republican Congress and vetoed by the president, would have saved $752 billion over seven years. Clinton offered a counterproposal that would have saved $417 billion.[45] Republicans used the debt limit and a government shutdown to push Clinton into supporting their budget. A public backlash against these GOP tactics, plus the public’s preference for the president’s budget proposals, allowed him to eventually block the Republican approach.

Penalty Default? Yes. Republicans had used the threat of a government shutdown and hitting the debt limit as leverage against President Clinton. He vetoed the budget reform legislation anyway, but the shutdown did not lead to a deal.

Public Support? No. The public wanted a deficit-reduction deal. However, Republican and Democratic voters were harshly split on how to balance the budget, and most voters opposed using the debt limit and government shutdown as leverage for a budget deal. Ultimately, the public sided against the more aggressive Republicans.

Healthy Negotiations? Emphatically no. Democrats ran millions of dollars in television issue-ads against the Republicans during the negotiations.[46] Republican lawmakers asserted that they did not want to be in the same room with Clinton.[47] Republicans portrayed the president as a dishonest negotiator, and the president portrayed Republicans as hostage-takers.

Clinton and House Speaker Gingrich attacked each other in the press daily. Clinton and Senate Majority Leader Dole were already gearing up for the 1996 presidential election and in little mood for compromise. House Republican freshmen did not trust the party leadership negotiating on their behalf. Similarly, deficit-reduction plans by moderate congressional Democrats were dismissed by their own party leaders.

Result: The penalty default, a government shutdown, was not enough to bring about a deal. There was a deal to be made—the disagreement was over the magnitude of the spending cuts—yet animosity between the sides resulted in failure.

1997 Balanced Budget and Taxpayer Relief Acts (“1997 Budget Deal”)[48]

Following the contentious 1996 election, President Clinton and the Republican congressional leadership decided to give balancing the budget another try. With Dole no longer in the Senate and House Speaker Newt Gingrich weakened, the Clinton White House sought a fresh start by reaching out to the Republican chairmen of the House and Senate Budget Committees.

Thanks to strong economic growth, the rapidly closing budget deficit meant that both parties could achieve the long-sought goal of a balanced budget without as much political sacrifice as earlier deals required. Starting essentially with the policy frameworks from the 1995–96 failed negotiations, new CBO budget estimates continually reduced the amount of required savings for a balanced budget. The president and congressional Republican leaders announced a package of spending and tax cuts on May 2, 1997, worked out the details over the summer, and enacted the final reforms in August.

This grand bargain yielded net estimated savings of $816 billion over 10 years. The spending savings of $1,036 billion consisted of discretionary spending caps ($520 billion); Medicare reimbursement cuts to health providers ($297 billion); Medicare savings from beneficiaries, such as premium increases ($88 billion); and $142 billion in resulting net interest savings—and an $11 billion cost of other provisions. Revenues were cut by $220 billion. The deal provided for a $500 per-child tax credit and a new entitlement, the Children’s Health Insurance Program (CHIP).[49]

Both sides wanted credit for a balanced budget. Republicans wanted to show that they could govern after the bruising government shutdowns of 1995–96, while Democratic leaders wanted to combat their image as tax-and-spend liberals. Liberal Democratic Rep. Charles B. Rangel (D., New York) triumphantly declared at the White House ceremony that “we have now shattered the myth that we Democrats are spending Democrats and taxing Democrats.”[50]

Penalty Default? No.

Public Support? Yes. The public wanted a balanced budget. Republicans had campaigned on a balanced budget. Clinton and congressional Democrats wanted to build their deficit-hawk credibility with the public.

Healthy Negotiations? Yes. In a complete reversal from the 1995–96 negotiations, both sides worked well together, trusted each other, and negotiated in good faith. Negotiators focused on ranking each side’s preferences, delineating must-haves and unacceptables, and seeking win-win solutions.

Neither side sought to embarrass the other. Clinton even decided to give the Republicans a “win” on tax cuts (even though the public shared Clinton’s skepticism) as a good-faith gesture to keep Republicans on board. Both sides also reduced the number of negotiators and excluded those who were seen as overly partisan or difficult. Gingrich credited the “human touch” for making the deal possible.

There were tense moments. Late one evening, Rep. John Kasich (R., Ohio) called Clinton aide John Hilley at home and asked for his address because, he said, “if we don’t get a deal by the beginning of the recess, I’m [expletive] coming over and burning your house down!” Yet Kasich later raved that “Hilley was the whole key to this because whenever things got crazy I’d talk to Hilley.”[51]

Result: With public support and healthy negotiations, a deal was to be had. The law included significant tax cuts and spending hikes up front, paid for by vague automatic cuts in the future. After surging economic growth revenues surprisingly balanced the budget by 1998, many of those future automatic cuts were canceled. This was the last successful budget negotiation that showed significant trust and good faith on both sides.

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(Originally published by the Manhattan Institute)

The end of the Obama presidency now allows for an overall assessment of taxes, spending, and deficits during his years in office. The analysis in this paper begins with the 10-year budget baseline that Obama inherited in January 2009 and measures subsequent tax and spending changes through the January 2017 baseline released as he left office. The data come from more than 20 Congressional Budget Office baseline updates over the administration’s eight years, supplemented with the line-item scores of approximately 110 major bills that Obama signed into law.

1. The cumulative 2009–19 budget deficits are set to end up at $8.93 trillion—$4.6 trillion higher than projected for the same time period when Obama took office.

2. The economy grew more slowly over this decade than was projected in 2009. Yet far from deepening the budget deficits, the slower economic recovery and technical changes saved $400 billion over the decade relative to the January 2009 baseline, as lower tax revenues were offset by lower interest payments on the national debt, the result of recession-dampened interest rates.

3. New legislation cost $5.0 trillion over the 2009–19 period. However, $4.1 trillion of this “cost” came from basic extensions of expiring taxes including the Bush-era tax cuts. Economic stimulus added $2.0 trillion in spending, and discretionary spending caps and mandatory sequestrations saved $800 billion.

4. The Affordable Care Act reduced the 2009–19 budget deficit by $275 billion, as its tax increases and Medicare cuts exceeded the cost of new health benefits. But the health law has made balancing the long-term budget more difficult by using most of the tax increases and Medicare cuts to finance a new entitlement rather than deficit reduction.

5. Virtually all net spending increases during the Obama administration were enacted during 2009–10, when Democrats controlled Congress. During the following six years, with a Republican House and eventual Republican Senate, $889 billion in net spending cuts were enacted, excluding legislation that simply extended expiring policies.

6. Obama leaves behind a budget with higher entitlement spending, lower discretionary spending, and (temporarily) lower net interest costs than originally projected. The ballooning national debt leaves taxpayers liable for exorbitant debt service costs when interest rates return to normal levels.

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$4.6 Trillion in Additional Federal Deficits

Upon taking office in January 2009, President Obama inherited a budget deficit that had soared from $161 billion in 2007 to a recession-slammed $1.186 trillion estimate for 2009. The January 2009 CBO baseline budget projection for 2009–19—which already incorporated the effects of the year-old recession in its projections—estimated that a strong economic recovery and the expiration of certain tax cuts would return the annual budget deficit to approximately $260 billion by 2012. In other words, the projections assumed that the high recessionary deficits would quickly fall back to earlier levels. Overall, CBO estimated that there would be $4.32 trillion in total budget deficits over the decade.

That is not what happened. Figure 1 shows that, as Obama left office, the 2009–19 budget deficits were now estimated to total $8.93 trillion—more than double the initial projections. Annual budget deficits remained above $1 trillion through 2012, fell to $438 billion by 2015, and have since begun rising once again. While current deficits of 3% of the Gross Domestic Product (GDP) are not historically atypical, they are significantly higher than the default baseline when Obama took office.

These deficits also exceeded the president’s own targets. A month after his inauguration, Obama pledged to “cut the deficit we inherited by half by the end of my first term in office.”[4] Instead, the inherited $1.186 trillion was pushed up to $1.413 trillion by 2009 stimulus legislation, and then remained over $1 trillion throughout the president’s first term (Figure 2).

It was not until 2014 that the budget deficit fell to half the inherited level in nominal dollars (2013, if measuring by percentage of GDP).

Had the president and Congress simply stuck to CBO’s original budget baseline legislatively (even allowing for budget effects of the weak recovery), the deficit would have fallen well below $300 billion by 2013 and approached balance by 2018. Instead, expensive new policies slowed the deficit reduction, leading to $8.93 trillion in red ink rather than $4.32 trillion—which is $4.6 trillion in additional deficits. Readers can determine which new costs were justified, and which were not.

Higher Deficits Were Not the Result of the Weak Economic Recovery

Conventional wisdom blames the persistently high budget deficits in the Obama years on the unexpectedly weak economic recovery. In 2012, for example, the president asserted that he had failed to meet his own deficit-reduction targets “because this recession turned out to be a lot deeper than any of us realized.”[5]

To be sure, the 2009–16 economy grew at barely half the 2.6% annual rate that CBO projected in January 2009. By the end of 2019, CBO now projects the economy to produce $7.4 trillion less output than it projected for these 10 years in January 2009. This translates into $1.9 trillion in forgone tax revenues. An additional $1.2 trillion in projected tax revenues was lost to technical revisions and other factors that are often intertwined with the underperforming economy.[6]

That is only half the story. The same sluggish economy and technical re-estimates that reduced tax revenues by $3.1 trillion also automatically reduced spending by $3.5 trillion over the decade—leading to a modest net reduction in the 10-year budget deficit relative to the January 2009 baseline.

The main source of lower spending: $2.3 trillion less in interest payments on the national debt, thanks to lower interest rates. These lower interest rates were a direct result of the weak economy and the Federal Reserve’s policy of keeping its target interest rates near zero, to spark growth. Consider that between 1996 and 2016, the national debt quadrupled, from $5 trillion to $20 trillion, yet interest payments were lower in 2016 than in 1996.[7] Had the original 2009 CBO interest-rate assumptions held, the federal government would be paying a $620 billion interest tab in 2017, rather than $270 billion.

That is the good news. The bad news is that when interest rates paid by Washington return to a historically normal range of 5%–7% (or even higher, because of the soaring national debt), federal spending will explode by hundreds of billions—or even trillions—of dollars.

In addition to low interest rates, the slow economic recovery and technical re-estimates saved $820 billion in mandatory program costs through developments such as lower automatic inflation adjustments and lower than projected spending on Medicare Part D. Finally, $397 billion was saved from faster than projected repayments of the 2008 financial bailouts as well as the rapid recovery of deposit insurance and government mortgage-guarantee institutions that had cratered in 2008. All told, this $3.5 trillion in nonlegislative spending savings exceeded the $3.1 trillion in lost tax revenues (Figure 3).

Even during the 2009–12 period of trillion-dollar deficits, the net budgetary loss to economic and technical revisions (relative to the January 2009 baseline) averaged about $50 billion annually.[8] Since then, these factors have provided a net savings of approximately $100 billion annually, as net interest and mandatory program savings, such as those described in the last paragraph, continue to grow rapidly.

Overall, the weak economy and technical re-estimates reduced deficits by $400 billion from the original 2009–19 budget projections. This offset some of the $5 trillion in new legislation, leading to a sum of $4.6 trillion in net additional deficits over this period.

$5 Trillion in New Legislation

In eight years, President Obama signed legislation that cumulatively added $4,988 billion in budget deficits over 2009–19. Taxes were reduced by $3.120 trillion, program spending increased $758 billion, and $1.110 trillion in interest costs resulted.[9] The main components are summarized in Figure 4, and some details are explained below.

1. Extending tax cuts inherited from previous administrations ($4,135 billion). The most expensive bills signed by President Obama did not reflect major policy changes; they were instead extensions of tax cuts that had been scheduled to expire. This includes extensions of the 2001 and 2003 tax cuts originally signed by President George W. Bush ($1,660 billion), the Alternative Minimum Tax (AMT) “patch”[10] ($1,247 billion), and a series of small tax cuts known as the “tax extenders” that Congress regularly renews every December ($481 billion).

Because this raised the national debt, it also added $747 billion in interest costs. Following a two-year extension enacted in December 2010, the AMT patch and most of the 2001 and 2003 tax cuts were finally made permanent in January 2013, and many annual tax extenders were made permanent in December 2015.

There is a persuasive argument that these extensions should have been incorporated into the original CBO baseline rather than counted as “new” tax cuts. After all, a baseline is supposed to show the tax and spending effects of maintaining current policies. Instead, the January 2009 baseline assumed the expiration of the tax policies above and thus the implementation of $5 trillion in new tax increases (including interest costs) over the next decade, the vast majority of which would later be canceled by a bipartisan congressional majority.

Yet controversial budget rules classified this simple continuation of current tax policies as a new $4 trillion tax cut.[11] It is true that the baseline merely reflected expiration dates that were written into these tax cuts (partly because of other arcane budget rules). Yet CBO’s baseline projections regularly assume that expiring entitlement programs (such as farm subsidies) will be extended and that Social Security and Medicare benefits will continue to be fully paid, even after their trust funds are exhausted. Simple consistency suggests that the baseline should have also assumed these tax policy extensions in the original baseline (and scored their long-term cost when originally enacted), rather than counting them as expensive “new” tax cuts.

Based on a current-policy baseline (which assumes the renewal of existing policies), Obama and Congress actually raised net taxes. The January 2013 legislation made permanent the 2001 and 2003 tax cuts for most taxpayers but allowed tax rates to rise for upper-income families and small businesses by an estimated $600 billion over 10 years, relative to the tax policies at the time. Certain tax-cut extenders have been scaled back as well, and new taxes were imposed to pay for the Affordable Care Act (ACA) as well as for children’s health care (tobacco taxes). The net effect is a 2017 tax code designed to raise more revenue from a given income distribution than the 2008 tax code.

2. Economic stimulus policies ($1.958 trillion). Shortly after taking office, President Obama and the Democratic Congress enacted the American Recovery and Reinvestment Act (ARRA), which included $748 billion in new “stimulus” provisions plus $262 billion in net interest costs over the decade. Over the next several years, this was followed by an additional $716 billion in economic stimulus and recession relief costs, including payroll tax holidays ($226 billion), emergency unemployment-insurance extensions ($191 billion), and extensions of new 2009 stimulus tax relief involving the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC), and various business-tax cuts ($187 billion). Net interest costs added $231 billion to this last round of stimulus policies, which were mostly contained to 2009–14, except for the permanently extended EITC, CTC, and AOTC provisions.

3. Discretionary spending cuts and mandatory sequestrations ($835 billion saved). Following an initial surge, discretionary spending proved to be the source of large budgetary savings in the Obama years. More than $300 billion in “emergency” discretionary spending was included in the 2009 stimulus bill described above. Two years later, a new House Republican majority demanded and received a $2.1 trillion spending cut over 10 years, in exchange for raising the debt limit by an equal amount. Because a congressional “Super Committee” created by the 2011 Budget Control Act (BCA) deadlocked in its attempt to find alternative budget savings, the BCA ended up imposing most of its cuts within discretionary spending. Specifically, the law created 2013–21 statutory discretionary spending caps that were $1.3 trillion below the CBO discretionary spending baseline. The remaining savings would come from modestly sequestering a small sliver of mandatory spending (such as Medicare), as well as lower interest costs.

Overall, discretionary outlays—excluding 2009 emergency stimulus spending and Hurricane Sandy relief—are set to come in $640 billion below the inherited 2009–19 baseline level. These reductions consist of defense discretionary spending ($506 billion below baseline) and nondefense discretionary spending ($423 billion below baseline)—partially offset by additional emergency supplemental funding for Overseas Contingency Operations (OCO), such as in Iraq and Afghanistan ($290 billion above baseline). This $640 billion in program savings also produced $78 billion in net interest savings and combine with the BCA’s mandatory sequester savings ($98 billion plus $19 billion in interest savings) to arrive at the $835 billion saved.

The savings listed above are far less than the initial BCA score because: 1) this paper’s 2009–19 analysis period cuts off the BCA’s larger savings years of 2020 and 2021; 2) Congress has broken the discretionary caps by more than $150 billion so far, mostly in return for slowly phased-in entitlement reforms; and 3) Congress has proved adept at using budgetary gimmicks to slip in extra spending. Despite this backsliding, the BCA represents one of the largest spending cuts in several decades.

4. Affordable Care Act ($275 billion saved). Shortly after its enactment, CBO estimated that the ACA would collect $526 billion in revenues (mostly from taxes on the health industry and upper-income families) and spend $401 billion over 2009–19—for a net deficit reduction of $125 billion.[12] The president and Congress subsequently reduced the law’s savings by repealing or delaying $50 billion in taxes, fees, and fines (while also saving $14 billion in spending). Yet the ACA’s total budgetary cost has continued to fall because of factors outside lawmakers’ control. Specifically, lower than expected enrollment in the health-care exchanges and the Supreme Court ruling making the state Medicaid expansion voluntary saved $279 billion in federal subsidies, while also reducing revenues by $79 billion over the decade (mostly through reduced risk-adjustment transfers). The decision by the Department of Health and Human Services to cancel the CLASS Act—an actuarially unsustainable long-term-care program that had been included in the original ACA—cost $65 billion.[13] Finally, $52 billion was saved in net interest costs because of the rest of the law’s deficit reductions.

Altogether, the $125 billion in original projected savings was reduced by $36 billion through subsequent legislation and by $65 billion from the cancellation of CLASS. Yet the budget picture benefited from $200 billion in savings outside lawmakers’ control (mostly due to decreased exchange enrollment) and $52 billion in net interest savings. The result is $275 billion in overall 2009–19 savings.[14]

Net deficit reduction does not necessarily mean that the ACA was fiscally responsible. The original law was estimated to provide $788 billion in new health-care benefits over the decade, offset by $931 billion in new taxes and cuts to programs like Medicare (excluding education savings). Given that entitlement spending is on a completely unsustainable path, there is a reasonable argument that the limited supply of realistic spending and tax offsets should have gone toward shoring up Social Security and Medicare, rather than funding a new government program. Instead, Washington added another expensive entitlement to its long-term obligations and reduced the supply of available offsets to address the upcoming deluge of debt. The task of balancing the long-term budget was made more difficult by the ACA.

5. Health extenders ($154 billion). Just as the CBO baseline had assumed large new tax increases, it also assumed that Medicare physician reimbursement rates would be allowed to fall by as much as 21% (based on a 1997 law), even though Congress had moved to prevent these cuts every year since 2002. During the Obama presidency, lawmakers continued to extend the current Medicare physician payment structure (as well as extending other small health laws), while often cutting other health-provider payments as offsets (thus cutting net spending relative to a current-policy budget baseline). Finally, in 2015, Congress made the Medicare “doc fix” permanent (and even expanded payment rates by $33.5 billion over the following decade) without major offsets. Overall, most of this $154 billion in spending is consistent with a current-policy baseline.[15]

CLICK HERE to read the full report at the Manhattan Institute