8/11/2023 0 Comments Federal spending![]() You can find the paper on the Brookings web site, although we have been doing further work that has changed our view of some of the implications of particular explanations. A few weeks ago, Louise Sheiner and I released a paper that examines alternative explanations for low Treasury rates and the implications of each for budget policy. But it is not well-understood how low rates should affect the amount of debt we should aim for. It is well understood that lower interest rates improve debt dynamics: For any given paths of revenues and noninterest spending, lower interest rates mean that debt will be lower. This is a complicated and greatly underexplored topic in economics. There are many possible explanations for why Treasury rates may remain much lower than historical norms, and different explanations have different implications for the optimal amount of federal debt. That is a sea change in the economic backdrop for fiscal policy, and it has come into focus just in the past few years. The yield on 10-year Treasury notes was 8% at the end of 1990, 5% at the end of 2000, and 2% at the end of 2015-with CBO and a number of other analysts now predicting that the 10-year yield will rise only to about 4% in the coming years, and many financial-market participants appear to expect it to remain below that. However, all else is not equal: Interest rates on Treasury securities are very low by historical standards and will probably remain low for a prolonged period. Those points argue, all else equal, for reducing federal debt by a lot and for doing so quickly. If we hit another financial crisis or severe recession with debt at 75% or 85% of GDP rather than 35%, our options will be more constrained. Also, high debt reduces the “fiscal space” for responding to unexpected developments. Federal debt can crowd out private capital investment. Moreover, even if debt stops rising at some point, allowing debt to stay so high would have significant costs. For comparison, debt averaged 38% of GDP over the past 50 years and was 35% in 2007 before the crisis.įederal debt cannot increase indefinitely relative to the size of the economy, so current law regarding federal spending and revenues is not sustainable. Under current law, federal debt is projected by CBO to rise from 75% of GDP currently to 85% by the end of the decade and more than 100% 25 years from now. I also would enact larger cuts in benefits and increases in taxes to be phased in later so that debt declines gradually relative to GDP in the long term. For the next decade, I think we should allow federal debt to rise as a percentage of GDP in line with what would happen under current law, but I would shift the composition of the budget by increasing federal investment above what would occur under current law and paying for that increase with cuts in benefits for higher-income retirees and hikes in tax revenue. Let me summarize my recommendations for federal fiscal policy, and then I will go through the elements piece by piece. And I will make recommendations that I think are in the best interest of the country and will not talk about what is politically feasible under different circumstances. I will talk only about the federal budget, although state and local government budgets are important and interesting as well. I will try to be explicit about the economic analysis on which I’m drawing, and you should point out places where you think my analysis is wrong I will also be explicit about the value judgments I’m making. I thought that structuring my comments tonight around my recommendations would help to make the discussion more specific and concrete. ![]() ![]() Therefore, CBO reports don’t say that “Congress should do X” instead, they say, “if Congress did A, then B would probably happen, and if Congress did C, then D would probably happen.”īut I am no longer CBO director, so now I can make recommendations. When I was director of the Congressional Budget Office, Members of Congress would often ask me for my recommendations about the federal budget: How big should federal deficits be? How should federal debt evolve over time? The answer I gave was to remind Members that CBO doesn’t make policy recommendations, because policy choices inevitably involve both analysis and value judgments, and CBO only does analysis. In a change of pace from the rest of your day, I’m going to talk about fiscal policy. I’m delighted to be back at the San Francisco Fed and to be joining all of you at this conference. Recommendations for Federal Fiscal Policy Taubman Center for State and Local Government.Shorenstein Center on Media, Politics and Public Policy.Mossavar-Rahmani Center for Business and Government.Malcolm Wiener Center for Social Policy.Belfer Center for Science and International Affairs.Ash Center for Democratic Governance and Innovation.
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