This week on Facing the Future we discussed the budgetary, economic, and distributional effects of the Harris and Trump campaign policy proposals. Our guest was Dr. Kent Smetters, Faculty Director of the Penn-Wharton Budget Model (PWBM) at the Wharton School of the University of Pennsylvania. Dr. Smetters and his colleagues recently analyzed these proposals as best they could, given the lack of detail in many instances. At this point, the results are not promising for anyone interested in stabilizing the debt. The PWBM analysis found that Harris’ proposals would increase 10-year deficits by $1.2 trillion and Trump’s would increase 10-year deficits by $5.8 trillion. [Note: This analysis and our interview took place before the Harris campaign released additional proposals on September 4.]
Smetters expressed concern about the fiscal trajectory of the Harris and Trump proposals. “Both candidates,” he said, “are adding more and more to the debt, and so we’re spiraling out of control. When it comes to this debt, the real inflation story is that at some point the Federal Reserve has to monetize that debt, or we have to default. And so unless Congress takes serious action, and does it soon, the central bank is going to have to monetize, and that’s where the hyperinflation comes from. You could easily imagine in a decade or two from now that we actually have a regular four, five, six percent inflation per year that lasts for a couple of decades to wear down the value of a lot of the debt that was issued in the past.”
“We’ve done calculations with the PWBM,” Smetters continued, “And on the current path that we’re on, within 20 years we basically hit a point of no return; that is, we can’t do anything at that point to avoid either an explicit default or hyperinflation. We really have to take this very, very seriously, and that’s under the most optimistic condition where financial markets constantly believe that eventually Congress will get its act together. And so if Congress and the White House don’t get their act together, then we would have inflation much earlier than that. or we could have a spike in interest rates and so forth when capital markets stop believing that to be the case.”
Smetters noted that the PWBM analysis did not include the “no tax on tips” idea floated by both candidates because it is not clear how such an exclusion would be implemented. “Honestly,” he said, “economists really aren’t taking that one very seriously, because in a really narrow sense it could maybe cost a billion dollars over 10 years. But if businesses and workers got smart, and it would be to their mutual benefit to get smart on that, they could reclassify a lot of payrolls as tips, and so that would actually then cost tons of money over 10 years.”
Earlier in the show, Concord Coalition Chief Economist Steve Robinson and I looked into some new numbers on the long-term fiscal health of Social Security. The Congressional Budget Office (CBO) recently updated its projections for that program, which at $1.4 trillion is the largest federal expense. By comparison, Medicare, defense, and interest on the debt are all close to $900 billion. Steve discussed CBO’s projections and how they compare with similar projections from the Social Security Trustees.
In several key respects, the Trustees’ projections tend to be more optimistic than CBO’s. For example, Robinson noted that CBO assumes higher gains in life expectancy and a lower fertility rate over the long-term than the Trustees’ assumptions.
“If you assume life expectancy is lower, and birth rates are higher, those are demographically optimistic. You have more workers per beneficiary, and so the program’s finances are improved; whereas, CBO assumes life expectancies are higher and birth rates are lower. That creates the reverse situation where you have more beneficiaries and fewer workers, and therefore the financial outlook is more pessimistic,” Robinson explained.
The bottom line, however, is that the timely payment of scheduled benefits under either set of projections will remain in doubt until policymakers enact needed reforms.
“We’ve known since basically the late 1970s that as the baby boomers retired the cost of the program would begin to rise, and the program would face substantial and ongoing deficits from roughly the mid 2010s going forward, and that’s what we continue to see. In fact, when CBO released their predictions last week they showed again that the program is facing deficits, and it will continue to do so as far into the future as we can reasonably predict,” Robinson said.
Hear more on Facing the Future. Concord Coalition Executive Director Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
