Automatic triggers can kick in when the economy falters — and when it booms.
Buried underneath Washington’s stimulus gridlock are the outlines of a bipartisan deal that could both soften recessions and address soaring debt. The creation of new “stimulus triggers” that would automatically kick in whenever the economy falls into recession has been endorsed by House speaker Nancy Pelosi, liberal economists such as Jason Furman and Lawrence Summers, and columnists such as the Washington Post’s Catherine Rampell and Bloomberg’s Noah Smith. On the flip side, “deficit-reduction triggers” that would automatically kick in when the economy is booming have been supported by White House economists and bipartisan representatives of think tanks ranging from the Heritage Foundation to the Brookings Institution. More recently, 30 House Republicans and 30 House Democrats recently signed a letter calling for deficit reduction as soon as the economy recovers.
The obvious solution is a bipartisan deal merging these complementary measures. Washington should build a system that provides aid during recessions and aggressively reduces the deficit when the economy is thriving.
Clearly, Washington can improve its recession responses. While every downturn is unique, nearly every recession eventually induces Congress to extend emergency unemployment benefits and expand Medicaid and safety-net assistance to states. Yet this response is often slowed down by congressional recesses, the need to craft new reforms quickly, and disagreement over the duration of these policies. Lawmakers also often abuse the “must-pass” nature of these bills by demanding expensive, unrelated add-ons. Better for Congress to carefully craft a permanent package of automatic triggers that can quickly provide aid during recessions and then remove that aid when the economy recovers.
However, while emergency expenditures in times of trouble are often necessary, Congress has typically failed to pare back deficits when the economy has boomed. It is difficult to argue against the $3 trillion in deficits that the Great Recession produced between 2008 and 2010. Less defensible was the $8 trillion in deficits that Washington subsequently ran up during the longest economic expansion in American history between 2011 and early 2020. Over the long run, this approach is a recipe for disaster.
The coronavirus and resulting recession are projected to add $8 trillion in government debt over the next decade — resulting in a debt level of 128 percent of the economy that shatters the record level set during World War II. From there, the Congressional Budget Office (CBO) projects $80 trillion in additional debt over the next three decades, even under the rosy scenario of no new spending increases, wars, recessions, pandemics, or 2017 tax cut renewals. The CBO also assumes that interest on the debt eventually consumes one-third of all taxes even despite continued low interest rates. If rates rise for any reason, each percentage point would cost $11 trillion in additional interest payments over the next three decades. Thus, an interest rise of a few percentage points would risk a debt crisis. Are we feeling lucky?
Instead, lawmakers should aim to minimize deficits over the business cycle. They can match recessionary-stimulus triggers with deficit-reduction triggers during booms. The recession triggers can affect emergency unemployment aid, Medicaid matching rates, safety-net benefit expansions, and perhaps tax rebates or a version of the Paycheck Protection Program. Each policy would be triggered (or turned off) based on monthly job gains or losses, or quarterly economic growth data. Congress could tweak or supplement these policies as events warrant. As the economy recovers, these added benefits should be turned off, and the transition to an economic expansion should trigger reforms to offset the previous cyclical costs, as well as rein in the escalating structural budget deficits. Congress can determine the size of the fiscal triggers based on targets of declining deficits or a stabilized national debt share of the economy.
From there, Washington could balance increased state aid during recessions with automatic reductions when the economy is booming and state tax revenues are soaring. Discretionary spending increases — both defense and non-defense — can also be strictly capped when the economy is thriving.
Social Security and Medicare are the most in need of reform triggers. Yes, this will be controversial. But the 30-year cash shortfalls projected for Medicare ($44 trillion) and Social Security ($19 trillion) — plus $40 trillion in resulting interest costs (all according to CBO data) — overwhelmingly drive long-term budget deficits and must be addressed. There is no plausible $63 trillion tax increase alternative. While low-income seniors should be exempt from most changes, wealthier retirees may have to accept higher Medicare cost-sharing, slower growth of Social Security benefits, and/or other reforms to address these program shortfalls.
The bipartisan 1983 Social Security reforms — which set a 44-year schedule of automatic savings policies — provide a successful precedent for the trigger approach. Those reforms are still being implemented in the 2020s.
And yes, any bipartisan deal will surely require tax triggers too. This can include capping tax deductions for the wealthy, raising the Social Security tax base, suspending tax bracket indexing, or trimming corporate tax preferences during periods of income growth.
Not even a booming economy will make these reforms painless. Nevertheless, Washington must address surging deficits whenever the economy is not too weak for reform.
There is room for flexibility in designing triggers. Not all programs need be affected, and the mixture of spending and tax triggers can be negotiated. Future Congresses would be free to alter the triggers, perhaps with some requirement to find alternative savings.
Fiscal consolidation is never easy. Yet America just ran up $8 trillion in deficits during a historic economic expansion, and now faces $8 trillion in pandemic-related borrowing on top of $80 trillion in baseline deficits over the next few decades under the rosiest of scenarios. This debt must be brought under control before it brings a crisis.
It is possible to both automatically expand assistance during recessions and address budget deficits during booms. Are members of Congress willing to put down their rhetorical weapons and compromise?
This piece originally appeared at the National Review Online (paywall)
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Brian M. Riedl is a senior fellow at the Manhattan Institute and author of the recent issue brief, Coronavirus Budget Projections: Escalating Deficits and Debt. Follow him on Twitter here.
This piece originally appeared in National Review Online