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This paper is part of an initiative from the Peterson Foundation to help illuminate and understand key fiscal and economic questions facing America. See more papers in the Expert Views: Bipartisan Policymaking under Divided Government series.
Bipartisan coalitions of lawmakers joined together to pass more major legislation in the 117th Congress than any other Congress in recent memory, including the biggest investment in American infrastructure in over half a century, proving that bipartisanship in Washington isn’t dead yet. Unfortunately, the net impact of all executive actions and legislation approved over the last two years increased budget deficits by $4.8 trillion over the 10-year window. Although some stimulus was needed coming out of the Covid pandemic recession, this level of spending helped push inflation to its highest level in over 40 years and put our fiscal policy on an even more unsustainable trajectory than it already was.
The Federal Reserve is primarily responsible for restoring price stability, but sound fiscal policy can make it easier for the Fed to bring inflation down without pushing the economy into a recession. Even more important than what fiscal policy does today is the path it sets us on for the future: the Congressional Budget Office projects annual interest payments on the national debt are currently on track to exceed total spending on national defense by 2030 and surpass Social Security as the largest item in the federal budget by 2050. The problem will only get worse if additional deficit spending forces the Fed to raise interest rates even higher.
Many hoped that a divided government elected with a mandate to fight inflation would usher in a return to fiscal responsibility. But the early signs are not encouraging: The first bill passed by the new House Republican majority in January would increase deficits by $114 billion over the next decade and the rules package they adopted paves the way for trillions of dollars in deficit-financed tax cuts. They have also been unable to specify any combination of tax and spending policies that could plausibly achieve their stated goal of balancing the budget within 10 years.
The administration and pragmatists in both parties will need to chart a better course that actually makes progress on America's pressing fiscal and economic challenges in the 118th Congress. Here are four ideas we at the Progressive Policy Institute's Center for Funding America's Future think that path might include:
House Republicans have made clear that they intend for a stand-off over raising the federal debt limit to be the first major fiscal fight of the new Congress. In his long quest to win the Speaker's gavel, Kevin McCarthy promised the far-right Freedom Caucus that he would demand any debt limit increase or suspension be paired with spending cuts. But more importantly, McCarthy gave these members the procedural tools to prevent any increase or suspension of the debt limit that didn't meet their extreme criteria from even coming up for a vote in the House.
There are two big problems with this approach. The first is that the debt limit doesn't actually impact the tax and spending policies that lead to an accumulation of debt. Instead, it merely limits the Treasury's ability to cover the difference between the taxes and spending Congress has already approved. Refusing to raise the debt limit is akin to running up trillions of dollars on the national credit card and refusing to pay the bill when it comes due. Even the possibility of defaulting on our debts could raise borrowing costs (counterproductively increasing both total spending and deficits) and hurt economic growth.
But perhaps more importantly, recent history shows that debt limit brinkmanship doesn't even accomplish its goals. The last debt limit deal to include spending cuts concentrated them on just one third of the federal budget and brought spending on public investments that most contribute to economic growth down to 50-year lows. These spending caps were so suffocating that a Congress with Republican majorities in both chambers and Donald Trump in the White House abandoned them without offsetting the cost. Meanwhile, our national debt continues to soar.
Democrats are rightfully refusing to negotiate on the debt limit because maintaining the full faith and credit of the United States is a basic fiduciary duty of Congress, not a bargaining chip to be leveraged. But Republicans who want serious discussions about how to reduce our national debt aren't wrong to do so.
One solution for this impasse is to reform the debt limit to remove the threat of default and pair it with a better mechanism for forcing policymakers to confront fiscal trade-offs. The Responsible Budgeting Act introduced last Congress by incoming House Budget Committee Chairman Jodey Arrington (R-Texas) and Congressman Scott Peters (D-Calif.) would allow Congress to suspend the debt limit automatically upon the adoption of a concurrent budget resolution by the House and Senate, or allow the president to suspend the debt limit for a period of time if he submits a credible deficit reduction plan to Congress. That plan, as well as alternatives with significant bipartisan support or those crafted by the relevant committees of jurisdiction, would then receive expedited consideration in Congress.
This process, or another like it, would be a better way to promote fiscal discipline than lawmakers simply threatening to not pay the bills already incurred when they come due.
Democrats are right to rebuff Republican attempts to extort policy concessions on entitlement programs such as Social Security and Medicare through debt-limit brinkmanship. But they must show a willingness to engage in good-faith negotiations after the threat of default is taken off the table, because the reality is America’s health care and retirement programs are in serious need of reform as our population ages and the ratio of workers to beneficiaries shrinks.
Social Security once collected more in dedicated tax revenue than it paid out in benefits, and those surpluses were tracked in the Social Security trust funds. Now those trust funds are being drawn down to cover growing cash deficits and CBO projects they could be exhausted in as little as 10 years. At that point, the program could only pay out 77% of benefits if no action is taken before then. And Social Security isn't the only program with trust fund troubles — the funds for Medicare Hospital Insurance and Highways are both projected to run out of money in the next five years.
If Congress and the president could put all these programs on a path to sustainable solvency without diverting general revenues from the rest of the federal budget, they could significantly curtail the growth of our national debt. One process for doing so is the TRUST Act, sponsored by Senators Mitt Romney (R-Utah) and Joe Manchin (D-W.Va.), which would create a bipartisan, bicameral “rescue committee” for each federal program with a trust fund that is on track for insolvency.
A symbolic vote in support of the TRUST Act passed the Senate with 71 votes last Congress, suggesting it has broad bipartisan appeal. Another option would be for President Biden to form a bipartisan fiscal commission with a mandate to offer comprehensive recommendations for putting the federal budget on a sustainable trajectory, like President Obama did when he created the Bowles-Simpson fiscal commission in conjunction with a 2010 debt limit increase. Pairing either of these with a debt limit resolution would allow Democrats to say they didn't negotiate any policy concession at gunpoint while Republicans can say they forced Democrats to the table for a real conversation on fiscal sustainability and entitlement reform.
After the anemic recovery following the 2008 financial crisis, Democrats internalized the lesson that insufficient fiscal stimulus during a downturn leads to lasting harm. Then when the COVID pandemic came around, they threw caution to the wind and passed a $1.9 trillion stimulus bill in the early months of the Biden administration on top of nearly $4 trillion of stimulus passed during the Trump administration. Many analysts at the time, myself included, warned that this was likely far in excess of what would be needed to support the economy. But the mantra of the moment was “it’s better to overshoot than undershoot.”
Now policymakers have seen the consequences of this cavalier approach to fiscal policy. Independent estimates from Brookings, Johns Hopkins University, and the San Francisco Fed all found that fiscal policies in the early Biden administration added roughly three percentage points to inflation. Voters deeply resented the rapid rise in prices, causing economic confidence in the summer of 2022 to drop to levels that rivaled what it was in the depths of the 2008 recession. A plurality of respondents in exit polls ranked inflation as their top concern in last year’s midterm elections.
Policymakers must find the right balance after experiencing one recent recession in which stimulus was inadequate and another in which it was excessive. To that end, PPI last year proposed creating a Commission on Economic Recovery that would examine the responses to our last two economic recessions and recommend specific policy changes to help recover from future recessions quickly without overheating. This proposal was later incorporated into the centrist New Democrat Coalition’s Inflation Action Plan and should appeal to pragmatists in both parties who want a “right-sized” fiscal policy that meets the moment by stimulating during recessions and reducing the deficit during expansions.
One area the commission could focus on is strengthening automatic stabilizers, which are policies designed to increase spending or reduce revenue during recessions and do the opposite during expansions without requiring additional action from Congress that may not be sufficiently timely. Another priority should be modernizing the design and administration of programs such as unemployment insurance so that Congress can more effectively trigger emergency changes manually, without losing billions of dollars to waste, fraud, and abuse like the Covid relief bills did.
One unexpectedly ripe opportunity for big bipartisan action may come from President Biden’s well-intentioned but misguided push to relieve the burden of skyrocketing education costs on middle-class families through mass debt cancellation by executive action. Before last summer, President Biden had already effectively canceled $155 billion in student loan debt, mostly for affluent professionals, through repeated extensions of a pandemic-era pause on student loan repayments and interest accrual. When the administration finally admitted this policy was worsening inflation and announced a plan to resume repayments in January 2023, they paired it with an attempt to outright cancel another half-trillion dollars of outstanding student debt without explicit Congressional approval.
However, several courts have either placed holds on the debt cancellation plan or struck it down as an illegal abuse of the discretion Congress gave the Department of Education in administering student loans. While the appeals process plays out, the Biden administration reversed course and decided to continue the repayment pause up until late August, or 60 days following a final ruling by the Supreme Court, whichever comes first.
In the likely event that the conservative-leaning Supreme Court rules against Biden’s plan, his administration will be dependent on Congress for legislative alternatives to deliver meaningful relief. This outcome may actually be a blessing in disguise for Democrats: Canceling debt merely uses taxpayer money to paper over the problem and gives universities a blank check to continue raising tuition costs at a rate far faster than economic growth. Unlike Biden’s executive actions, a legislative solution could tackle the root problem by requiring cost-cutting reforms of universities that receive federal aid, restructuring financial aid to better support students in need, and expanding non-college pathways for people that don’t need a traditional four-year degree.
There are good reasons for Congressional Republicans to come to the table, too. Even if the court strikes down Biden’s debt cancellation plan, it is likely to leave in place the president’s authority to continue pandemic-era emergency measures long after declaring the pandemic itself over. Thus, a “grand bargain” on higher education would allow Republicans to curtail wasteful spending and claw back easily-abused presidential spending powers, while Democrats could get a win on truly reducing education costs for working families and expanding economic opportunity.
The ideas outlined above are not the only opportunities for making sound fiscal policy. Congress will need to reach an agreement on discretionary spending levels as part of the annual appropriations process and could find modest savings there. Comprehensive permitting reform and other regulatory changes could help taxpayers get a better bang for their buck on funds that have already been appropriated. And perhaps most importantly, lawmakers must resist the temptation to make the problem worse, such as by reviving tax breaks that expired last year without offsetting the cost. But these ideas offer a constructive starting point for charting a better path forward.
Ben Ritz is the Director of PPI’s Center for Funding America’s Future, which develops policy proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, and transform our tax code to reward work over wealth. Ben's expert analysis has been published in the Washington Post, the New York Times, the Wall Street Journal, Forbes, The Hill, and other national news outlets.
Prior to joining PPI, Ben staffed the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, where he helped develop its proposed reforms to Social Security and retirement-related tax expenditures. Ben also worked on other federal budget issues at BPC including sequestration, budget process reform, and the federal debt limit.
Before joining BPC, Ben served as Legislative Outreach Director for The Concord Coalition. In this capacity, Ben was responsible for coordinating activities with members of Congress and other organizations promoting fiscal responsibility, as well as tracking legislation and developing informational products to educate citizens about the federal budget.
Ben earned his Master’s of Public Policy Analysis; a Graduate Certificate of Public Finance; and a B.A. in Communication, Legal Institutions, Economics, and Government from American University.