Fiscal Alarmism and the Debt Limit Crisis
The “debt limit crisis” is in the rearview mirror, but budget deficits are projected to exceed 7 percent of GDP in a decade. This blog discusses why the CBO projection is likely to be over optimistic and why fiscal alarmism is now warranted.
Lawrence H. Summers
Charles W. Eliot University Professor and President Emeritus at Harvard. Secretary of the Treasury for President Clinton and Director of NEC for President Obama
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While I am glad to see that the “debt limit crisis” is in the rearview mirror, CBO projects budget deficits will exceed 7 percent of GDP and be on an upwards trajectory a decade from now.
— Lawrence H. Summers (@LHSummers) June 6, 2023
Watch my @PIIE talk here:https://t.co/fpYNNVLxyZ via @YouTube -
For all of the post financial crisis/ pre-pandemic period I feared secular stagnation and opposed fiscal alarmism. But now I am alarmed because we are in new and dangerous territory.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
Current CBO medium term deficit projections are twice as large as those when the Simpson- Bowles process was initiated in 2011 and substantially larger than those faced by the incoming Clinton administration in 1993.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
Moreover, I am convinced the CBO projection is way over optimistic. On what I regard as reasonable assumptions about the economy and future policy, the deficit will, after a decade, exceed 10 percent of GDP. This would be by far the worst long run fiscal outlook in our history.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
There could come a question of how long the world’s greatest debtor can remain its greatest power.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
My judgement is that short term Treasury yields, which currently exceed 5 percent, will run well above CBO’s 2.3 percent assumption over the next decade, especially in light of high deficits. 1 percent higher rates add about 1.2 percent to the deficit, given current debt levels
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
I doubt all the Trump tax cuts will actually phase out in 2025. This could add more than half a percent of GDP to deficits. There has also been a revenue shortfall so far this year of 1 percent of annual GDP. Experience suggests such shortfalls are at least in part persistent.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
The CBO assumption that defense spending as a share of GDP will fall by 20 percent seems unlikely to me given ongoing tensions with Russia, China, Iran and North Korea and the increasing coordination between these adversaries.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
There is room for argument, as @ojblanchard @jasonfurman and I have discussed, about sustainable deficit levels. I know of no one serious who thinks 10 percent is close to acceptable. So significant adjustment will likely be necessary.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
Rising defense and interest costs do not really represent a choice. By any measure the size of the dependent aged population is rising. The prices of services the govt buys like health, education and law enforcement tend to rise inexorably relative to the rest of the economy.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
All of this suggests that returning government spending to traditional levels will not be easy.
— Lawrence H. Summers (@LHSummers) June 6, 2023 -
WE ARE AN UNDERTAXED NATION. Raising revenue needs to start with those most able to pay—the top 1 percent— but quite likely it cannot end there.
— Lawrence H. Summers (@LHSummers) June 6, 2023