The economy is recovering from the depths of the pandemic in large part due to the massive relief packages that Congress passed in 2020 and 2021. Just in time for this recovery, Senate Republicans are pushing for cuts to vital programs. According to news reports, Five GOP senators are proposing a commission that would come up with proposals to balance the federal budget within a decade. Given that four of the five sponsors of this idea have signed on to the tax pledge to never, ever under any circumstances raise taxes, they are looking for programs to cut. They consequently take aim mainly at cuts to Social Security, Medicare and Medicaid.
These targeted programs are already and will continue to prove crucial to the financial and physical health of millions of Americans that have suffered from the pandemic. Many workers, especially older ones, have lost their jobs permanently and will move into early retirement with permanently lower benefits and little or no savings outside of those benefits. Millions of Americans, again particularly among older ones, experience long-term consequences from COVID-19, the disease caused by the novel virus. Those hardest hit by pandemic will need strong, expanded retirement and health benefits, not cuts to an already basic system.
It is worth considering bringing government spending and revenues more in line with each other over time. But a balanced budget is a completely arbitrary public finance goal. A country that has strong growth amid historically low interest rates can and will shrink its debt burden – defined as either the ratio of debt to gross domestic product (GDP) or as the share of interest payments out of GDP. By both measures, the U.S. government’s finances are manageable. This is especially true since the pandemic-related fiscal measures of 2020 and 2021 are expected to provide a substantial boost to economic growth. The Federal Reserve will also likely keep interest rates low for some time. Congress will eventually need to worry about the long-term health of the U.S. government, but that does not mean a balanced budget, especially one that is achieved by cutting only vital programs. The federal government instead will need more revenue to start closing the gap between revenues and spending.
The program-cutting push for a balanced budget right ignores two key aspects of fiscal policy. First, it matters whether fiscal interactions create temporary or permanent deficits and second, it matters whether the spending or tax cuts underlying the deficits resulted in faster growth. On both counts, using the pandemic-related fiscal measures to justify cuts for Social Security, Medicare and Medicaid is wrong.
The pandemic-related deficits are mainly temporary. Congress enacted the CARES Act in March 2020, which offered temporary relief mainly to families, unemployed workers and closed business. Most of its provisions expired in the second half of 2020. The newly elected Congress then enacted the American Rescue Plan in March 2021. It supports people, businesses and state and local governments with substantial yet temporary financial relief. Most measures will expire in 2021 and Congress will expand few if any of these provisions.
Contrast this to the tax legislation that most of the five senators now worried about long-term deficits helped to pass in 2017. Donald Trump’s signature legislative achievement was the Tac Cuts and Jobs Act of 2017. It showered trillions of dollars on highly profitable corporations and the richest American households that had seen the largest economic gains in the wake of the Great Recession from 2007 to 2009. Moreover, many provisions of this tax legislation are now permanent fixtures of the tax code and many temporary ones, such as tax cuts for high-income earners will likely become permanent, if past supply-side tax cuts are any indication.
Many of the Republican senators now supposedly worried about deficits supported the tax cuts for corporations and the rich but opposed the most recent round of fiscal relief. Yet the TCJA’s effect lasted possibly for a short period of elevated growth, while most of its benefits went to support shareholders and top-income earners. In contrast, the CARES Act offered much needed relief amid the worst unemployment crisis since the Great Depression, while it helped to stem the tide on declining economic growth. And experts predict that ARPA will boost economic growth to its highest rate in decades. This will help the economy to recover most if not all losses from the pandemic’s early months and lay the groundwork for faster growth in the years to come. The temporary fiscal interventions of 2020 and 2021, which the senators opposed, provide a much higher bang for the buck than the long-term budget busting trickle-down tax cuts of 2017, which many supported.
Where do Social Security, Medicare and Medicaid fit into the picture? The pandemic has highlighted the importance of these programs. Congress expanded support for Medicaid in particular with its pandemic relief efforts. The immediate benefits are less inequality and better health outcomes, both of which ultimately support stronger economic growth. Improving revenues for these programs by, for example, increasing payroll taxes on the top income earners will ultimately result in stronger growth and shrinking federal deficits. Yet most of the senators trying to find solutions to the deficits have already taken any revenue increases off the table. They are not serious about finding solutions, only serious about cutting vital programs for American families.
The entire commission idea showcases cruel hypocrisy on the part of the senators. They are now worried about deficits and programs that are sorely needed by low-income and middle-income Americans. They even opposed the last round of fiscal relief, the American Rescue Plan, while they were fine pushing trillions on companies and people that did not need extra help getting rich.