Like buffets and online dating and many other terrible-and-wonderful things, budgets are about trade-offs.
Policy makers in Washington seem to have forgotten that obvious reality. From the Great Recession through the acute phase of the coronavirus pandemic, interest rates were low, prices stable, the dollar in demand, deficit hawks chastened, bond vigilantes quiescent. Congress could spend and spend, whether the economy needed the stimulus or not. Donald Trump got his mammoth tax cuts for the rich. Joe Biden got his energy spending and extended child tax credit. For the first time, the green-eyeshade set wondered if the country could run deficits in perpetuity; some began arguing that it should.
Now Republicans in Congress and the White House are preparing a “big, beautiful bill” that will likely add hundreds of billions of dollars to the debt. Interest rates are far higher than they were five years ago. Inflation is above the Federal Reserve’s target and rising, thanks to tariffs and the trade war. The bond vigilantes have woken up; investors around the world are questioning whether the dollar and American bonds are as safe as they seemed. Reality has reasserted itself. Trade-offs do exist, and Republicans do not seem to notice or care.
The first priority for Republicans: tax cuts. The party intends to extend Trump’s expiring 2017 fiscal package, which reduces the revenue collected from the richest Americans. It also intends to get rid of taxes on tips, overtime, and Social Security payments, and to lower taxes on manufacturing firms. Although the exemption of tips and overtime seems like it would benefit waiters and sales clerks, it will likely make the tax code more regressive. Most low-income workers do not pay federal income taxes, and hedge-fund managers and lawyers will figure out how to tie the provision into a loophole. Similarly, the Social Security plan would help rich retirees more than poor ones. However distributed, the cuts would be expensive.
With less revenue coming in, negotiators on Capitol Hill are starting deep in the red. Reducing the deficit would require significant cuts to entitlement spending and the military. But Republicans don’t want to do that. Instead, they are targeting smaller discretionary programs. The White House has suggested slashing $163 billion from education, health, and housing, as well as eliminating foreign-aid and green-energy initiatives. The only department that will receive a significant funding boost is the Department of Homeland Security, which surveils the border and executes immigration raids.
Savings will come from eliminating waste, fraud, and abuse, as well as from defunding the “harmful woke, Marxist agenda,” the White House says. Pinkos and criminals will pay for the tax cuts. Yet the Government Accountability Office estimates that the government loses roughly $50 billion to $100 billion a year to misappropriation, not nearly enough to cover the budget gap. Republicans have put forward no plan to identify and squeeze out such improper payments, a task made harder by the loss of experienced civil servants. The Department of Government Efficiency has proved incompetent and might end up increasing the deficit by hamstringing the IRS.
Republicans have similar fantasies about Medicaid, Medicare, and Social Security. The White House has promised not to touch the programs and again to find savings by getting rid of waste, fraud, and abuse. But Congressional Republicans are searching for as much as $880 billion to trim from a set of domestic programs, and are focusing on Medicaid. The only way to save that much money is to insure fewer people. Thus, Republicans are contemplating ways to cut without saying they’re cutting: refocusing the program on “vulnerable populations” (Medicaid already covers only the poor and other at-risk groups), adding work requirements, tightening enrollment standards, and requiring the states to cover more of the cost. They say they are shrinking the “deep state”; what that means is that they are taking away public goods and making public services inaccessible.
Whatever the final numbers, the budget will skewer the poor and squeeze out crucial long-term investments in energy, scientific research, medical advances, and children. Fewer kids will get meals, supportive educational services, and summer-enrichment programs; fewer loans will go to builders in distressed communities; fewer states will be able to make investments in new roads and clean air; fewer universities will research cancer cures. Over decades, the country will be poorer. That’s the trade-off.
The austerity of this project has led to panic among some Republicans, whose constituents live in the real world and will notice if they can no longer see a doctor or visit a national park. It has sparked creativity among others, who are trying to preserve the illusion of revenue while cutting taxes. “This ad-hoc, inconsistent, manipulative, and disingenuous approach to budgeting is enough to make your head explode,” Maya Macguineas, a leading deficit hawk, wrote in a statement. “Congress isn’t even pretending to do honest budgeting.” It is budgeting without budgeting.
It is also budgeting with no appreciation for where the economy is right now, given the trade war. Fewer container ships are arriving in the United States from abroad, meaning retailers are beginning to hike prices and manufacturers are beginning to lay off workers. Fewer investors are counting on the stability of the United States’ political system and the dollar, disrupting the bond market and causing borrowing costs to creep up. As the country learned during the height of the pandemic, Congress spending billions of dollars when inflation is rising due to supply disruptions will mean even higher inflation and higher interest rates—though Trump swears the opposite will happen.
The president appears to be living in an imaginary economy. Addressing a joint session of Congress in early March, he gave a 10,000-word speech warning about fraud and trumpeting his tariffs and tax cuts. He never discussed Medicaid or Medicare. He brought up the federal budget directly just once. “I want to do what has not been done in 24 years,” he said. “Balance it.”
The post A Budget Built on Illusion appeared first on The Atlantic.
