Politics & Government
Wesleyan economist contends debt fall-out will depend on time frame
Zelity says W. Bush, Trump tax cuts may have been ill-advised as spending has continued to increase
By Scott Benjamin
With Treasury Secretary Janet Yellen indicating that the debt limit could be exceeded as early as June 1 and the Democratic president and the Republican-controlled U.S. House engaged in a tug-of-war with plenty of static in the air, could there be an economic calamity before the Tampa Bay Rays garner their 45th victory?
“If it can be quickly resolved it may not be a huge issue,” says Wesleyan University Economics professor Balazs Zelity.
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However, he added that if there is a “prolonged default" you could have "a very deep crisis that could be similar to the Great Recession in 2008. It really depends on the length."
Why has the debt escalated from $5.7 trillion in 2001 to the current $31.4 trillion?
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New York Times columnist Bret Stephens noted recently that Democratic President Joe Biden's proposed budget is $6.8 trillion - a considerable jump from $3.7 trillion package that Democratic former President Barack Obama got enacted in 2013.
In a phone interview with Patch.com, Zelity said the numbers "are misleading," since the economy has grown and you have to factor inflation.
"Part of the growth is due to the response to COVID," he added.
Zelity also points to the "aging population" and the rising costs for Social Security and Medicare.
Club For Growth President David McIntosh recently wrote in The Wall Street Journal that, "The [Social Security] law 'without any change' requires a huge benefit cut in 10 years" since it is running out of funds.
Fifteen years ago when he was on his way to the White House, Barack Obama said that the first $250,000 of income should be subject to the Social Security Tax. Today it is only at $160,200.
Why should someone making $1 million a year only have 16 percent of their salary subject to that tax?
Said Zelity, “One of the possible remedies would be to increase the revenues in the Social Security system."
He added that there also could be a reduction in benefits or a further increase in the retirement age.
“It is up to the public to decide,” commented Zelity. "It will have to be fixed by legislation."
The federal government has been running deficits for nearly 22 consecutive years. Have taxes been too low? Were the 2001 W. Bush tax reduction and the 2017 Trump tax cut poor policy decisions?
“You can look at it from both ways,” remarked Zelity, who has a doctorate degree from Brown University. “But these tax cuts have not been helpful. They came at a time when expenditures continued to increase. It seems to be a little counter-productive to be cutting taxes under these conditions.”
Robert Rubin and Paul O'Neill - treasury secretaries in the Clinton and W. Bush administrations, respectively - have said that 10-year or permanent tax cuts can be very inaccurate since fiscal conditions can vastly change.
Zelity commented, "This is rather context dependent. If I understand this correctly, the claim is that tax cuts are usually (partially) justified by the fact that they are projected to increase economic growth in subsequent years. This increased economic growth could make up for (part of) the revenue loss from the cut, thereby making the longer-term budgetary impact of tax cuts less bad than it would first seem. The problem is that the economic growth projections that are often used to justify these cuts are highly uncertain. Indeed, I agree with the fact that one should take into account the inherent uncertainty, which gets bigger the longer the time horizon, when estimating the impact of tax cuts."
The Wall Street Journal's Nick Timiraos has reported that to combat inflation the Federal Reserve Board has raised interest rates to a 16-year high.
“The Fed policies have been effective," said Zelity, noting that inflation reached 9.1 percent in June of last year and is now at 4.9 percent.
He noted that Federal Reserve Board Chairman Jerome Powell has hinted that the most recent rate boost may be the last for a while.
"I think they want to be cautious for now," Zelity explained. "They want to see what the higher interest will do."
However, he said to get inflation down the 2.0 percent target, the higher interest rates may induce an increase in the current 3.4 percent unemployment rate, which is the lowest in 54 years.
“The public perception and the financial markets are not quite in agreement with the Fed perception,” Zelity commented. "The financial markets expect a recession by the end of the year."
Three of the four largest bank failures in history occurred in recent months. Is the system stable?
Zelity said that, “The crisis has been very effectively contained for now."
He said that the recent failures at Silicon Valley Bank, Signature Bank and First Republic Bank were largely due to them having "very special depositors."
Wall Street Journal columnist Josh Zumbrun has reported that adjusted for inflation the 2023 bank failures are about six percent of the cost of the failures during the 2008 fiscal crisis.
Remarked Zelity, “I would not expect much fall-out from this."
Resources:
Phone interview with Balazs Zelity, Patch.com, Tuesday, May 9, 2023.
E-mail statement from Balazs Zelity, Patch.com, Wednesday, May 10, 2023.
https://ctmirror.org/2023/05/1...
https://www.wsj.com/articles/f...
https://www.nytimes.com/column...
https://www.amazon.com/Price-L...
https://www.wsj.com/articles/s...
https://www.washingtonpost.com...
