Full Policy Essay

As 2021 begins, U.S. fiscal policy is under extraordinary strain. The Covid-19 pandemic has thrown millions out of work. GDP, which cratered spectacularly in the second quarter of 2020, is recovering less rapidly than many would hope. With interest rates at their zero bound, the Fed is out of ammunition. Continued fiscal stimulus remains the best hope for a full recovery.

Despite that reality, proponents of fiscal austerity, who dozed through the deficits of the Trump era, are suddenly warning against continued fiscal stimulus. In a new paper, Niskanen Center Senior Fellow Ed Dolan explains why their arguments are wrong.

The federal government is not headed for default. Sovereign governments that issue their own currency are immune from insolvency. The only way the federal government could be forced into default on it debt would be if Congressional conservatives reinstated the debt ceiling, and failed to raise it. That would be the fiscal equivalent of shooting a hole in the bottom of the lifeboat we are all riding in.

The debt is not growing out of control. Yes, the federal debt has risen over the past year as a share of GDP, but that is no cause for alarm. The simple mathematics of debts and deficits, combined with twenty-first century demographic realities, ensure that there will be no exploding debt. 

Shrinking the government is not the path to freedom and prosperity. What we need is not smaller government, but better government. As Herbert Stein wrote half a century ago, the federal government has gone too long without a long-run budget policy—without a policy for the size of deficits and for the rate of growth of the public debt over a period of years. For too long, we have been making decisions about the size of the deficit that are entirely inconsistent with our professed long-run goals, with the explanation or hope that something will happen or be done before the long-run arises. Dolan lays out three simple rules that can put fiscal policy back on track for recovery and beyond.

Read the full policy essay here.