A fiscal plan for the moment

Oct 26, 2022

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The longer and higher Federal Reserve officials raise interest rates to curb inflation, the greater the risk that they will go too far, causing a recession or breaking something in financial markets.

To avoid a mistake, Congress and the White House must step up and do more to help the central bank, policy analysts at the Committee for a Responsible Federal Budget say.

Today, in a new paper shared with Morning Money, they lay out a blueprint for fiscal policymakers to reduce budget deficits, outlining policies they say will also help boost the Fed's inflation-fighting power and hopefully reduce the risk of a recession.

"We need a fiscal reset," Maya MacGuineas, the group's president, told MM. Inflation remains near a four-decade high, and federal debt held by the public topped $24 trillion at the end of the fiscal year — up from about $17 trillion in early 2020. Meanwhile, interest costs on the debt are soaring, as your MM host wrote this week .

"And yet what we've seen is — basically with one exception, the Inflation Reduction Act — nonstop borrowing," MacGuineas said.

The framework shows what policy changes are necessary to fight both the inflation and debt challenges, she said. While fiscal blueprints are typically meant to be phased in gradually, this one includes faster-acting changes aimed at cooling price pressures by reducing deficits by $350 billion in the first calendar year.

The goal: Stabilize the debt at its current level — about 97.5 percent of gross domestic product — within a decade, a change that would require roughly $7 trillion in savings.

Among the ideas:

Restoring discretionary spending caps similar to those that were in place in the 1990s and during the previous decade;
Reducing Medicare provider payments and lowering prescription drug costs;
Imposing a broad "deficit reduction" surtax on individual and corporate income;
Increasing the Social Security retirement age and revamping the payroll tax to raise more revenue for the retirement program;
And changing the way inflation is measured government-wide.

CRFB said the plan could reduce inflation by as much as a full percentage point in the near term.
"We're not saying, 'Congress, here's the answer, adopt this,'" she said. "We're saying, 'It's time to start having a realistic discussion about what needs to happen.'"

The nonpartisan group took heat from Republicans this summer when they praised the Inflation Reduction Act for its deficit-reducing policies, which they said would help curb inflation. But they've lately been a thorn in the White House's side, blasting President Joe Biden's student debt forgiveness plan and accusing him of taking undeserved credit for falling deficits this year.

MacGuineas said they're willing to work with anyone who's interested in pursuing the ideas to help design a policy proposal.

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Driving the Day

Trade data released at 8:30 a.m. …New home sales data released at 10 a.m.

DEMS RAMP UP PRESSURE ON POWELL — Our Victoria Guida: "Senate Banking Chair Sherrod Brown on Tuesday called on Federal Reserve Chair Jerome Powell not to lose sight of the central bank's responsibility to foster a strong labor market as it wages a furious battle against surging prices."

MM sidebar: The letter follows our story this month about how most Democrats have been reluctant to criticize Powell over rate hikes and comes just days before the Fed's next policy meeting, and two weeks before the mid-term elections. But Brown is hardly bringing fire and brimstone (Sen. Elizabeth Warren has called Powell's rhetoric "dangerous" and his rate hikes "extreme"). The letter may turn up the temperature ever so slightly, but we have a long way to go before the Fed starts taking real political heat.

SCRAPERS — Our Katy O'Donnell: "CFPB Director Rohit Chopra said Tuesday that the agency will ask for public input this week on a long-awaited data-sharing rule, with an eye toward issuing a draft regulation after the first quarter and finalizing in 2024."

LETTUCE INTRODUCE THE NEW PM — Our Emilio Casalicchio: "Rishi Sunak has promised to 'fix' the economic mess wrought by his predecessor Liz Truss after being appointed the new U.K. prime minister."

CRYPTO POLL — Former Sen. Cory Gardner (R-Colo.) is touting a new Crypto Council for Innovation poll as a case for why digital assets could be a swing-state issue for a small segment of voters. Pro-crypto candidates are going to get those votes and, "in an election cycle where one or two percent of the vote may matter, this will win elections," said Gardner, who's now the chief strategist of political affairs for the Andreessen Horowitz and Coinbase-backed industry group.

That reading of the Pioneer Polling and Tarrance Group-led survey elides some glaring reputational risks the industry's facing going into the midterms. Just 33 percent of likely voters view crypto favorably, compared to 40 percent who view it unfavorably — a worse score than big banks. More than half said politicians "should be focused on other issues and ignore cryptocurrencies. A majority of crypto investors said candidates' positions on the asset class would only be "a minor factor" in how they vote.

Gardner , who previously led the National Republican Senatorial Committee, said in an interview that his biggest takeaway was that 45 percent of likely voters "want this to be treated as a serious part of the economy that will exist over the long term. That is not something that is going away."

FRANK LUCAS EYES RETURN TO AG — Rep. Frank Lucas plans to return to the House Agriculture Committee if the GOP gains a majority after next month's election, the Oklahoma Republican tells our Zach Warmbrodt. Lucas, who chaired the agriculture panel when it drafted the 2014 farm bill, has been on leave from the committee since 2019 when he stepped away because Republicans lost seats in the minority.

If Republicans retake the House, Lucas also expects to be tapped as chair of the Science, Space and Technology Committee and to remain a member of Financial Services, where he is the most-senior GOP member.

JOIN WOMEN RULE THURSDAY FOR A TALK WITH DEPARTING MEMBERS OF CONGRESS: A historic wave of retirements is hitting Congress, including several prominent Democratic women such as Illinois Rep. Cheri Bustos, House Democrats' former campaign chief. What is driving their departures? Join POLITICO on Oct. 27 for "The Exit Interview," a virtual event that will feature a conversation with departing members where they'll explain why they decided to leave office and what challenges face their parties ahead. REGISTER HERE .

Regulatory Corner

TIMING IS EVERYTHING — The Competitive Enterprise Institute estimates that federal regulations have sapped as much $2 trillion from the economy, according to a new report from the free market advocacy group. The report lobs several attacks on Biden-era regulation, claiming that the insertion of "controversial, unrelated progressive causes into the regulatory process" has reversed former President Donald Trump's business-friendly policies.

Economy

TOUGH SELL — FT's James Politi and Lauren Fedor: "[M]onths of unrelentingly high inflation — with consumer prices still rising at an annual rate of 8.2 per cent in September — have made 'Bidenomics' an almost impossible sell on the campaign trail ."

WALL STREET PROFIT PLUNGE — Our Joe Spector: "A report Tuesday from New York State Comptroller Tom DiNapoli found that Wall Street profits plummeted 56 percent in the first six months of the year compared to the same period last year — down from $31 billion to $13.5 billion."

HEALTH INSURANCE INFLATION POISED TO DROP — WSJ's Gwynn Guilford: "Health insurance has put upward pressure on the main measure of inflation, but is now swinging into reverse . This swing will act as a much-needed, albeit small, drag on inflation currently running at four-decade highs, economists say."

Crypto

SAME AS IT EVER WAS — From Sam: "Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) are ringing alarms over the number of former federal officials who have taken top jobs with crypto industry startups."

Fly Around

Jeremy Hunt on Tuesday was reappointed as chancellor of the exchequer , as new U.K. prime minister Rishi Sunak "gave him the key job of setting out a plan to put Britain's public finances back in order." — FT's George Parker and Delphine Strauss

Russian oligarchs are obscuring their wealth through a web of shell companies and middlemen managed by services firm Bridgewaters, based in the Isle of Man, a wind-swept self-governing island in the Irish Sea, making it hard for authorities to track assets and enforce sanctions. — WSJ's Rob Barry

Elon Musk pledged Monday to close the acquisition of Twitter Inc. by Friday in a video conference call with bankers helping fund the deal, according to people with knowledge of the matter. — Bloomberg

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