A Conversation with Jeff Holland

Jeff Holland has spent much of his career thinking about the federal budget. He worked at the Congressional Budget Office (CBO) for 26 years, including 18 years as Chief of the Projections Unit, helping to produce CBO’s baseline projections for the deficit and national debt. He then spent almost eight years as Vice President of Research at the Peter G. Peterson Foundation.

After being introduced by his former boss and a former Deputy Director of CBO, we asked Jeff a fairly specific question: could the aspirations within the Grand Bargain be translated into policies that would actually stabilize the growing national debt?

In short, yes! Jeff created a detailed scoring exercise, identifying policies consistent with the Grand Bargain and using existing estimates from CBO, the Joint Committee on Taxation, government agencies and other organizations to model their potential fiscal impact.

We sat down with him to talk about what he found, why fiscal prudence and the national debt matters, and what his analysis tells us about the importance of approaching the problem as a package. America has debated the national debt for decades. From your perspective, where are we today, and why should people care?

The U.S. has accumulated debt over time, but there have also been periods when people became concerned about it and Congress and the President took action to reduce it. Here we’re talking about debt relative to the size of the economy, the debt-to-GDP ratio. As the economy grows, it can support more debt, but you want to keep that relationship in check.

By the time we hit the Great Recession and financial crisis in 2008, the debt-to-GDP ratio was only around 35%, significantly lower than the roughly 100% of GDP where we stand today. The Great Recession and then the pandemic a little over a decade later required a lot of additional borrowing, which significantly increased the amount of debt outstanding.

The concern is that this level of debt can weigh on the economy by crowding out other investments, pushing up interest rates and potentially contributing to inflation. Those things can affect how our economy grows in the future.

Debt at around 100% of GDP is almost unheard of. Before the pandemic, we had only been around that level during and immediately after World War II, after which the debt-to-GDP ratio came down significantly. The problem is that some of the factors that helped reduce it then, economic growth, population growth and increases in productivity, probably aren’t in the cards at anything like the same scale today.

On top of that, we’ve created significant commitments going forward. We know that spending on Social Security and Medicare has been rising as the population ages; both programs have been drawing down trust fund reserves they accumulated in earlier decades. And because the federal debt is already so large, we also have significant interest payments. So we’re very unlikely to be able to simply grow our way out of the situation we’re in.

We don’t know where the tipping point is. But not knowing where it is means there’s an argument for taking out some insurance against that risk, and that insurance would be keeping the debt-to-GDP ratio in better check.

How does that affect people in their everyday lives? Why should someone care about this in terms of their own money and their future?

If you have a loan of any sort, if you have a mortgage or if you want to buy a house, you probably want mortgage rates that are lower than they are today.

If you’re concerned that all this government money in the economy is creating excess demand, you might also be concerned about inflation, which we’ve been experiencing for the past few years.

There have also been estimates that the growing amount of debt reduces income over time. So if you’re concerned about your family’s income and your ability to grow that income over time, you also have reason to be concerned about the size of the debt and its trajectory.

One of the things you’ve done for the Grand Bargain is score the package. For people unfamiliar with the term, what does “scoring” actually mean, and what were you trying to establish?

When we say scoring, we mean assigning a cost or a saving to a policy.

The Grand Bargain is slightly different because, in a lot of cases, it doesn’t propose a specific policy. Instead, it proposes guidelines, aspirations or desired outcomes. So the question put to me was: are there a set of policies that meet the wording and intent of the Grand Bargain that would actually stabilize the debt-to-GDP ratio going forward?

What I did was look for scores or evaluations that had already been produced by organizations such as the Congressional Budget Office, the Joint Committee on Taxation, think tanks and executive branch agencies. I was looking for credible evaluations of policies that would meet the wording or intent of the Grand Bargain.

In some cases, the aspirations call for increased spending, for example on community health centers. In other cases, they point towards reducing spending, including in certain areas of healthcare, or increased taxes. So I identified policies that met that language and then looked for existing evaluations that would allow me to quantify their fiscal impact.

If we’re going to say publicly that these ideas, when put together, have the potential to reduce the debt, how important is it to be able to demonstrate that?

I think the question that was asked was a really important one: if you took the Grand Bargain aspirations and translated them into actual policies, would they do what we want them to do in terms of stabilizing the debt-to-GDP ratio?

And we found that they could.

It’s important to say that the scoring is illustrative. Because the Grand Bargain doesn’t prescribe specific policies in every case, you could interpret some of the aspirations differently or scale policies differently. And through the legislative process, you would probably end up with some changes to what these illustrative policies imply.

But the fundamental question was: could the Grand Bargain actually do what it says it is trying to do [Improve the opportunities to live a thriving life AND keep the federal deficit in check]? And the answer is yes, given at least some combination of policies consistent with those aspirations.

Having done that work, what did the scoring tell you about the package as a whole?

Given this illustrative set of policies, we found that within a decade the Grand Bargain could stabilise the debt-to-GDP ratio and set it on a downward path.

As I said, the debt-to-GDP ratio is now around 100%, so the debt is about the size of our economy. There’s no known tipping point at which that ratio suddenly becomes unsustainable; the concern is the trajectory, particularly as interest payments and future commitments continue to grow. Under the illustrative package, the ratio wouldn’t go too much above 100% in the very near term and would then begin to drop. By the end of the decade, it would be below 100% of GDP.

What were the biggest drivers behind that result?

There were a number of policies that contributed to the result. On the spending side, some of the biggest effects on reducing the deficit came from reducing spending in Medicare, including changes to some of the benchmarks in the Medicare Advantage program that are used to determine payments.

On the revenue side, one of the larger examples is imposing a carbon tax. Right now there is no federal carbon tax. The Grand Bargain proposes a carbon tax of around $51 a ton, and there is an existing estimate of what a $50-per-ton carbon tax would raise. We used the numbers CBO had compiled for that policy in the Grand Bargain scoring.

One of the central ideas behind the Grand Bargain is that the package matters. It isn’t about taking any single reform in isolation. Did your analysis reinforce that?

We evaluated the Grand Bargain as a whole, so we were looking at the effect of the entire set of policies. Some would increase spending, although those increases were relatively small. Others would reduce spending or increase taxes, and a couple of those, like the examples I just gave, have a fairly large effect.

Our annual deficit right now is over 6% of GDP. With such a large gap between spending and revenues, you can’t do it all on one side of the budget.

I think the Grand Bargain illustrates that you need to look at both sides. You need to reduce spending where you can, and you need to increase revenues where you can.

Taken together as a package, there will always be something that somebody doesn’t like. But I think what the Grand Bargain illustrates is that people recognize there are trade-offs. To get to where they want to go, they have to accept those trade-offs and accept that they won’t get 100% of their favorite policies, but hopefully they get a large proportion of them. And that the economy overall will be better off with a healthier fiscal trajectory.

What does this all tell us?

There is a limit to what this analysis can tell us. The Grand Bargain is not a piece of legislation, and Jeff’s scoring is not a prediction of exactly what Congress would enact or what the final fiscal impact would be. There are different ways its aspirations could be translated into policy, which is precisely why Jeff describes the policies used in his analysis as illustrative.

What the work does allow us to ask is whether there is a credible fiscal version of the package at all. Can the aspirations we have tested with Americans be translated into policies that, taken together, stabilize the debt relative to the economy? Jeff’s analysis suggests they can.

It also helps explain why looking at the Grand Bargain as a package matters. Some of the aspirations cost money. Others reduce spending or raise revenue. Taken individually, it is easy to support the things we want and reject the things we don’t. The fiscal consequences look very different when those choices are added together.

That gives us something else we can now explore through the Grand Bargain Launchpad. Because Jeff’s model maps the aspirations to illustrative policies and their fiscal effects, we can begin to show people what their own choices mean for the debt trajectory: what happens if they take only the aspirations they favor, and what happens when they consider those choices as part of the whole package.

That gets closer to the question at the centre of the Grand Bargain: not whether everyone agrees with every individual proposal, but what trade-offs Americans are prepared to accept to get more of what they want.