I worry that people are looking for quick fixes to our current fiscal problems, when in fact we will need to take painful steps in order to get fiscal policy back to a sustainable track. In this post, I’ll look at three recent examples:
Here is Arthur Sants:
The administration’s “crypto czar” David Sacks told CNN, that it “could create trillions of dollars of demand for our Treasuries practically overnight”.
Sacks’ prediction is almost certainly wrong. In fact, it is questionable whether it would create any net increase in demand. Even if people did buy stablecoins at this scale, they would have to take money out of the banks to do this. The banks would then need to sell Treasuries to finance these withdrawals. On top of this, customers withdrawing deposits from banks would cause a decrease in the money supply as banks would have fewer assets to lend against. Remember, stablecoin needs to be backed one-to-one. Whereas banks can lend out a lot more money than they hold in deposits.
Senator Ted Cruz has argued that the payment of interest on bank reserves represents a huge cost to the Treasury. David Beckworth is skeptical:
Senator Cruz’s proposal would end IORB. But would it also end payments to the banking industry from the federal government? Not really. For a given level of liquidity demand, banks would simply shift from holding reserve balances to holding Treasury bills (T-bills) if reserves no longer earned interest. The payments from the federal government to banks would continue, just in the form of interest on T-bills rather than interest on reserves.
I have never been a fan of paying interest on bank reserves. But ending this policy would not provide substantial revenue to the federal government,
The recently passed “Big Beautiful Bill” contains a number of provisions that reduce taxes and government spending. In some cases, the tax increases are scheduled to phase out in a few years, whereas the spending cuts are not scheduled to begin until after the next midterm elections. But how likely is it that a future Congress will eliminate popular tax cuts? Recall that many of the tax cuts passed in 2017 were originally scheduled to end this year, but Congress opted to extend them indefinitely. If the Democrats take the House in 2026, will they want to see the scheduled Medicaid cuts take effect?
PS. This is from AI Overview:
Delayed Rules: The House bill delayed the implementation of two Biden administration rules aimed at simplifying Medicaid enrollment and maintenance until 2035, according to the Kaiser Family Foundation. These rules aimed to reduce barriers to enrollment in Medicare Savings Programs (MSPs) and align MSP applications with Medicare’s Part D Low-Income Subsidy (LIS).
Delayed Implementation of Work Requirements: The Senate bill includes a provision that allows states experiencing implementation challenges to potentially delay Medicaid work requirements until December 31, 2028, at the discretion of the HHS Secretary.
Provider Tax Cuts Delayed: The Senate also delayed implementation of provider tax cuts until 2028. These cuts had been a point of concern for the health care industry.
Waiver Expirations: While some states currently have Medicaid waivers for continuous eligibility, CMS will not renew approval for expenditure authority, and the earliest expiration date is in December 2025.
Overall Impact: These delays offer some breathing room for hospitals and states, allowing for potential adjustments to the law and further lobbying efforts. However, the cuts and changes still pose significant challenges for those relying on Medicaid.
And, if we want to spitball here, tariffs could even lay the groundwork politically and psychologically for a future transition to an actual big-boy VAT. Citizens and businesses might recognize that consumption taxation you can see is better than consumption taxation that you can’t. A future administration could leverage dissatisfaction with tariffs to propose replacing them with a more economically efficient and lower-rate VAT.Politically, the VAT would then become not a “new” tax but rather a tax cut (in rate terms only) eliminating import tariffs.
As Churchill once said:
“Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.”
