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A Fiscal Plan Assembled by the Modelers

By Julia Cataneo

A Fiscal Plan Assembled by the Modelers

The analysts running the Penn Wharton Budget Model (PWBM) fill an important role in national debates by providing credible budgetary and economic estimates of tax, health, student loan, and other federal program reforms. They typically look at ideas advanced by participants in the political process, such as elected officials or candidates, but they occasionally veer from that formula as circumstances warrant.

A recent publication is an example of looking outside of the political process. In fact, the assessed plan was developed by the PWBM team itself with the goal of demonstrating the compatibility of deficit reduction and improved economic results for less fortunate Americans.

The PWBM team started with a series of principles that it contends would be supported by most public finance economists, including a renewed budgetary focus on genuine public goods at the expense of lower priority initiatives, a commitment to progressivity in both taxation and major spending programs, correction of market failures, and taxation of negative externalities.

These and other guiding concepts led to major reform recommendations in the following policy categories:

The budgetary effects of the plan, after taking into account the improved economic outlook, would be substantial but perhaps not sufficient. The Congressional Budget Office estimates debt held by the public will grow from 99 percent of GDP in 2024 to 166 percent in 2054 under current law. The PWBM analysts estimate their plan would lower cumulative borrowing by 38 percent in 2054, which suggests a total of just over 100 percent of GDP. That would be near the highest level recorded in the nation's history.

There would be less concern about the potential estimated economic benefits if they were, in fact, realized. The model estimates a 21 percent bump in GDP in 2054, driven by a higher capital stock (up 31 percent) and an expansion of the supply of labor (hours worked would rise 13.5 percent). Workers would benefit from these changes and earn wages that are 6.8 percent above current law projections.

The economic benefits would be particularly consequential for future low-income workers. PWBM estimates the present value benefits to be over $100,000 for persons born this year who will earn wages in the bottom quintile of workers.

PWBM does not endorse this plan but says it offers it to better inform the policy conversation. Its estimates bolster the case for a pro-growth tax reform and focused spending on the less well-off.

Not all analysts will agree with how the plan is assessed. The health care changes are likely to be particularly controversial, and their estimated beneficial effects would be contested. The PWBM team says Medicaid spending and private insurance premiums would fall because of the HSA requirement and mandatory private coverage for immigrants. Both policies will be seen as unrealistic by critics who question whether the market can be tamed without strict price regulations.

Still, the PWBM publication is a welcome counter to the pervasive pessimism that surrounds today's budget debate. A bold offering that simultaneously advances tax, entitlement, and immigration reforms really could deliver substantial fiscal and economic returns. The ball is back on the policymakers' side of the court.

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