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Well, the reconciliation bill passed
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through the Senate and the House, and it
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helps extend the 2017 Tax Cuts and Jobs
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Act, but there are concerns about what
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the bill might do to the national debt,
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how it will impact jobs, various other
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issues, and the impact it will have on
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the labor force. Pleasure to be joined
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by Kent Smeters, who's faculty director
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of the Pen Wharton budget model, as well
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as a professor of business, economics,
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and public policy. The Pen Wharton
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budget model, by the way, has done a
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full review of the impacts and Kent
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joins us to go over them. Kent, great to
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talk to you again. How are you, sir?
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Be back. Thanks for having me again.
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Thank you. All right, so let's dig into
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the numbers right now and what we see
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passed and signed by the president on
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July 4th. What are the impacts the Pen
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Wharton budget model expects to occur?
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So, as you pointed out,
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debt over time, that is higher deficits
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uh every single year over time. And so,
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we're expecting about 3.2 trillion in
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additional debt over the next 10 years.
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And if you do this on what's called a
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dynamic basis, that is you take into
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account economic feedback
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that it actually goes up, not down.
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In particular, the 3.2 trillion goes up
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to 3.6
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uh trillion. And um the main reason
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there is some dynamics associated with
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who's paying taxes as well as how some
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people can re-qualify for certain
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benefits like Medicaid and so forth. And
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so we uh show that uh really the impact
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on the economy is basically zero um or
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over the first 10 years technically a
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slight negative by about a third of 1%
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of GDP over 30 years a bigger negative
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impact roughly about four and a half% of
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GDP over 30 years that this will uh
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reduce the economy by um the main
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drivers there are just continued uh
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increases in debt even beyond the
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10-year budget window.
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Uh you mentioned about the healthc care
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potential issues. Uh a lot of
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conversation about that. Also
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conversation about SNAP things like SNAP
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benefits. Uh give us a sense of what
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kind of impact we're going to see there.
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Right. Um, so our numbers are probably
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not quite as pessimistic as CBOS's in
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terms of how many people are going to
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lose healthcare, but um, they're, you
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know, around 11 12 million. We're a bit
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less than that, but still um, there will
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be some people who will have a harder
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time qualifying for Medicaid. Um, this
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is in large part undoing um, some of the
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expansions that happened under uh, Biden
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as well as Obama on the Medicaid side.
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um uh in terms of the impact on say by
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income group. So the Senate what they
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purposely did is they delayed some of
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the hit until after the midterm
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election. We're basically saying the
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bottom 20%
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tile right now in uh the year 2027 are
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basically going to have very little
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impact, but they will still be net
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losers of about $165 per household. Um
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uh but by 2030,
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the bill would basically um reduce
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resources for the bottom 40% of
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households.
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Uh it it would um if you take in account
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both taxes saved as well as transfers
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reduced that is how much less they get
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and principally in the form of Medicaid
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and SNAP the bottom 40% will lose
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roughly about $1,000 a year and that's
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mostly uh from the fact that some of the
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tax benefits that they otherwise would
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have enjoyed be before 2030 such as not
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no tax on tips And overtime that pretty
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much wears off by that point.
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And the bigger loss really just comes
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from the loss of Medicaid and SNAP. So
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roughly about $1,000 per uh household in
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the lower 40% of the income
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distribution.
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You mentioned the taxes part of the
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story and a lot of discussion about uh
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you know the extension of the tax cut
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and jobs act and the potential benefits
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and that's talked a lot about by the
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administration. But there are also a lot
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of people out there who are saying that
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while there may be some benefit, it may
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not be as strong a benefit as what maybe
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people would like to see.
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Sure. I mean, the administration really
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um I don't know how to say this more
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politely, but they just kind of uh
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greatly embellished the the economic
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benefits of uh this particular bill. And
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in particular,
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um, they said went as far as to say not
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only would the economic expansion be so
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big that the tax bases would grow so
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large that they um, it would the bill
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would actually pay for itself. So it
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would grow the economy so much that the
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bill would actually pay for itself. it
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would grow so much even more than that
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that it would then bring down the debt
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GDP ratio which without this bill is
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already increasing and so even before
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this became current law um the current
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law be you know a minute before this was
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signed already had an exploding debt the
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GDP ratio over time so they they're
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saying this is going to create so much
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revenue it will even turn that around so
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it's not going to just pay for itself
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up, but it's going to like doubly pay
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for itself. I mean, it was just over the
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top and there's really no rational
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economic model that can justify that
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type of conclusion. So, like you said,
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um most groups, including us, you know,
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concluded that the economic impacts are
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pretty modest. You could go plus or
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negative in the first 10 years, but it's
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roughly around zero. And part of the
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conversation also is the uh the money
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the revenues that would be coming in
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from tariffs but that has you know a a
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small impact on what the overall numbers
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would be for the government over the
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next several years as well. Correct.
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Right. And for this particular bill they
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can't count that money anyway because um
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that money would have been attributed to
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what's called executive action or
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executive order. And so for the purpose
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of this bill would be ex excluded. It's
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already part of what we call the
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baseline. Um but who knows where that
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money is gonna come down to. I mean if
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we took the April 2nd you know uh a
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rates seriously um and that's you know
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almost created a meltdown of financial
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markets. Um that would have raised
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potentially four to5 trillion dollars
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over 10 years. um but at the same time
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really crush the economy. Um but if we
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look at more modest rates of you know to
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that they're potentially looking at
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we're maybe talking about a couple
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trillion dollars over 10 years. But the
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problem with that is that even if you
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use all that money to try to pay down
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debt that is to reduce the budgetary
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impact of this bill you're also really
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uh playing with capital markets. you're
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narrowing the base of capital markets
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over time by which you are trying to
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sell all this debt into. And so on one
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hand you get some revenue um so that you
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can use it to reduce reduce debt. But we
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really need a really open market you
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know worldwide capital market to be
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demanding our debt. And to the extent
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that a reduction in trade reduces
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um the demand for our debt um uh that's
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going to uh be much more negative than
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any positive income that comes from the
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tariff revenue.
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And longer term, as you said, there's an
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impact to the ne to the downside over
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the next several decades with this bill
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in place. Um and that would obviously
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mean there's a negative impact on GDP as
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well,
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right? Um so even putting the tariffs uh
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issues aside
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we're projecting that indeed this bill
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would now law it would reduce GDP by
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over 4 and a.5% in about 30 years. So it
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really does add a fair amount to debt
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because it's not only that it's bigger
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than the House version that was you know
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previously passed on the House side.
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What the Senate really did is they said
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we're going to make a lot of these
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provisions permanent,
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you know, for what's called bird rule
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compliance. We'll pretend like anything
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that's already in the tax discussion
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jobs act will not cost us anything
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because after and so there's a little
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bit of an accounting game going on. But
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in terms of actual debt that has to be
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sold by the US Treasury, that's going to
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remain the same. And that's just it's
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just more things that we have to finance
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really using debt. So there are options
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out there to deal with this, you know,
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growing debt problem. It's just that
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they're not being discussed right now in
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DC.
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Yeah.
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Yep. All right, Kent, great to talk to
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you. Thanks very much for your time,
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sir.
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Pleasure.
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Thank you. Ken Smeters, faculty director
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of the Pen Wharton budget model and
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professor of business, economics, and
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public policy at the Wharton School.
