Hoover Institution (Stanford, CA) — The Hoover Institution's Fiscal Policy Initiative hosted a conference on the Economic Consequences of US Fiscal Policy Trends on March 10 and 11, 2025. The conference featured extensive discussions on America's mounting fiscal challenges, with experts examining budget projections, debt sustainability, international responses to debt crises, the effectiveness of government spending, the effects of tax policy, and the interaction between fiscal and monetary policies.
The conference revealed deep concerns about the US government's current fiscal trajectory. With federal net debt exceeding 100 percent of GDP and continuing to rise, participants emphasized that rising federal borrowing endangers future economic growth and opportunity.
Moderated by Hoover senior fellow and chair of the Fiscal Policy Initiative Joshua D. Rauh, the conference laid the groundwork for a path to a sustainable fiscal policy that promotes prosperity.
Session 1: Current Budget Projections and Alternative Forecasts
The first session examined the current US fiscal outlook. Phillip Swagel, the director of the Congressional Budget Office (CBO), discussed CBO’s long-term budget projections, showing rising deficits that are unprecedented during peacetime conditions. Marc Goldwein from the Committee for a Responsible Federal Budget noted that debt-to-GDP ratios are approaching record levels without the excuses of earlier debt peaks (like World War II), with interest payments now exceeding spending on children and becoming the second-largest government program. Mike Franc, policy director of the House Budget Committee, provided an overview of the House budget plan and the challenges facing today’s Congress.
Session 2: International Responses to Debt Crises
The second session explored international debt crisis experiences and potential lessons for the United States. Hoover senior fellow Peter Blair Henry presented Jamaica's exceptional case of reducing its debt-to-GDP ratio from 144 percent to 72 percent through sustained primary surpluses, aided by strong political consensus and economic oversight committees that included both public- and private-sector representatives.
MIT professor Emil Verner examined characteristics of sovereign debt crises across countries, highlighting that successful debt reductions typically require sustained spending cuts rather than relying solely on economic growth or lower interest rates.
Alejandro Werner of the Georgetown Americas Institute discussed Latin American experiences, noting that successful fiscal consolidations usually have come after paradigm shifts in economic thinking and are more effective when embedded within broader economic reforms and political consensus rather than relying on isolated institutional changes.
Session 3: Effects of Government Spending
The third session explored the impact of federal spending expansion and the efficiency of government programs. Hoover senior fellow John F. Cogan traced the root of fiscal problems to the 1930s expansion of federal spending into areas traditionally managed by states, showing how the expansion, alongside entitlements, has driven deficits. Hoover senior fellow Valerie Ramey presented research challenging the effectiveness of Keynesian stimulus, finding that temporary transfers and infrastructure spending have much smaller economic effects than commonly believed. Rauh highlighted the growing burden of interest payments on the federal budget, cautioning that even small, unexpected increases in future interest rates could lead to interest payments consuming nearly all federal income tax revenue.
Session 4: The Economic Effects of Current and Future Tax Policy
The fourth session analyzed tax policy impacts, with Alan Auerbach of the University of California–Berkeley presenting on the large disconnect between current law (which assumes tax cuts will expire) and current policy expectations (which assumes extensions), noting that extending the Tax Cuts and Jobs Act (TCJA) of 2017 would cost approximately $4.5 trillion over 10 years. Stanford professor and Hoover research fellow Rebecca Lester highlighted concerns about diminishing US innovation incentives, particularly focusing on how recent R&D tax treatment changes have reduced research incentives when compared to incentives among international competitors like China. The American Enterprise Institute’s Kyle Pomerleau analyzed tax policy growth effects, noting that while the 2017 business tax cuts boosted the economy, extending the TCJA’s personal tax provisions would have less effect on growth.
Session 5: Effects of Fiscal Policy on Labor Markets, Income Distributions, and Poverty
The fifth session examined poverty measurement and fiscal policy impacts on economic mobility. Richard Burkhauser of Cornell University challenged conventional poverty measures, showing that when properly measured using absolute standards and comprehensive income, poverty has declined dramatically since the 1960s, with only about 2–3 percent of Americans remaining in poverty by 2019. Bruce Meyer of the University of Chicago presented research demonstrating that administrative data combined with survey data reveals even greater poverty reduction than official statistics suggest, while consumption data shows little increase in inequality across most of the distribution.
Session 6: Fiscal Policy and Monetary Policy
The fiscal policy and monetary policy session explored the relationship between fiscal and monetary policies. Hoover senior fellow John B. Taylor presented the basics of the federal budget process and countercyclical fiscal policy, showing how stimulus packages work in theory and reviewing recent examples. Hoover senior fellow John H. Cochrane argued that the inflation following COVID-19 resulted from combining massive fiscal stimulus with monetary accommodation, comparable to war finance in US history, and warned that future crises could trigger dangerous inflation if fiscal sustainability isn't addressed. Hoover distinguished visiting fellow Kevin Warsh criticized the Federal Reserve for blurring the lines between monetary and fiscal policy through quantitative easing and other unconventional policies, arguing that central banks have wandered beyond their proper authority while failing to take responsibility for inflation.
Session 7: Effects of Federal Borrowing on Interest Rates and Treasury Markets
The session examined how federal debt affects interest rates, with Stanford professor Hanno Lustig demonstrating that Treasury yields are affected by CBO budget scores that project increased deficits. Lustig presented evidence that an increase in the present value of deficits over the next 10 years raises 10-year Treasury yields and showed that US Treasuries no longer enjoy the significant convenience yield they once did. Jaeger Nelson, chief of the Fiscal Studies Unit within the Macroeconomic Analysis Division at CBO, followed with complementary analysis showing how rising deficits crowd out private investment. CBO estimates that a 1 percentage point increase in debt-to-GDP ratio increases 10-year Treasury note rates by about 2 basis points, creating a cumulative impact on US economic growth prospects as debt continues to rise.
Session 8: Economic Growth and Federal Borrowing
Hoover senior fellow Michael J. Boskin presented a comprehensive review of the literature on debt and growth, emphasizing the negative impact of high debt-to-GDP ratios on long-term economic growth and the importance of considering spending composition. He stressed that countercyclical fiscal policy multipliers are generally small and that successful fiscal consolidations have typically focused on spending restraint rather than on tax increases. Hoover research fellow Paul Schmelzing followed with an analysis of interest rates (r) and growth rates (g) over five centuries, presenting evidence that the post-1930s period shows a significant reversal of historical trends, with r-minus-g trending upward rather than downward for the first time in centuries. He linked this structural break to the expansion of transfers programs, suggesting that the recent low r-minus-g environment may not be as permanent as many economists have assumed.
Session 9: Worst-Case Scenarios and Likely Policy Responses
The final session explored strategies for managing future fiscal crises. Participants discussed developing a “crisis playbook” to guide policymakers, with suggested approaches including greater use of long-term debt to reduce rollover risk, abandonment of generic fiscal stimulus during crises, and maintaining Federal Reserve independence to ensure appropriate monetary responses. Several participants highlighted the importance of improving data systems for unemployment insurance and other social programs to enable more targeted interventions. Participants warned about the possibility of a combined national security and financial crisis producing especially severe consequences, noting that unprecedented challenges might require unconventional responses.
