This week, the Federal Open Market Committee (FOMC), the Federal Reserve’s monetary policy decision-making body, voted unanimously to keep the federal funds rate at 3.5 percent to 3.75 percent. This decision, the first under new Chair Kevin Warsh, was in line with expectations as inflation is currently around four percent, well above the Fed’s two percent target, and unemployment is relatively low at 4.3 percent.

The FOMC also released its periodic Summary of Economic Projections (SEP) of participants’ projections for real GDP, unemployment, inflation, and the federal funds rate for this year and beyond. Notably, the median federal funds rate projection for 2026 was 3.8 percent, up from 3.4 percent in March. This change implies that the FOMC is expecting roughly one quarter percentage point (i.e., one typical rate change) increase before the end of the year, while it was expecting a quarter percentage point decrease in March. Although the median projection showed one increase, the “dot plot,” which shows all participants’ individual rate projections, showed six policymakers expecting multiple hikes.

The Federal Reserve has a congressional mandate to promote price stability and full employment. However, monetary policy changes affect Treasury debt service and our fiscal situation. The rates on T-bills, short-term Treasury bonds, closely track the federal funds rate. Apollo’s chief economist, Torsten Slok, recently observed that T-bills currently account for nearly 85 percent of gross Treasury issuance. Although the decision to keep the federal funds rate steady was no surprise, interest rates — and therefore debt-service costs — are now expected to be somewhat higher in the future.

As my colleagues and I observed in February, net interest outlays have grown as a share of the budget deficit in recent years and are projected to grow even larger (see Figure 1).

Figure 1. Total Deficits, Net Outlays for Interest, Primary Deficits 1976-2036

If the Fed begins to increase the federal funds rate, this trend will worsen, especially as the large stock of debt issued at lower rates continues to mature and roll over at higher yields. (One major reason President Trump has argued for the Fed to lower its target interest rate is to lower government borrowing costs.)

Theoretically, by increasing relatively more longer-term bonds, the Treasury could increase the share of debt it can inflate away because those bonds would not have to be refinanced so quickly. However, this strategy also carries risk: markets pricing in higher future inflation would demand higher yields on longer-term bonds at issuance, which could worsen the very debt-service dynamics described above.

This week’s Fed decision underscores the relationship between monetary policy and the government’s borrowing costs. Although the decision was not a big surprise, it is a warning that if inflation remains elevated and further rate hikes are warranted, the federal budget will face increasing pressure.

While Members of Congress set the terms of debate on Capitol Hill, the Fiscal Lab helps Members’ office understand the budgetary and economic issues the Members debate. Additionally, by offering tools and analysis to Members of Congress and their staff, the Fiscal Lab helps improve the terms of engagement—how Members, their Offices, and the two congressional entities responsible for scoring, the Congressional Budget Office, and the Joint Committee on Taxation (JCT), speak with one another. Normally, our work is publicly invisible, but last week, Fiscal Lab’s contributions were noticed by the media.

A Possible Reconciliation 3.0

As reported by Politico, the influential Republican Study Committee hosted a meeting with several senior House lawmakers, CBO Director Phillip Swagel, JCT Chief of Staff Tom Barthold, and several outside groups, including the Fiscal Lab.

In recent years, dialogue between Members of Congress and CBO and JCT have often been less productive due to the official scoring bodies’ limited transparency about how they arrive at their cost estimates. In addition to offering lawmakers estimates of the fiscal cost of policies under consideration, Fiscal Lab also exists to help facilitate greater understanding and trust between lawmakers and the scoring agencies by performing analysis—especially focusing on the key analytical aspects of proposed legislation—and setting a higher standard in modeling transparency within our own work.

Last week’s meeting, reported by Politico, was a much more productive meeting than the conversations that were taking place at this time last year. For the Fiscal Lab to be so involved and helpful to such key meetings less than a year from our launch is truly remarkable. It is a testament to the quality of our work and our growing reputation among our core audience: Members of the House and Senate and their staff.

Independent Validation and Trust

Part of the reason for the growing trust in the Fiscal Lab is the quality of our work, and a great example of this was a small piece of legislation, which though important in the particulars, also served as both a demonstration of our modeling and a great example of the detail and analysis that makes the Lab’s work shine next to the work of CBO and JCT.

In early April, staff from the office of Rep. Lloyd Smucker (PA) asked the Lab for our views on the fiscal effects of their legislation (H.R. 2347) to remove the tax burden on sexual assault victims, who are awarded damages in litigation. Our analysis showed the legislation would have a fiscal effect of less than $100 million per year, and less than $1 billion over 10 years. Our score goes on to document the available data, from which the evaluation is made, limitations of the data, and source links that support Fiscal Lab’s analysis. This is typical of our work, and it’s not especially noteworthy.

What makes this work more noteworthy is that shortly after being asked for our views on the legislation—and before our scoring work was complete—the bill was marked-up out of committee and sent to the House floor for a vote. Consequently, this triggered a score release from CBO, which included work from JCT, and the result was that Fiscal Lab and CBO/JCT independently producing scores on the legislation, which were released within a day of each other. Both scores align with the fiscal cost being less than $100 million per year and less than $1 billion over 10 years.

The difference in the score was not in the numbers; it was in the analysis and the details. Unlike the Fiscal Lab analysis, the CBO/JCT data is presented without supporting documentation. Members and staff are left to take the score as credible just because CBO/JCT say so. In an era where trust is at a low ebb, providing more information and sourcing is critical to restore and build confidence in the halls of Congress and in the public more broadly.

And more often than not, it will hopefully be the case that Fiscal Lab and CBO/JCT scores align. Assuredly, there will be times when we do not align, but when that happens lawmakers will have full documentation and sourcing for how and why Fiscal Lab generated our scores. We want to set the standard for high quality, well-sourced work that helps to build trust so that we can have the critically important conversations necessary for improving our nation’s perilous fiscal condition.

This week’s Lab Report focuses on the challenges that lay ahead and our strategy for achieving reform.

The Fiscal Lab’s one-year birthday fits nicely with the United States’ 250th birthday as our vision aligns strongly with the Founding Father’s. Bill Beach has regularly called attention to the “Hamiltonian norm,” the idea established by Alexander Hamilton that debt reasonably accrued during emergency periods should be paid down during normal times, so that the country’s debt convertibility or currency are not questioned. Unfortunately, in recent decades, the federal government has moved away from the Hamiltonian norm to its and the country’s peril as it accumulates alarmingly high levels of debt.

The departure from the Hamiltonian norm also goes hand in hand with Congress failing to act prudently and repeatedly ceding more authority to the executive branch and administrative agencies. Returning to this norm requires empowering both Houses of Congress with the tools they need to address our fiscal crisis. Writing as Publius in Federalist No. 51, James Madison argued, “In republican government, the legislative authority necessarily predominates.” “By getting its fiscal house in order, Congress can better reassert its Article I powers and preserve the nation’s capacity to provide for the common defense, respond to emergencies, protect vulnerable populations, and address other urgent national priorities. The Fiscal Lab’s vision is as much Madisonian as it is Hamiltonian.

The challenges before us are vast. The United States’ fiscal outlook continues to deteriorate as publicly held debt as a fraction of GDP is already above 100 percent and will worsen unless the federal government changes path (Figure 1).

Figure 1. Debt held by the public, 1906–2056

Despite these challenges, we are not deterred. The Fiscal Lab has assembled an outstanding team. We have scored over a hundred bills on issues including taxation, healthcare, trade, energy, and means-tested programs. We have conducted dozens of private meetings with staffers, as well as educational presentations for larger groups.

While we will continue this work, we will also innovate to reach new audiences. We have launched Fiscal Lab Updates, a video and podcast series on timely budgetary matters, and plan to publish educational online course content in the coming months. The Fiscal Lab will also soon launch a new endeavor, the Center for Strategic Fiscal Reform (CSFR). The CSFR will host regular meetings to discuss pressing fiscal matters and related research findings. It will be a successor to the Center for Strategic Tax Reform, expertly led by the late Ernie Christian, a brilliant tax reform advocate. We are excited for the CSFR to showcase important work and produce the kind of vibrant debate that ultimately leads to policy change.

The Fiscal Lab’s inaugural year was as challenging as it was rewarding. We look ahead to year two with confidence—and a great deal more work to do!

Last week, we noted that our one-year anniversary as a charted organization is coming up on June 9. To celebrate, we discussed the need for the Fiscal Lab as well as the legislative analysis—one half of our mission—we’ve conducted over the past year. Such work includes scores of 83 legislative proposals under the Republican Study Committee’s (RSC) reconciliation 2.0 proposal. We have also scored and provided analytical support on dozens of other bills coming from both Democrats and Republicans.

Today, we’d like to discuss the other half of our mission—Hill education, as well as a productive meeting the Fiscal Lab team had with senior members of the Congressional Budget Office (CBO).

Educating Capitol Hill

To turn the United States’ fiscal ship around, Members of Congress and their staff will need to be much better educated about what good fiscal policy looks like and why bad fiscal policy leads to such pernicious effects. However, many staffers have little economics training, so interpreting economic analysis, whether from the CBO, the Joint Committee on Taxation (JCT), or for some other organization, can be difficult. This problem is compounded by high staff turnover, which makes it difficult for Congress to build collective institutional knowledge on fiscal policy matters.

To better educate Hill staff, the Fiscal Lab has created educational content both in the form of in-person trainings and video content.

In January and February, the Fiscal Lab conducted its inaugural “CBO 101” seminar series where we explained what CBO does, how to understand CBO’s work, and how to best work with CBO to House staffers. We also taught basic economic concepts including inflation and GDP and walked staffers through scoring exercises of different policy proposals.

Fiscal Lab Senior Fellow Joe McCormack presenting to congressional staffers on “CBO 101”

As part of CBO 101, Bill Beach walked staffers through how to craft an effective scoring request letter to CBO. Following this, Michael Schultz wrote a primer titled “How to Write a Scoring Request Letter to CBO,” based on Beach’s presentation for anyone to use (more on this in a moment).

We have also given presentations to Senate staffers on interpreting the CBO’s baseline and have had many private briefings to staffers from both Houses on issues their Members are especially interested in.

Video Strategy

In addition to being physically present on the Hill, the Lab has also created a YouTube channel where we post recordings of our public Hill presentations as well as conversational videos on important fiscal topics. For example, Beach and I recorded an episode on the economic and budgetary implications of the closing of the Strait of Hormuz due to the war with Iran. Parker Sheppard and Beach also recorded an episode on a 3 percent deficit-to-GDP target, an increasingly discussed practical proposal to get the United States’ debt under control.

Bill Beach and Parker Sheppard discuss the appeal of a 3 percent deficit.

As we move into our second year, we plan to produce similar videos as well as more structured course-like content on fiscal and economic matters.

Meeting with the CBO

This week, the Fiscal Lab team met with senior CBO staff, including Director Phillip Swagel to discuss the aforementioned scoring request letter primer. CBO leadership expressed interest in how we can expound upon this guide and offer similar educational material. The conversation reinforced that our educational material improves clarity and facilitates better analysis for congressional offices.

The meeting also highlighted several opportunities for future educational resources for Congress and congressional staff. We discussed how to help policymakers better understand what goes into a CBO score, the importance of distinguishing between the roles of CBO and JCT, and why legislative language must be drafted with sufficient specificity to be scoreable. We also explored ways that outside research can support the scoring process, particularly in areas such as fraud prevention. As a result of these discussions, Fiscal Lab plans to expand its guidance by developing a broader set of resources that help offices understand how CBO evaluates legislation, what information is most useful to analysts, and how policymakers can formulate questions that lead to more meaningful budgetary analysis.

The Fiscal Lab received its charter as a nonprofit corporation on June 9, 2025. With our one-year anniversary approaching, the Fiscal Lab will use this Weekly Lab Report and the next two weeks’ Reports to assess the work it’s done so far — both in scoring legislation and educating Members of Congress and their staff — as well as the challenges that lie ahead.

The Need for the Fiscal Lab

The United States finds itself in a worsening fiscal crisis. Credit downgrades, rising bond yields, rising deficits, and ballooning debt threaten the US’s ability to meet its obligations and to carry out its major functions including national security, public infrastructure, and a social safety net.

Although Members of Congress have ideas for turning America’s fiscal ship around, the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) focus heavily on providing analytical support to congressional leadership and some senior Members, leaving senior and nearly all junior Members with less support. This neglect has consequences: It’s practically impossible to bring a vote to the floor without a CBO or JCT score, which leaves Members who cannot get CBO or JCT support in a bind.

The Fiscal Lab exists to educate Members and their staff—both Republicans and Democrats—and to help score their draft legislation, especially if they are having trouble getting support from CBO or JCT. This week, Executive Director Bill Beach went on the Macro Musings podcast where he observed, “The lab, in short, is there to educate Members and their staff about economics and the budget, and then to score their bills so that no good idea dies from lack of analysis.”

Bill Beach and David Beckworth on the Macro Musings podcast

To understand the context into which the Fiscal Lab was born, we need to take a slightly deeper dive.

The Constitution empowers Congress with making the fiscal choices for all federal operations. So why does it feel like the Congress has no control—or is just rubber-stamping administration spending—and is there any hope for a more robust Congress in the future?

Some of this apparent lack of control stems from the growth of congressional factions. Congress and even the parties within Congress are often divided. Control can be split between House and Senate with interparty disputes. Then, the parties themselves within Congress can be divided by intraparty disputes. This weakens Congress and makes prudent fiscal decisions incredibly difficult to reach.

Another reason is the rise of the administrative state. Since the beginning of the progressive era (which we date to the late 1800s with John Dewey, Richard Ely, and Woodrow Wilson), the executive branch and administrative state rapidly expanded with “experts” drawn into the growing alphabet soup of federal agencies. Today, the administration brain-trust of technical professionals often write the laws, which they later administer, that administrations push Congress to enact. Congress simply does not have the professional firepower to compete, leading Congress to defer and become dependent on the administration.

Attempts to bring balance—like the legislative reorganization of the late 1940s, and the 1974 Budget and Impoundment Control Act—have done little to shift the imbalance. As of March 2026, over 2 million civilian, nonmilitary, nonpostal service workers are employed by the administration, while only 31,000 work for the legislative branch. Even where Congress has talented and specialized staff—especially on committees—there are too few staff to truly manage and perform needed oversight of the current federal fiscal environment.

Making matters worse for Congress, the number of staff working on policy is far less than even the 31,000 number. Committee and leadership staff number around 6,000 and personal staff around 12,000. Then 5,000 of the 12,000 are state and district staff, meaning that at most 13,000 staff are working on developing policy and performing oversight for Congress. (And the number is far lower if communications and administrative staff are not counted.)

The staff of the Fiscal Lab on Capitol Hill.

The Congressional Budget Office and the Joint Committee on Taxation are the official legislative cost estimate entities for Congress, but they get backlogged and prioritize leadership and committee bills, which leaves rank-and-file Members, especially those in the minority, with effectively no analytical support.

The Fiscal Lab is not the first effort to build better policy through better analysis. In 1997, Beach launched the Center for Data Analysis (CDA) at The Heritage Foundation to provide such support, but CDA’s analytical work for Congress has receded over the past decade. The void is palpable and the current generation of staff and Members are increasingly left in the dark.

Meanwhile, we have experienced explosive growth in federal spending and debt from policies like those in the wake of the 2008 Great Financial Crisis, COVID spending, the Inflation Reduction Act, and the imminent insolvency of Social Security. The need for widely available, independent, and credible analytical support is keenly felt and needed more than ever.

One Year In

In this environment, the Fiscal Lab on Capitol Hill was born in June 2025, achieved its tax-exempt status in July, and formally launched amidst the government shutdown in the fall of 2025. Fiscal Lab quickly attracted an amazing team of seasoned congressional veterans and economic PhDs, gained support from benefactors interested in advancing sounder public policy by providing House and Senate Members with better analytical support; and now enjoys the respect of Democrats and Republicans alike, as well as the CBO, congressional committees, and rank-and-file Hill staff from both parties. We’re not a think tank; we are a “do” tank.

Since September 15, 2025 (our official launch date), we have been privileged to study proposals and offer one-on-one insights to senior and junior Republicans and Democrats. Among our first tasks was evaluating and providing 10-year conventional cost estimates for 83 separate legislative proposals under consideration for the Republican Study Committee (RSC) reconciliation 2.0 proposal, including full documentation of sources, assumptions, and modeling. House leadership chose our work in providing insights on those proposals for the final reconciliation bill, but just as important was our work on providing insights for policies that were not included. We helped the Representatives better understand the policies before them so that they could make better choices for their proposal and their constituents.

From both the House and Senate, Democrat and Republican Members and staff are asking the Fiscal Lab to study a wide range of legislative proposals that ultimately are introduced and find their way to the floors of the two chambers. The Lab doesn’t write the bill, but we provide many suggestions for improving the bill’s effectiveness, should it become law. In the end, the Lab supplies documented analytical support so that offices can make better-informed decisions. Increasingly, we are also providing staff training, staff workshops, and briefings for both House and Senate Committees. For example, Beach testified recently at a House Oversight Committee Roundtable, and on multiple occasions senior Members have invited us to meetings to discuss the fiscal effects of policies under consideration.

The close working relationships that we are developing with many Member offices is broadening our work from scoring bills to assisting Members in thinking through the formulation of letters to the official scoring bodies. CBO has taken notice of our guide for writing to the official scoring organization, and our work is greatly appreciated by our core audience.

The Fiscal Lab’s work with Congress is just beginning. The congressional appetite for independent, rigorous, transparent budget and regulatory analysis is strong. Fiscal Lab’s future looks bright.

Strong Job Growth in April

In his latest Economic Policy Innovation Center (EPIC) jobs report, Bill Beach argues the Bureau of Labor Statistics’ (BLS) April jobs report shows that US labor markets have been resilient in the face of war, rising prices, and a dramatic slowdown in migration. The BLS reports a net jobs gain of 115,000, well above economists’ consensus forecast of 55,000. Figure 1 shows much higher average monthly job growth in 2026 than in 2025.

Figure 1: Monthly Change in Total Non-Farm Payroll Employment, January 2021 through April 2026 (Thousands)

Source: Bureau of Labor Statistics, Economic Policy Innovation Center (EPIC)

The good news does not stop with the April jobs report. Beach also points to the latest BLS’ Job Openings and Labor Turnover report, which showed an increase in hiring from 4.9 million to 5.6 million in March. Hiring expanded in industries across the private sector, including Transportation, Warehousing, and Utilities; Professional Business services; and Leisure and Hospitality. In the first quarter of 2026, productivity also grew by a healthy 2.9 percent while final sales to private domestic purchasers, which measures output minus government consumption and inventories, grew at an impressive 2.5 percent.

Restoring Fiscal Rectitude

Earlier this week, Beach and Fiscal Lab board director, David Malpass, both submitted comments for a roundtable discussion, “Reducing America’s National Debt: Rooting Out Federal Waste, Fraud, and Overregulation,” hosted by the House Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs. Beach pointed to the importance of the “Hamiltonian norm,” the principle established by Alexander Hamilton that the United States would pay down its debt after short-term emergencies and not allow the debt to grow so large that it would threaten the value of the dollar. The Hamiltonian norm was established in the 1790s and was generally adhered to throughout much of US history, but Congress has largely ignored it in recent years as it has embraced chronic deficits.

To get our fiscal trajectory on the right track, Beach recommended a few immediate first steps. Social Security cost of living adjustments should be based on the CPI-U, the BLS’s official measure of price changes rather than the current CPI-W, which is an outdated metric. The criteria for means-tested programs should continue to be tightened. Drawing on research done with Parker Sheppard, he also recommended Congress establish a regulatory budget to limit the growth of federal regulations to boost economic growth.

Malpass similarly observed that the United States’ fiscal position is grim. Political will not solve the problem, so new checks and balances are needed. The United States has a debt limit, but it does not actually constrain spending. Rather, “[t]he current debt limit’s only concrete enforcement mechanism is a dangerous game of chicken over whether to default on Treasury debt, a step that would be monumentally damaging.” The next debt limit extension, which will happen next year, is an opportunity to replace this antiquated system with real enforcement mechanisms. Malpass argued “First, rather than default, there should be incremental consequences painful to Washington when it violates the debt limit. Second, the limit on spending or debt should be a percentage of gross domestic product rather than a dollar amount and should focus on cumulative debt, not annual deficits.” He also suggested several ideas for how to achieve the new debt limit including limiting executive branch spending and pay when debt is above the limit.

A New Fed Chair and the Fed’s Balance Sheet

On May 13, the Senate confirmed Kevin Warsh as the 17^th chair of the Federal Reserve. Undoubtedly, Warsh faces many challenging issues, including stubbornly high inflation, messy labor market data, and Fed independence. Another major issue is the size of the Fed’s balance sheet, which has grown massively since the Great Financial Crisis. Warsh would like to aggressively reduce the balance sheet, which currently stands at approximately $6.73 trillion, and shrink the Fed’s footprint in financial markets.

Back in March, Sheppard wrote how a large Fed balance sheet blurs the distinction between monetary and fiscal policy. A larger balance sheet means greater potential for huge swings in profits as well as losses. The Fed’s QE program in response to the Covid-19 pandemic led to large losses, ultimately borne by taxpayers. The Fed has also blurred market signals by buying and holding trillions of dollars in Treasury debt. Without such large Fed intervention that lowers the yield on Treasury debt, markets would have likely forced more discipline on Congress.

Reducing the Fed’s balance sheet will be difficult and will also depend on fiscal reform that only Congress can deliver. The Fiscal Lab will have more to say about this in the coming weeks.

Bias in the Baseline

In case you missed his post earlier this week, Parker Sheppard observes that the Congressional Budget Office (CBO) baseline contains assumptions that obscure the true level of government spending. Although the baseline is generally thought of as a projection assuming no changes to current law, there are exceptions. For example, certain mandatory spending programs, including SNAP, TANF, and CHIP, are assumed to continue beyond their expiration dates. Discretionary spending is also assumed to keep pace with inflation. Sheppard explains that:

The baseline rules force lawmakers to recognize the maximum total cost of a policy when initially putting it in place. But the outcome has been the opposite of the intent. By treating continuation as the default, the baseline rules make extending certain programs appear costless because they are not included in CBO’s score.

He points out that the “Cost Estimate Clarity Act,” recently reintroduced by Rep. Ben Cline and Sen. Roger Marshall, would require the CBO to disclose the gap between the statutory baseline, which includes these hidden exceptions, and an actual policy baseline. Lawmakers would then have a clearer sense of how much legislation actually costs.

Q1 GDP Data

On Thursday, the Bureau of Economic Analysis released the advance estimate of GDP data for the first quarter of 2026. Real GDP grew at an annual rate of 2.0 percent—slightly below the 2.2 percent consensus forecast—but well above the previous quarter’s anemic 0.5 percent. Joseph McCormack observes that much of the growth came from business investment, reflecting continued growth in the AI industry.

However, the news is not all rosy. Consumer spending slowed from the previous quarter, while inflation ticked up noticeably. The Personal Consumption Expenditure Price Index, the Federal Reserve’s preferred inflation measure, rose 4.5 percent, well above the Fed’s 2 percent target. Although the recent war with Iran contributed substantially to energy prices, even core inflation, which strips out energy and food prices, rose 4.3 percent.

Figure 1 shows real GDP growth in dark blue, real final sales to private domestic purchasers (a measure of “core GDP,” which only includes consumption and noninventory investment) in gold, overall or headline PCE inflation in light green, and core inflation in dark green. While the pickup in real GDP and real final sales to private domestic purchasers are encouraging, the high inflation numbers could spell trouble for consumers as well as the broader economy.

Figure 1. Economic output and inflation, Q1:2023–Q1:2026

Source: The Federal Reserve Bank of St. Louis

Horan on the Let People Prosper Show

This week, I had the honor of appearing on economist Vance Ginn’s Let People Prosper Show. Vance and I spoke mainly on the United States’ grim fiscal outlook. Today’s large budget deficits are not due to one-time events such as war or recession. Rather, they are caused by increased mandatory spending, which, unless reformed, will contribute to even larger future budget deficits. Those large deficits, in turn, are contributing to higher interest payments, further worsening the federal debt.

We also discussed why tariffs are unlikely to be a great policy reform in reducing the deficit even if they generate some revenue in the short term. True reform will consist of a more disciplined approach to federal spending and policies that enhance economic growth.

The CBO baseline is Washington’s primary tool for fiscal comparison. Every budget negotiation, every scoring dispute, every reconciliation fight starts from the baseline. Those rules were written to keep lawmakers from gaming the system. They ended up institutionalizing the problem instead.

The baseline’s exceptions, which were designed to prevent legislative gaming, have made the explosive debt path the default, and any departure from it a scored, deliberate cost.

The rules were meant to keep debt in check, but it’s clear they haven’t worked. The 10-year baseline released by CBO on February 11 projects federal debt held by the public will rise to 120 percent of GDP in 2036, well above the previous peak in World War II. By 2055, debt reaches 156 percent of GDP. That’s dangerously close to the natural debt limit of 160 percent estimated by IMF economists. At that threshold, no fiscal adjustment can bring interest costs under control.

Markets have not collapsed because investors still expect a future Congress to act. But in a narrowly divided Congress, that assumption is no longer guaranteed. The window for an orderly resolution is closing. The later Congress waits to make changes, the more disruptive they will be.

Some have suggested raising revenue as the least disruptive change, but that is not the easy escape hatch it might appear to be. Analysis from economists at the Joint Committee on Taxation shows that the current tax system already operates near the revenue-maximizing top marginal rate. Raising it to 40 percent would increase revenues by only 0.5 percent. Yet, balancing the budget through revenue alone would require total tax collections to rise by more than a third. It’s unlikely that the federal government can collect that much tax. Though federal spending is currently 23 percent of GDP, federal receipts have never topped 20 percent.

That is why balancing the budget will require cuts to spending. And seeing those cuts realized requires understanding why the baseline makes the growth in spending so structurally difficult to check.

The baseline is widely described as a projection of what would happen if Congress made no changes to current law. But the baseline makes a number of exceptions that presume Congress takes some future action.

For instance, mandatory programs established before 1997 are assumed to continue past their expiration dates. This includes projections for income support programs like SNAP, TANF, and CHIP. Those programs are projected to spend $1.8 trillion over the 10-year budget window, or about 3 percent of mandatory spending.

Discretionary spending is presumed to grow with inflation. This keeps real costs constant so that the standard of goods and services purchased remains unaffected by inflation. The adjustment for inflation is not trivial, especially with rising costs in recent years. Simply extending discretionary spending at 2026 levels would reduce the deficit by $2.2 trillion over 10 years.

These exceptions were put in place to prevent legislators from sunsetting programs they intended to reauthorize. The baseline rules force lawmakers to recognize the maximum total cost of a policy when initially putting it in place. But the outcome has been the opposite of the intent. By treating continuation as the default, the baseline rules make extending certain programs appear costless because they are not included in CBO’s score.

The Cost Estimate Clarity Act would make those exceptions an explicit part of every CBO score. The bill would require CBO to disclose the gap between its statutory baseline and true current expectations in every cost estimate. Lawmakers would see both projections side by side, highlighting cases where the baseline rules significantly affect the score.

Congress has many fiscal decisions to make to alter the path of federal debt. The current baseline rules subtly tip the scales toward continuing on the status quo. The Cost Estimate Clarity Act would change that. By requiring CBO to show both projections side by side, it makes the hidden assumptions visible so that lawmakers can make decisions with the full picture in front of them.

A Handy Dandy Guide for Working with CBO

A Congressional Budget Office (CBO) score gives Members of Congress, their staff, and the public an assessment of what a bill costs. Certain bills require scores, and even those that don’t typically benefit from having a score, as it informs the drafting process and adds a level of credibility as Members try to garner support for their legislation. Unfortunately, the scoring process can be a source of ire as scores frequently involve technical jargon and assumptions, which can be difficult to understand.

The scoring process starts when a congressional office sends a scoring request letter to CBO. A well-written letter communicates specifically what a Member’s questions are and what variables should be considered in the analysis and increases the likelihood of receiving a helpful score. By contrast, a poorly written letter could delay the scoring process and result in a score that does not adequately address the Member’s questions.

To help Members and their staff, Michael Schultz has written a guide with step-by-step instructions for how to write a request letter to CBO. A good letter will flesh out exactly whether the Member wants a conventional score, a dynamic score, or both and what variables should be considered. It will also ask for a kickoff meeting as well as check-in dates to ensure the Member’s office and CBO are on the same page. Schutlz also includes a letter requesting a score of a fun hypothetical bill, H.R. 1776, the Grand Annual National Independence Day Universal Ice Cream Distribution, Commemoration, and Patriotic Dessert Access Act, to show what a good letter looks like.

This practical guide is essential reading for any staffer who is new to the scoring process.

AI and Labor Markets

In his latest EPIC report, Bill Beach reviews the generally positive BLS jobs report for March. He also digs deeper into tech sector data, and asks “Is artificial intelligence wiping out jobs in the tech sector or transforming it?” As seen in Figure 1, Beach observes dramatic reductions in employment in computer programming and computer design over the past two years. These trends substantiate anecdotes of large companies including Amazon and Block laying off workers because of productivity gains. However, Beach also observes that AI has not yet had substantial effects on overall productivity and economic activity. How do we answer this seeming paradox? Beach argues the tech firms overhired during the pandemic, and corrections “have been underway since 2022” and began before AI began to affect coding later in 2023 and 2024.

Figure 1. Employment Change in Computer Systems Sector, Programming, and Design, 3 month moving averages, March 2016 – March 2026 (in thousands, seasonally adjusted)

Source: Economic Policy Innovation Center (EPIC)

While AI is now replacing coding personnel, Beach argues it will lead to staff (in tech and beyond) strengthening after a transition period where AI is “integrated into production processes.”

How the U.S. Income Tax Grew

In case you missed it, Joe McCormack wrote a brief overview of the history of the income tax earlier this week in honor of Tax Day.

McCormack points out that the federal income tax, which started in 1913, was initially much smaller and applied to a much narrower base than it does today. However, as the size of the federal government grew, taxation on income grew too. He points out:

Over time, Washington transformed the system from a limited tax on a relatively small number of wealthy taxpayers into a far broader, mass tax system, especially as withholding, payroll taxation, and postwar expansion made federal taxation a routine part of working life for millions of households.

Despite the expansion of the income tax, federal spending has outpaced revenue. On average over the past 40 years, the federal government “has spent roughly 3.8 percentage points of GDP than it typically collects.” This spending problem has contributed to mounting deficits. While some economists argue that the solution is more revenue, McCormack cautions that higher taxes can harm economic growth by discouraging work, saving, and investment. Rather, Congress needs to prioritize a reduction in spending.

Last Wednesday, April 15, was the dreaded tax deadline, the day Americans are reminded how much of what they earn is claimed before they ever see it. For some, that means rushing to file on time and then writing yet another check to the federal government instead of receiving one. For others, a refund may feel like relief, but it is really just the return of their own overpaid tax dollars after giving Washington an interest-free loan. And for many workers, that annual reckoning comes only after seeing money already stripped from each paycheck—federal withholding, payroll, Social Security, Medicare, and often state and local taxes leaving them with far less than what they actually earned. How did the country get here, and how did today’s tax system become such a permanent, and frustrating, feature of American life?

The modern federal income tax began in 1913, not as a World War I measure, but as part of a political and fiscal shift away from heavy reliance on tariffs. After ratification of the Sixteenth Amendment, which established Congress’s power to impose a federal income tax without apportioning it among the states, Congress passed the Revenue Act of 1913 and created a new source of federal revenue tied directly to income. At first, the system was far narrower than what Americans live with today. Because of generous exemptions and deductions, less than 1 percent of Americans paid only 1 percent of taxes on net income. Simply put, the original income tax was aimed at a relatively small, higher-income slice of the country rather than the broad middle class. However, over time, as the federal government expanded, it repeatedly widened the tax base, reaching more households, more forms of income, and more economic activity. What began as a narrow tax on only the wealthiest individuals gradually evolved into a cornerstone of federal finance. Once that process existed, it was then far easier for Washington not only to raise rates, but also to widen the base, exposing more of the economy to taxation.

The expansion and revisions of income tax rates changed dramatically over time, but so did the tax base itself. The top federal income tax rate that began at just a few percent, rose sharply during World Wars I and II, and eventually climbed above 90 percent in the immediate postwar era before falling, over later decades, to far lower levels today.

However, for much of the income tax’s early history, the tax base was narrower, fewer households faced the tax, and the top rates applied only at extremely high-income thresholds. Over time, Washington transformed the system from a limited tax on a relatively small number of wealthy taxpayers into a far broader, mass tax system, especially as withholding, payroll taxation, and postwar expansion made federal taxation a routine part of working life for millions of households.

To better “sell” this income tax, not as a legal obligation, but as a patriotic duty, the Treasury Department even enlisted the help of former service member Donald Duck to boost tax compliance. In 1942, Disney’s The New Spirit, depicted Donald overcoming his reluctance in paying his income taxes once he learns that his tax dollars provide military equipment to defeat the Axis powers. This short film was highly effective because many Americans at the time believed their tax dollars were tied directly to national defense and a common purpose.

Today, that sense is badly weakened if not lost entirely. For many taxpayers, Washington no longer acts like a careful steward of public sacrifice; instead, it looks like a government that piles on debt, and fritters away tax dollars without producing results that clearly improve American life. This frustration is reasonable. Household budget data show growing spending and debt as many Americans struggle to buy homes and meet higher everyday costs, while the federal government continues to run massive trillion-dollar deficits.

While federal revenues have moved up and down over time, as a share of GDP they have generally stayed in a fairly narrow historical range. As shown in Figure 1, over the past 50 years, revenues have averaged about 17.3 percent of GDP, while federal outlays have averaged about 21.1 percent of GDP. In other words, Washington has historically spent roughly 3.8 percentage points of GDP more than it typically collects. That is the core fiscal problem: The federal government has built a spending structure that persistently runs ahead of what the tax system has historically produced. The country’s fiscal problem is not simply that revenues are too low. Rather, spending has outgrown the nation’s normal tax base.

Figure 1. Government revenues and outlays (and forecasts) as a percent of GDP

Citation: Budget and Economic Data | Congressional Budget Office

While some commentators have nostalgically argued that a return to the higher taxes of the World War II and postwar era would be a solution to our deficit problem, such calls should be met with skepticism. History shows that what began as a narrow tax aimed at a small number of wealthy Americans did not remain narrow for long. Over time, it expanded into a far broader and more permanent burden that reaches deep into the paychecks and working lives of ordinary Americans. Nor are higher marginal tax rates economically costless. The Congressional Budget Office has noted that higher marginal tax rates on labor income tend to reduce hours worked, while the Tax Policy Center has similarly explained that high marginal tax rates can discourage work, saving, investment, and innovation. Congress needs to reform its addiction to spending before imposing additional burdens on everyday Americans through higher taxes.

That is also why supposedly one-time tax policies, such as a wealth tax, should be approached with extreme caution. Once the mechanism exists, history suggests it can be expanded well beyond its original design. So, while higher taxes may raise more revenue for a period of time, they can also weaken the economy that produces that revenue in the first place. If Washington wants to demand more from taxpayers, it should first prove it can spend with discipline and purpose. Otherwise, Americans are left with the worst of both worlds: a heavier tax burden and a government that still cannot live within its means.

October 1 through November 12, 2025 saw the longest, full federal government shutdown in US history as Senate Democrats objected to extending Affordable Care Act subsidies. Since February 14, 2026, the Department of Homeland Security has been partially shut down with Congress failing to agree to fund Immigration and Customs Enforcement (ICE) and Border Patrol.

In a new Fiscal Lab essay, Joseph McCormack argues that the annual budget process, which has led to recurring, chaotic shutdowns, is outdated and that new solutions are needed to restore fiscal discipline.

Annual appropriations deal with discretionary spending, but discretionary spending has shrunk as a percentage of the federal budget over the past several decades and is projected to keep falling as our aging population means more mandatory spending, notably Social Security and Medicare. As McCormack points out, Congress spends a “disproportionate amount of time and political energy on annual appropriations brinksmanship,” but such political brawling is over an increasingly small amount of federal spending.

McCormack reviews other historical attempts to rein in deficit spending including commissions on entitlement reform, deficit targets, PAYGO, and sequestration. In each case, Congress failed to deliver long-lasting fiscal reform because they lacked adequate enforcement mechanisms.

McCormack suggests several avenues for budgetary reform. One option is to switch to a two-year appropriations cycle, which would likely reduce the drama of shutdowns and give Congress more time to focus on mandatory spending. Other options include a 3 percent deficit-to-GDP target; a Taxpayer’s Bill of Rights, which restricts real government spending per capita; and even a balanced budget amendment. Each of these options comes with serious tradeoffs, but with our debt burden on such an unsustainable path, something must be done.

Q4 GDP Numbers

Last week, the Bureau of Economic Analysis (BEA) released its final estimate of GDP for the fourth quarter of 2025. Although the BEA initially estimated real GDP rose 1.4 percent in the quarter, it revised that number down to a low 0.5 percent. I appeared on the Morning Wire podcast to discuss these numbers and explained how much of the low growth is explained by the government shutdown. I also observed that real final sales to private domestic purchasers, which measures consumption and investment minus inventories and could be viewed as “core GDP,” grew at a 1.8 percent rate and was revised down from an initial 2.4 percent.

While the real final sales to private domestic purchasers numbers are less worrisome than the overall GDP numbers, they both indicate a slowing economy. The BEA also showed last week that both the headline and core Personal Consumption Expenditures (PCE) price indexes rose 2.9 and 2.7 percent, respectively, in the fourth quarter. Unlike the GDP numbers, these numbers remained the same for each of the BEA’s estimates. In other words, economic growth is falling, while inflation remains elevated.

A 3 percent deficit-to-GDP target has become a popular proposal for stabilizing the national debt. The idea has been endorsed by the House Budget Committee and enjoys bipartisan.

Last week, William Beach and Park Sheppard spoke on Sheppard’s recent Fiscal Lab paper on this proposal.

The total federal budget deficit equals the primary deficit (the deficit excluding interest rate payments) plus interest payments to service the existing federal debt. Long-run economic growth and the real interest on federal debt have both averaged about 3 percent. As Sheppard explains, a total 3 percent deficit target is therefore a natural anchor because it would roughly balance the primary deficit. Congress would fund its noninterest spending from revenue, while it would borrow to cover interest expenses.

Currently, the federal deficit is about 6 percent of GDP, so a 3 percent target may sound difficult to achieve. However, deficits of roughly 3 percent are not unusual by historical standards. Congress has achieved a deficit near this level in 20 of the past 60 years. Figure 1’s green line shows the combinations of primary deficits and net interest expenses consistent with a 3 percent total deficit. Sheppard also argues that a 3 percent target is much more practical than a completely balanced budget. To completely balance the budget would require very steep cuts, which Congress is unlikely to commit to. It is better to pick a realistic goal that Congress can adhere to than an ideal goal it will give up on.

Figure 1. Primary deficit vs. net interest expense, 3% deficit constrain

How would the US achieve this target? While theoretically either an increase in revenues or a decrease in outlays would reduce the budget deficit, Sheppard cites a recent study indicating that the US is already close to the top of the “Laffer curve,” the revenue-maximizing tax rate. Therefore, the US is much more likely to see a deficit reduction primarily in the form of spending cuts.

Listen to the whole interview!

For years the program has relied upon its trust fund balances to cover the shortfall between benefits promised and Old Age Survivors Insurance (OASI) taxes collected, and that trust fund is projected to be fully exhausted by 2032. By law, a benefit cut must take place when tax revenue and trust fund reserves are insufficient to pay benefits. Beginning in 2032, that is a roughly $500 billion hole, or a 28-percent benefit cut, which worsens over time.

This week, I wrote in a Washington Examiner op-ed on the challenging political environment and realistic timetable for reform of the program. The deadline for sustainable reform is not 2032. Rather, the deadline for a Republican-led reform is 2027; for a Democrat-led reform, it could be 2029.

Social Security reform will not take place during an election year, and in 2031 all will be geared toward emergency half-trillion-dollar patches. To lead on reform, a political party must control the White House and ideally control Congress. That leaves only 2027 for the GOP and only 2029 for whomever wins in 2028.

It seems certain that Congress won’t allow a 28-percent benefit cut, leaving the alternative annual half-trillion-dollar patches on the table, which would—like the unfunded COVID measures of 2020 and 2021—open the door wide for inflation.

If there is any note of encouragement, in just one day, the op-ed generated more than 40,000 X/Twitter impressions, which is in addition to other consideration of the content from our primary audience, Congress. Perhaps all is not lost. Maybe there is an inkling of hope that our nation will avoid this fiscal landmine. With Social Security and all serious reforms, the Fiscal Lab stands ready to help Congress and the public grow in awareness of the fiscal effects of federal policy choices being considered.

Does that mean, however, that everyone across the income distribution is “enjoying” a 2.4 percent inflation rate? By no means. Households at different parts of the income distribution face different inflation rates, which is an important feature of the inflation landscape for analysts and politicians to keep in mind. Table 1 compares overall inflation with inflation by income quintile.

About 60 percent of the population faced an inflation rate in February that was likely higher than 2.4 percent. Research conducted by BLS in 2024 indicates that the bottom three-fifths of the income distribution experienced an inflation rate higher than the “typical consumer unit,” and the top two-fifths had an inflation rate lower than the official rate. In other words, analysts should not rely on the announced CPI when drawing conclusions about affordability across the income distribution.[1]

Table 1. Inflation Rate Varies Across Income

Source: BLS

Note: BLS uses a research version of the CPI for this analysis.

Why would these differences exist? The reason stems from how much of certain goods with high price volatility a household consumes. For example, high-income households spend a larger percentage of their income on optional, nonessential items and less on food, transportation, clothing, and housing. Low-income households spend a higher percentage of their income on these necessities and less on nonessentials. If the housing component in the CPI rises by 5 percent, this increase will affect lower-income consumers more than higher-income ones.

For example, the Proctors (an imaginary household) are a low-income family in the bottom 10 percent of the income distribution. Nearly 80 percent of their earnings goes to pay for housing, food, transportation, and clothing. The Lowry family (another imaginary household), on the other hand, is in the top 10 percent of all income earners. They only spend 30 percent of their income on these necessary items. Thus, a price rise in these essentials will affect the Proctor family more than the Lowrys. This disparity is especially evident if prices for the rest of the CPI basket of goods are relatively stable.

The lesson here is evident: When using average price increases to talk about the state of inflation, analysts need to be cautious about the composition of consumption across income groups. Politicians especially need to be cautious, since voters are present in every income group and may be feeling very differently about the state of economic activity.

[1] Note that Q1 is the lowest income quintile and Q5 is the highest. This graphic originally appeared in William W. Beach, “Flat Job Gains: The EPIC Jobs Report for March 2026,” Economic Policy Innovation Center, March 6, 2026.

Last month, the Congressional Budget Office (CBO) published its latest baseline projections for the federal budget and the US economy. The budget baseline is important, in part, because it serves as the benchmark for how new legislation will affect the federal deficit. However, the baseline is a projection of federal spending and revenues under current law only.

We saw how brittle an assumption this is within days of the baseline coming out. Nine days later, the Supreme Court ruled President Trump’s authority to unilaterally enact tariffs under the International Emergency Economic Powers Act (IEEPA) unconstitutional. Another eight days later, the United States, along with Israel, began bombing Iran as part of Operation Epic Fury. Within 20 days, these two events have made the baseline obsolete as the Supreme Court ruling dramatically reduced expected revenues, while the war will almost certainly cause outlays to rise.

Bill Beach and Patrick Horan spoke about how these events will affect the federal budget as well as the broader economy. They also discussed how Congress and CBO could reform the baseline to take into account possible changes to policy.

The Challenges of a Large Fed Balance Sheet

Some politicians and commentators have recently criticized the Federal Reserve (Fed) for paying interest on reserves (IOR) as they view the policy as subsidizing banks at the cost of taxpayers. In a new policy brief, Parker Sheppard explains how that criticism identifies a real problem, but it “doesn’t address the underlying issue,” which is a large Fed balance sheet.

Prior to the 2008 Financial Crisis, the Fed had a comparatively small balance sheet and manipulated the federal funds rate through conventional open market operations where it bought and sold Treasury bills. In that crisis, the Fed made large-scale asset purchases and massively expanded its balance sheet to stabilize the banking system. To prevent those new reserves from creating excess inflation, the Fed began paying IOR to prevent banks from lending out those excess reserves into the economy.

Sheppard explains how this arrangement blurs the distinction between fiscal and monetary policy and causes problems for the Fed. A large balance sheet where the Fed holds onto more Treasury assets causes the Fed to have a larger role in debt management, a role traditionally reserved for the Treasury Department. A large balance sheet also shifts fiscal risk to taxpayers when the Fed incurs losses on its balance sheet. Table 1 shows how interest earnings (positive or negative) flows between the public, the Fed, and Treasury depending on the size of the balance sheet and on the level of interest rates.

Table 1. Stylized interest flows

Sheppard argues for unwinding the Fed’s balance sheet, but to get there, Congress needs to help the Fed by reducing the federal deficit.

Can Leprechaun Gold Save Us?

Since St. Patrick’s Day was earlier this week, the Fiscal Lab decided to investigate the economics of leprechauns, the short elf-like creatures of Irish folklore. Legend tells us that leprechauns have pots of gold that can be found at the end of a rainbow.

How much leprechaun gold would be needed to pay off the federal debt? Assume a pot of leprechaun gold holds one cubic foot (a big pot). Now, let’s assume that big pot could contain 15,000 one-ounce gold coins. At a little over $5,000 per ounce (roughly the current price of gold), the pot would be worth just over $75 million. While that would be life-changing wealth for a household, it would only fund the federal government for about five minutes. To finance just one year’s deficit of roughly $1.85 trillion, it would take nearly 25,000 pots of gold. To pay off the entire US federal debt, now above $39 trillion, it would take nearly 520,000 pots.

That’s a lot of pots. And while leprechaun gold is mythical, it is an analogy for shortcuts that people try to find to bring themselves wealth. Many politicians try to find quick fixes to make our budget woes go away, but the real solution to our fiscal woes will be discipline and a willingness to make difficult policy decisions.

Figure 1- Federal Current Expenditures

Instead of the typical budget categories, the chart shows federal spending as recorded in the national accounts. It further breaks current federal expenditures into four main components:

1. Consumption expenditures. Measures production and consumption of public goods by the government. Covers national defense, public safety, health, education, economic affairs, and other functions of government.

2. Transfer payments. Payments distributed by the government that do not produce a good or service, such as Social Security, Medicare, and Medicaid.

3. Interest payments. Payments that cover the cost of borrowing separately from the cost of production.

4. Subsidies. Payments to businesses or governments related to production that create a difference between the market value of a good and the value received by the producer.

Two trends from the graph are apparent:

1. The size of total current federal expenditures is roughly constant over time. The average total is 22 percent of GDP, and aside from spikes during the pandemic, the total stays within a few percentage points of the average.

2. Transfers grow over time. Spending on public goods and services has grown more slowly than GDP over time. Meanwhile, spending on transfers has grown to make up the majority of federal current expenditures. Much of the growth was driven by transfers to persons, which grew from 4 percent of GDP in 1970 to 15 percent of GDP in 2025.

Federal revenues have averaged about 18 percent of GDP over the same period. That’s more than sufficient to cover the cost of consumption expenditures, with some left over for moderate interest expenses and transfers. Reversing the growth in social benefits to persons back to 5 percent of GDP would be enough to bring current expenditures in line with current receipts and balance the federal budget.

The headline statistics, however, were not, in my opinion, the tantalizing part of BLS’s employment situation summary. Rather, BLS announced new “population controls” for calendar year 2026 based on the Census Bureau restatement of the US population that Census announced in early January. BLS uses population estimates or controls from Census to “plus up” their survey results to national totals.

Due to deficiencies in the Decennial Census of 2020, principally age grouping and other distortions to the composition of the population, Census had employed a methodology that blended population trends to smooth through the issues in 2020. That ended in 2025 when Census implemented new techniques to estimate component totals for 2020 onwards, and these improved estimation approaches significantly changed estimates of the population components. In addition, Census developed better estimates of immigration that also contributed to total and compositional changes.

BLS incorporated these new population controls or estimates, which are displayed in this table that comes from my EPIC jobs report. Census and BLS made the single biggest change in the population of whites aged 16 and above. The white population count fell by 5,642,000, and this reduction primarily fell in prime age whites 24 to 55 years of age, which saw a reduction of particularly 3,966,000. Some analysts suspect that most of this white population loss was recoded to the category of “more than one race.” There are fewer males and more females in the population. There also are fewer African Americans and more Asians and Hispanics. The new population controls resulted in fewer people working (total employment fell by 1,432,000) and more people counted as not in the labor force (neither working or looking for work: +1,185,000).

These new population estimates could have significant effects on the distribution of federal funding by state and region and through programs designed to address sex and racial policy goals. While fairly technical, this is the type of detailed change that moves Washington’s goal posts.

Source: “How War in the Middle East is Choking Off the World’s Oil and Gas,” New York Times, March 3, 2026

So, what could happen to the U.S. economy if oil is prevented from flowing out of the Persian Gulf because Iran closes the Strait of Hormuz? Patrick Horan interviewed me on this very topic.

Based on previous simulations conducted in a war game setting, the US economy would suffer significant output and employment losses, unless Congress working with the administration and the private sector adopt policies that mitigate those losses.

The war game simulations conducted by others at the Heritage Foundation and me in 2007 and 2008 involved circumstances remarkably like the current conflict with Iran. The first game assumed that Iran retaliated to partial destruction of their nuclear weapons program by the United States by, in turn, destroying collection and refining capabilities in Saudi Arabia, as well as effectively closing the Strait of Hormuz.

These assumed moves by Iran led to these results (dollar amounts for GDP and disposable income brought forward to 2025 values):

· a doubling of crude oil prices in the first month of the conflict, from about $80 per barrel to $150;

· a decline in real Gross Domestic Product of about $240 billion in the year following the start of hostilities;

· a drop in real disposable income of $372 billion over the same period;

· and a decline in nonfarm employment of 1 million jobs by the end of the first six months.

The second game involved a similar crisis where terrorist attacks caused the closing of the Straits of Hormuz as well as Malacca between Indonesia and Malaysia and led to similar results.

Of course, these are the adverse effects that would flow from the scenario above if little effective mitigation occurred. Given that today’s circumstances are remarkably similar to the war games of 2007 and 2008, the point of surfacing simulation results of nearly 20 years ago is straightforward: Actions to reduce the harmful domestic and global economic effects need to start now while the inventory of world crude oil supply is high. Daily shipments of crude oil worldwide average around 80 million barrels per day. It won’t take long before a protracted conflict in the Persian Gulf will start draining the energy out of the world’s leading economies.

The gamers in 2007 and 2008 argued that many of the adverse economic effects could be mitigated if not eliminated through temporary tax policy changes, temporary regulatory relief (particularly with respect to CAFE standards and clean air regulations), emergency income assistance for affected populations, and a rapid increase in military spending that would have an economically stimulative effect.

Policymakers today might make different decisions. The point is that decisions need to be made and made promptly.

Last week, the Congressional Budget Office (CBO) released its latest Budget and Economic Outlook, which provides baseline projections for the federal budget and the broader economy, including deficits, debt, growth, interest rates, and labor market conditions.

Yesterday, the Supreme Court ruled the IEEPA tariffs unconstitutional. Because those tariffs comprised a large share of the Trump administration’s trade agenda, the decision would change key policy assumptions underlying the CBO baseline. The Fiscal Lab has analysis of both the baseline and the budgetary implications of the court’s ruling.

The CBO Baseline (Pre-Supreme Court Decision): A Grim Picture

Even before yesterday’s decision, the Budget and Economic Outlook looked grim.

In a short policy brief, senior fellows Patrick Horan and Joseph McCormack and project manager Michael Schultz review and analyze the main takeaways from the latest CBO baseline.

The federal government has a spending problem. In our policy brief, we agree with the CBO, which writes outlays, total deficits, net outlays for interest, and primary deficits are all “large by historical standards.” The latest baseline shows revenues modestly rising as a percentage of GDP, but outlays—primarily mandatory and net interest outlays—rising at a more rapid rate.

Large projected deficits will cause publicly held debt to GDP to rise to unprecedented levels in the coming years. The historical record for this metric is 106 percent in 1946, right after World War II. By 2036, publicly held debt to GDP will break this record and reach 120 percent (see Figure 1). Unlike in the postwar years though, the United States’ population is aging rapidly, meaning more pressure on Social Security and Medicare and fewer workers contributing to economic growth and generating tax revenue.

Figure 1: Federal Debt Held by the Public

The Budget Baseline (Post-Supreme Court Decision): An Even Grimmer Picture

Although President Trump has issued an executive order imposing new tariffs in lieu of the court’s decision, the Fiscal Lab has conducted a quick analysis of what the ruling, by itself, means for the budget baseline. With no substitution, the end of the IEEPA tariffs would likely generate some economic growth as firms and individuals benefit from lower import prices. However, the reduction in tariff rates also means lower revenue, fueling larger primary deficits. Larger primary deficits, in turn, generate higher interest expenses. While economic growth can partially offset some of the increase in deficits through higher tax revenue, it will not offset all of it.

We find that, over 10 years, the Supreme Court decision:

· Reduces revenue by $3.1 trillion;

· Increases outlays by $948 billion; and

· Increases the federal deficit from $24.4 trillion to $24.8 trillion (see Figure 2).

Figure 2: How the Supreme Court Decision Affects the Budget Baseline

Uncertainty in the Baseline

Parker Sheppard also has a policy brief, observing that CBO does not fully explain the uncertainty around its projections. The baseline provides a point estimate for its variables. However, this point estimate is one path among many paths that are plausible.

Sheppard explains different sources of uncertainty surrounding the baseline projections. One such source is incorporation of assumptions about certain policies that may not hold up in reality. For example, Social Security outlays are assumed to continue after its “trust fund is exhausted instead of being reduced to current revenues.” If the baseline did not have this assumption, outlays would fall by a substantial 28 percent in 2032 (see Figure 3).

Figure 3: Revenues and Outlays for Social Security with Scheduled and Payable Benefits

The CBO baseline should be viewed as a helpful starting point, but Congress should also be aware of the baseline’s confidence intervals. Publicly held debt to GDP is projected to reach 120 percent by 2036, but how likely is it to be higher or lower than that? Such information is crucial for Congress to make informed decisions as it considers how to budget appropriately.

The Fiscal Lab launched in September 2025. As we approach our six-month anniversary, we want to reflect on what we have done and discuss what is on the horizon.

The Problem

The fiscal condition of the federal government continues to worsen, despite billions spent supporting the election of deficit reformers in both parties, millions spent on think tanks that have produced thousands of policy papers condemning fiscal malfeasance, and the warnings of hundreds of the world’s foremost financial experts and economists that the fiscal path we walk now leads only to disaster.

Despite all of this, our fiscal condition is worse today than a year ago and seems worlds away from the days when federal debt was little more than a third the size of the US economy. Today, total federal debt is larger than the largest economy in the world. Publicly held federal debt increased from $17.2 trillion at the end of the first quarter in 2020 to $30.2 trillion at the end of the fourth quarter in 2025, which is an increase of 76 percent over just five years. While revenues are healthy and continue to grow, they have not exceeded spending since 2001.

Clearly, what we have been doing to turn the tide of red ink has not worked, and it is past time to change our strategies. Only Congress can make the big policy pivots needed to alter our fiscal course, but the Article One branch of government has grown weaker in its abilities to address fiscal problems. One reason for this decline is the capacity of senior Hill staff to sustain reform efforts from one Congress to another, which has fallen dramatically as growing turnover and declining analytical skill levels have hallowed out their collective policy knowledge. Another reason is the greater time elected Members spend raising campaign funds compared to thinking about policy reforms.

Our Launch

It was against this backdrop that the Fiscal Lab on Capitol Hill was founded. The Lab is designed to work behind the scenes in Members’ offices to provide state-of-the-art analysis of proposed legislation, budget scores that compete with those provided by the Congressional Budget Office (CBO), and relevant, highly focused training to mid-level and senior staff. Lab staff sit with Members and their legislative directors to provide analytical assets to support good fiscal proposals (however broadly or narrowly focused) so that no idea that improves our fiscal condition dies for lack of analytical attention. At the same time, Lab staff provide data and arguments that demonstrate how key program reforms that slow down deficit growth can also produce broadly shared economic and social benefits.

Thanks to our generous funders and stakeholders, we launched the Fiscal Lab on September 15, 2025. Our website announced our presence on that date, which we punctuated with a blitz of Hill visits organized by our Senior Fellow and Director of Strategic Outreach, Doug Branch. Those visits to House and Senate offices resulted in several projects and promises to work with the Fiscal Lab on a wide range of legislative initiatives. Note that we decided to launch over a 30-day period that we expected would contain the normal fiscal year-end drama of past years. Little did we know that our launch would coincide with the longest cessation of governmental activity in history. Honestly, the government shutdown was an excellent backdrop for highlighting the many reasons why we launched the Fiscal Lab.

Fiscal Lab Executive Director William Beach and Director of Strategic Outreach Doug Branch on the “Speaker’s Balcony” in Fall 2025.

Our First Projects

No sooner had we announced our arrival, however, than Doug secured an amazing assignment: the Republican Study Committee (RSC), the largest Republican caucus in the House, asked the Lab to score over 100 provisions (basically separate pieces of legislation) in what would become the House’s second reconciliation bill, (or Reconciliation 2.0). Organizations far larger and well established would have found the challenge of scoring these separate pieces of legislation in six weeks daunting, to say the least.

Even so, the Fiscal Lab accepted the opportunity. We did what the Lab was built to do: work closely and behind the scenes with Members and staff to refine and analyze legislation designed to walk the federal budget back from the fiscal crisis cliff. Under the direction of Joseph McCormack, one of the Lab’s Senior Economists, Patrick Horan and Bill Beach worked steadily on all 108 separate policy initiatives.

Six weeks later, the lab produced conventional 10-year scores that closely followed the scoring template of the CBO. We decided to follow a number of CBO scoring conventions in order to make it easier for House leadership to use our analytical work in obtaining useable scores from CBO. These conventional scores then appeared in the RSC’s publication, “Making the American Dream Affordable Again.” The Lab now is working on a dynamic scoring analysis of Reconciliation 2.0 under the direction of Parker Sheppard. That is, how would the US economy react if Congress were to enact the provisions contained in the RSC’s document of January 13, 2026.

While Lab staff were providing the RSC with detailed budget scores, other offices asked us for analytical support. Lab staff have worked on several bills to reform federally supported healthcare, trade policy, apprenticeship and other work policy programs, and means-tested welfare policies. Anyone who visits www.fiscallab.org might find value in our policy papers and opinion essays, but the analytical work connected to legislation is reserved for elected Members of Congress.

Educating Congress

Our legislative analysis work is only one half of our Hill initiatives. The Lab’s other major mission is Hill staff education. We believe that solving our fiscal crisis will require Members and Hill staff who are much better educated about how deficits affect the economic and financial performance of the private sector. It requires, as well, Hill staff who are better prepared to work with the Congress’s official analytical agencies: the Congressional Budget Office, the staff of the Joint Committee on Taxation, and the Congressional Research Service.

To that end, the Fiscal Lab brought Michael Schultz on board as our Project Manager to coordinate the growing portfolio of Lab activities. With Schultz’s help, the Lab conducted its first Hill training session over three weeks starting on January 16: “CBO 101: Understanding the Baseline Budget & Economic Outlook, Scoring, and Transparency.” The House Committee on the Budget supported the Lab’s training work. CBO exerts enormous influence over the pace and content of House and Senate Legislation. Unfortunately, many Members and staff do not know how best to work with CBO or evaluate the agency’s work. Thus, many opportunities for better legislation and crisper analysis are left untapped.

Fiscal Lab Senior Fellow Joe McCormack presenting to congressional staffers on “CBO 101”

The mid- to senior-level staff who attended these sessions learned about the history of budgeting, the administrative workings of the CBO, and how to write a request letter to the CBO. More importantly, they learned about the models and scoring techniques that CBO uses. It is crucial that staff who work with CBO (or its tax scoring counterpart, the staff of the Joint Committee on Taxation) be able to use the language of budget analysis. Students also had ample time to improve their statistical and Excel skills. The Lab instructors taught these staff how to take CBO budget forecasts and modify the assumptions about economic growth rates and changes in prices. These applied or lab sessions were the most popular part of the course.

New Courses in 2026

In addition to our scoring, congressional seminars, and policy papers, the Fiscal Lab is now planning new courses this year in basic economics and statistics, in how to work with the Joint Committee on Taxation, on trade and tariff policies, and on immigration. We are exploring partnerships with several universities to enhance these courses through college credit opportunities for Hill staff. The Lab has launched a YouTube channel where we provide videos of our events. It will also offer on-demand courses on topics crucial to building capabilities equal to the mighty task of changing our country’s fiscal direction.

Stay tuned!