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!

Last month, the Fiscal Lab launched “CBO 101,” its first educational seminar for Capitol Hill staffers. Participants who complete this three-part series will gain an understanding of (1) the Congressional Budget Office’s (CBO) organizational structure; (2) the mechanics of writing a letter to the CBO; (3) the history of the US budget; and (4) how to efficiently locate government data from agencies such as the CBO and the Bureau of Labor Statistics.

As we discussed in a previous newsletter, Part 1 provided an overview of CBO, the scoring process, some of the models CBO uses, and the differences between conventional and dynamic scoring.

In Part 2, which was held last Friday, Parker Sheppard reviewed basic economic concepts including GDP, the price level, and headline and core inflation. He and participants worked through an exercise to demonstrate how the government could save billions of dollars each year by basing Social Security benefits on the Chained-Consumer Price Index instead of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Fiscal Lab Senior Fellow Parker Sheppard instructs as seminar participants participate in a scoring exercise.

Joseph McCormack pointed the audience to our new “Reference Links” page, which provides an extensive list of useful links to government reports and data from agencies including the Congressional Budget Office, the Joint Committee on Taxation, the Bureau of Labor Statistics, the Census Bureau, and the Federal Reserve Bank of St. Louis. Bookmarking this page will help staffers easily access the data they would need to find for answering a wide swathe of budgetary and economic questions.

McCormack then had some fun by walking through a scoring exercise for a hypothetical bill, H.R. 1776, which would give free-of-charge ice cream to all Americans on July 4. Staffers had to think critically about what assumptions (what is the price of ice cream, what is the growth rate of the population, etc.) would go into such a score.

Fiscal Lab Senior Fellow Joseph McCormack

Bill Beach concluded the session by going through all the steps needed to write a letter to the CBO for a score request. A good letter to the CBO will include what type of budget score (conventional, dynamic, or both) a Member would like, the economic concepts the Member would like to be considered, and a requirement for a meeting between the CBO and the Member’s staff identifying the elements to appear in the score and the timeline for the score to be completed.

Fiscal Lab Executive Director William Beach

If you could not attend these sessions or would like to revisit them, then you are in luck! The Fiscal Lab has just created a YouTube channel where it posts its video materials.

You can find Part 1 here:

And Part 2 here:

Part 3 of CBO 101 will be held today, Friday, February 6. Fiscal Lab staff will go into greater detail about the rules and assumptions that go into CBO’s federal budget baseline projection as well as tips congressional staffers can use for creating charts on the budget or other economic concepts. Video of Part 3 will be up in the coming days!

As we face a threatened government shutdown over ICE funding and as much of the Northeast grapples with historic cold and literal ice, the Fiscal Lab remains very busy.

Using Models and Theory to Understand CBO and JCT

Understanding reports from the Congressional Budget Office (CBO) or Joint Committee on Taxation (JCT) can be difficult for nonexperts, but Parker Sheppard argues it doesn’t need to be.

In his latest primer, Sheppard gives a high-level overview of what economic modeling is and how modeling is used to analyze policy changes. He defines some technical terms including elasticities, exogenous variables, endogenous variables, and parameters, and explains how these concepts fit into models. Sheppard also provides a helpful checklist of questions staffers should ask when interpreting a given report. These questions include:

· Which model was used for the analysis?

· What simplifying assumptions go into the model?

· Did CBO specify the exogenous variables (the variables a new policy changes) as Congress intended?

· How certain are the results? Does the forecast from a model have a wide range or narrow range of outcomes?

Some References and Vocab Words

For staffers and anyone else interested in the federal budget, there is a lot to know: acronyms, abbreviations, jargon, National Income and Product Accounts, and more. The Fiscal Lab has two pages on its website to help budgeteers wade through all this information. First, we have published a 700-plus term (and growing) glossary with everything from “Accounts Receivable” to “Yield Curve.”

Second, we also have a “Reference Links” page with links to regular reports and other data releases by the CBO, JCT, Bureau of Labor Statistics (BLS), Federal Reserve Bank of St. Louis (FRED), and more.

Both the Fiscal Lab Glossary and Reference Links pages are living documents and will be updated as needed to support congressional staffers and other interested audiences.

Hidden Costs of Inflation

Inflation is the rise in general prices across the economy. While rising prices are bad enough, Joseph McCormack argues that inflation often leads to “shrinkflation” and the harder to measure “skimpflation.” Shrinkflation means a good remains at the same price, but with fewer easily identifiable parts included. For example, a “box of granola bars that previously had 10 bars included may now only have eight.” Skimpflation is the degradation of a “service that cannot be easily quantified.”

McCormack argues that skimpflation, particularly in subscriptions, has become more common. For example, Tesla is moving from a one-time $8,000 purchase for its Full Self-Driving function to a $99 per month subscription. Over a Tesla’s average 15-year lifespan, that subscription equals about $17,800. Similarly, movies, TV shows, and sports have become fractured across streaming services. Now, a family may need Netflix, Amazon Prime, and other streaming services to watch what they previously largely got from a simple cable package.

To reduce the costs of inflation, including skimpflation, Congress should get to the root of the problem: too much money chasing too few goods. It can only do this by disciplining itself fiscally and by demanding sounder monetary policy by the Federal Reserve.

Teaching the Basics of CBO and Scoring

Last week, the Fiscal Lab held its first educational seminar on Capitol Hill! The seminar, which was attended by about 20 bright congressional staffers, was the first in a three-part series titled “CBO 101: Understanding the Baseline Budget & Economic Outlook, Scoring, and Transparency.”

The purpose of this series is to educate staffers on how the CBO (the Congressional Budget Office) works, how congressional staffers can get the most out of making requests of CBO, and how to interpret CBO’s models and scores. Staffers attending this series will have a better sense of what CBO considers and doesn’t consider when it scores legislation, and will be in a better position to assess CBO’s judgments.

Doug Branch opened up with a brief introduction of the Fiscal Lab and then a historical overview of the US budget process from the American Founding to today. Next, Executive Director Bill Beach explained the structure of the CBO and walked through the exact steps in making a request to CBO.

Fiscal Lab Staff (left to right): Joseph McCormack, Bill Beach, Parker Sheppard, Doug Branch

Parker Sheppard then taught attendees about CBO’s budget, economic, and demographic projections. He wrapped up the day by giving a hands-on Excel workshop where staffers evaluated a policy proposal, using these projections. (The example used in the workshop is discussed in our very first newsletter.)

Parker Sheppard and staffers discuss CBO and scoring.

Part 2 of this series, which will focus on basic economic concepts and other helpful data sources for scoring, will be held next week. Also, be on the lookout for video links of all our seminars in the coming days.

Inflation and Affordability

The Fiscal Lab’s Patrick Horan spoke with EWTN, America’s premier Catholic broadcasting network, on the state of the US economy, the latest inflation numbers, and affordability concerns.

Horan noted that the Consumer Price Index rose 2.7 percent in December from one year earlier. While that’s lower than where inflation was in the summer and early fall of 2025, inflation is still too high relative to the Fed’s 2 percent inflation target. He also observed that recent jobs data and GDP data are providing different signals as jobs data has generally been weak, while GDP data has been relatively strong.

Finally, Horan responded to President Trump’s desire to ban large institutional investors from buying single-family homes and for credit card companies to cap interest rates. Although these policies may sound good for affordability, Horan cautioned they may do more harm than good. Institutional investors are not a big part of the housing market, so banning them would do little to the overall market. A much better way to achieve housing affordability would be to liberalize zoning and other rules, which make it difficult to build housing and constrain supply. Capping credit card interest rates would choke off access to credit for those least well off. If the president wants to reduce interest rates, he should work with Congress to reduce budget deficits, which put upward pressure on rates.

Patrick Horan on EWTN News Nightly.

New Year’s Eve 2025 not only marked the end of a tumultuous and historic year, but also the first four months of the Fiscal Lab. Not that I’m drawing a parallel with the larger field of political and policy change, but in our own way 2025, or its last four months, was historic and tumultuous.

We launched the Lab on September 15 after working from the late Spring to secure funding, staff, and a host of other indicia of a Washington nonprofit. 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 one of the most dramatic cessations of governmental activity in the post–World War II era. Honestly, the government shutdown was an excellent backdrop for launching the Fiscal Lab.

No sooner had we launched, 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 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 10-year scores that closely followed the scoring template of the Congressional Budget Office (CBO). These conventional scores then appeared in the RSC’s newly released 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.

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 Lab will conduct its first Hill training session starting on January 16: “CBO 101: Understanding the Baseline Budget & Economic Outlook, Scoring, and Transparency.” 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.

In so many ways, the first four months of the Lab’s life has shown the promise we envisioned when creating this organization. The elected Members of the House and Senate today certainly need more analytical support if they have any chance of taming the enormous series of annual deficits that loom so clearly without dramatic change in the nation’s policy portfolio. It is the Lab’s purpose to supply that extra analytical energy and help this and future Congresses make real progress toward a more fiscally stable future.

The Fiscal Lab at the Annual Meeting of the American Economic Association

The American Economic Association held its annual convention this year in Philadelphia. For four days, from January 2 through 5, thousands of economists from all over the world descended on the City of Brotherly Love to discuss developments in the many fields of economics and review the interplay between economics and public policy.

Bill Beach, Executive Director of the Fiscal Lab on Capitol Hill, attended the conference and appeared on two panels and one round table. Beach has been heavily involved in several work groups focused on how best to reform the US statistical system and develop new, more timely economic statistics. Two of his presentations focused on those reform efforts. The panel on “The State of Government Economic Statistics” held on the last day of the conference attracted a large audience and featured experts from the business, nonprofit, and academic sectors.

Beach also spoke on a panel that explored the current state of the US labor market. He argued that changes in the workplace are so rapid and so driven by technological and international developments that, even with the best, high-frequency statistics, we would have trouble finding and collecting data that would enable analysts to make reasonable estimates of the new tasks that are redefining existing jobs. That said, our current array of statistics fails to measure how tech and the international division of labor are affecting tasks. They fail because we lack a way of connecting changes in tasks (think how AI would change human tasks) with job change and labor productivity.

Beach made a call for developing a new task classification system that would run parallel with existing industrial and job classification systems. This new task classification system would give us a much better view of what’s happening, since most of the change workers experience is at the task level.

On surface it seems little in our fiscal situation changed in 2025. Deficits remain large; the national debt is gargantuan and growing. Helping Americans in their daily lives remains a constant theme among all lawmakers: Republicans favor spurring economic growth and individual opportunity through deregulation and tax reductions, evidenced by the One Big Beautiful Bill; Democrats favor expanding and extending entitlements, evidenced by supporting extension (or, now, reauthorization) of ACA Covid-era subsidies. Some things never change, right?

Yet, meaningful steps were taken in 2025 that could change the dynamics of our fiscal situation. First is the question of impoundments: When Congress authorizes and appropriates a sum, is the president bound to spend every dollar? If the president can get a job done for less, or if spending the last bit of a sum has marginal benefits, or is detrimental to the security of the republic, must the president spend? (This is separate from the question of deficiencies, which occur when an administration spends more than what Congress has appropriated.) Washington, Jefferson, and Madison all declined to spend all that was appropriated. The recent phenomena of insisting that all moneys appropriated be spent is a 1970s-era development that the current administration is challenging and that could have a tremendous long-term fiscal effect. Among other things, rescissions could put new pressure on Congress to constrain its spending plans. Rescissions could also send powerful signals to money markets that the federal government is truly serious about reducing deficits.

Another question involves the nature and accountability of the administrative state, and what the current administrations calls “formerly independent” agencies. The alphabet soup of federal independent agencies flowing from the Progressive era has long been constitutionally questionable yet perceived as unchallengeable. Today, the Trump administration is challenging that system, and if the federal judiciary finds merit in their arguments, the actions of so-called independent agencies may finally be held accountable to the American public with potentially major fiscal effects.

A third question involves the functioning of the executive branch departments and agencies in the wake of reductions in force (RIF). Many agencies and programs have been mothballed, and these changes will not be quickly or easily reversed, even if a new administration that is hostile to Trump is elected. Arguably, Trump’s reductions in force have been messy and morale-killing. How many of those RIF’d will be willing to return in the future? That will likely leave countless programs lacking infrastructure and the institutional knowledge to quickly resume operations. Hence, the ability to operate programs and spend money may be slowed beyond the Trump administration, regardless of the 2028 election outcome.

The present administration is challenging much that those of us older budgeteers thought to be true. Congress does have the power of the purse, but the claim feels hollow given the body’s perpetual rubber-stamping of programs that are redundant, counterproductive, or otherwise nonsensical. Much of this has now been upended. Few policymakers will have the audacity to publicly celebrate this, though silently Republicans and Democrats alike should perhaps thank President Trump for clearing out the dead underbrush of federal programs to allow for the growth of new programs better tuned to the needs of today.

With today’s zero-sum game of politics, legislative gridlock seems likely to remain, at least as long as the minority retains some rights in the Senate. I don’t pretend to know the answer, because minority rights are important in the Senate, yet today’s gridlock effectively strips Congress of its power of the purse, giving more leverage to the executive branch. This is the new norm, with Congress passing omnibus or minibus appropriations or continuing resolutions that lack a real exercise of congressional spending power, meaning that programs and spending and interest on debt increases while the nation’s economic output is hobbled, opportunity for all Americans is reduced, and desperately needed fiscal space is crowded out.

Like it or not, some—if not many—of these Trump reforms will survive court challenges, and hence 2025 will likely be recorded as a major adjustment year for federal spending. The question now is whether Congress will be left in the dust. Fortunately for Congress, the launch and opening of the Fiscal Lab offers at least a source of new staff education and fiscal analysis to help members reassert Congress’s control over spending, if they dare. Truly, these are exciting times to be engaged in the federal fiscal space.

For our last weekly report of 2025, the Fiscal Lab has new analysis on the state of US labor markets and ways to improve the Congressional Budget Office (CBO). And on a more light-hearted note, we also share staff book recommendations we read this year!

Rejuvenating the CBO

In a new Fiscal Lab brief, Joseph McCormack explains how the CBO can improve its analysis and transparency. McCormack points out that when CBO scores (i.e., quantifies) the budgetary effects of legislation, it primarily uses conventional or static methods. A static score means that potential macroeconomic effects are not considered. For example, a tax cut will lead to less government revenue, all else equal, but the cut might also boost economic growth. The resulting growth may then raise revenue. A static score would not consider the effects of higher growth, but an economic or dynamic score would. Although CBO does provide some economic scoring for major pieces of legislation, McCormack argues this should be the norm for all scores.

McCormack also observes that CBO’s work is insufficiently transparent to allow other economists to double-check its work. He points out that the American Economic Association requires all empirical papers to “provide clear information about the data, programs, and other computational details sufficient to ensure replication.” CBO ought to have the same level of openness. More transparency is not only good for American democracy, but it will also help CBO gain more credibility with Congress.

Alarming Signs in Recent Jobs Data

Writing for the Economic Policy Innovation Center, Fiscal Lab Executive Director Bill Beach analyzes the Bureau of Labor Statistics’ sobering November 2025 jobs report. As Beach points out, the data shows a net increase of 64,000 jobs in November and a net decrease of 105,000 jobs in October. Moreover, the BLS revised August and September jobs numbers downward by 22,000 and 11,000.

The unemployment rate ticked up to 4.6 percent in November, up from 4.4 percent in September (we will never know the true October unemployment rate because of the lack of survey data due to the government shutdown). The unemployment rate is up a full 0.4 percentage point from November of last year (Figure 1).

Figure 1. National unemployment rate

Source: Economic Policy Innovation Center

With an unemployment rate trending upward and likely more downward revisions to job creation coming, Beach warns “analysts can say without too much disagreement that the trend in labor market activity is decidedly in the wrong direction.”

Recommended Readings

Parker Sheppard

Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead (2025) by Kenneth Rogoff. The biggest economic event of 2025 was President Trump’s imposition of tariffs on many US trading partners. The tariffs were meant to address concerns that excess strength from the dollar’s role as a global reserve currency made American exports more expensive and diverted investment from the real economy to financial assets. Rogoff traces how the dollar became the global reserve currency and evaluates the prospects of potential replacements, such as the yuan or Bitcoin. Rogoff argues that the current system contributes to financial instability both at home and abroad, while warning that the current system is not guaranteed to last.

A History of the Bible: The Story of the World’s Most Influential Book (2019) by John Barton. Barton traces the story of the Bible, both the story in the text itself and how that text was received and passed on over time. Just as important as the text is how people have read and interpreted it. He points out that key tenets of both Judaism and Christianity are not found in the text. Barton offers a balanced treatment, providing both critical study of the text and a genuine effort to understand how the text communicates truth. Relevant to the Fiscal Lab, his advice is worth remembering not just for reading the Bible but also for understanding the results of economic models.

Joseph McCormack

The Fifth Risk (2018) by Michael Lewis. Lewis examines what the US federal government does and the risks it manages, often out of public view. He interviews a former Department of Energy chief risk officer, who recounts five major risks the department worried about: lost or mishandled nuclear weapons, North Korea’s nuclear program, Iran-related nuclear risks, failure or attack on the electrical grid, and project-management failure. This “fifth risk” is the slow accumulation of failures leading to systemic weaknesses that can become catastrophic when neglected. Lewis shows the consequences when leadership undervalues staffing and institutional knowledge. He shows how quickly expertise can be lost, how difficult it is to rebuild once gone, and why that fragility matters for national safety and prosperity.

Red Ink: Inside the High Stakes Politics of the Federal Budget (2012) by David Wessel. Red Ink is a fast-paced narrative of how the federal budget actually works. Written in the aftermath of the Great Recession, it captures the deficit-driven fights that continually lead to the fiscal cliff we are facing. Wessel argues that budget debates are both highly consequential and widely misunderstood, in part because so much federal spending runs on autopilot. He explains why healthcare spending growth and rising interest costs dominate the long-run fiscal outlook, and why borrowing has financed a third of federal outlays. Rather than relying on textbook descriptions, he tells the story through the lens of real decision-makers and institutions, including the OMB and the Congressional Budget Office. The book is a clear portrait of how brinkmanship and process constraints can shape outcomes as much as the underlying economics.

Doug Branch

Apollo 13 (2006) by Jim Lovell and Jeffery Kluger. Lovell’s tale, which was faithfully presented in the 1995 blockbuster movie of the same name—but with greater precision in the book—takes the reader to the daring days of America’s early space exploration, reflecting on Lovell’s experience as a test pilot through the final Apollo mission’s successful failure. It’s a story of teamwork, dedication, and problem solving in the highest degree and under the greatest pressure. And it reminds readers of the nation’s dedication to the program, and the national prestige that Apollo inspired. If you liked the movie, you will even more enjoy this work of Lovell, who passed in August of this year.

Who Can Hold the Sea: The US Navy in the Cold War, 1945–1960 (2022) by James D. Hornfischer. Hornfischer’s final work, Who Can Hold the Sea, makes a forceful case for the continued necessity of a strong naval presence in the nuclear age that is increasingly focused on air power and ballistic missiles. This work offers a driving and compelling history from World War II to the atomic tests, the Korean War, nuclear-powered vessels, and the use of naval platforms for launching unimaginably terrible weapons.

From a fiscal policy standpoint, in the background of both space and naval efforts, is the reality that both require dedication of enormous sums of federal taxpayer resources, which the US was, perhaps, better able to absorb before the absolute explosion of mandatory/entitlement spending programs and changing demographics leading to fewer taxpayers supporting a greater number of program beneficiaries as we have today.

Both books are historically illuminating, and they will lead thoughtful readers to reflect on the effects of our limited fiscal space a quarter into the 21st century with debt servicing costs crowding out new opportunities for advancing human knowledge, broad-based and shared economic growth across the economy, and strengthening our nation’s security and ability to serve as a beacon of freedom to the world. The books’ histories are great in themselves, but when contemplated three-dimensionally with the fiscal plane in view, they also beg many questions with respect to 2025 and America’s fiscal choices, if we are to remain the great nation that we have been blessed to inherit.

Patrick Horan

The Monetarists: The Making of the Chicago Monetary Tradition, 1927–1960 (2023) by George Tavlas

Anyone interested in the history of macroeconomic and monetary thought should read this volume. The book chronicles “the Group,” a set of eight University of Chicago economists. Seven of the Group—Paul Douglas, Henry Simons, Frank Knight, Aaron Director, Garfield Cox, Lloyd Mints, and Jacob Viner—were on the Chicago faculty by the 1930s and very active in making proposals for addressing the Great Depression. The eighth member was Milton Friedman, himself, who was a graduate student at Chicago in the early 1930s and returned there as a faculty member in 1946.

Tavlas recounts the Group’s analysis on and clashes over fractional-reserve banking, the velocity of money, monetary policy rules, and flexible exchange rates versus the gold standard. The reader also learns how the progressive Douglas left the university to serve in World War II as a private in the Marine Corps (at age 50!) and how his departure allowed Knight to bring acolytes like Milton Friedman and George Stigler on board and to ensure Chicago’s place as a market-oriented department. The Monetarists is essential reading for those interested in the evolution of the macroeconomics of the Chicago school.

The Fiscal Lab wishes you and yours a merry Christmas and happy holiday season, and we will back with the next Weekly Lab Report in 2026!