Last month, the Fiscal Lab’s Matthew Dickerson presented to Senate and House staffers on the mechanics and importance of the debt limit.

Senior Fellow Matthew Dickerson discusses the debt limit with Senate staffers.

Dickerson reviewed the history of congressional borrowing and the modern debt limit, which began in 1939. The debt limit is a tradeoff: Congress maintains a statutory constraint over how much debt may be issued, while the Treasury controls day-to-day debt management. Importantly, the debt limit does not increase borrowing per se, but it gives the Treasury borrowing authority to finance obligations enacted by law.

As shown in Figure 1, the national debt has skyrocketed in recent years, rising nearly $18 trillion in the past seven years, from $22.314 trillion in August 2019 to $40.172 trillion in September 2026. Since Congress runs very large deficits with no offsetting surpluses, the debt continues to rise, forcing Congress to regularly either suspend or increase the debt limit.

Figure 1. Total federal debt

Dickerson explained how the “contact date,” the date the government reaches the debt limit, differs from the “X-date,” the date the government exhausts its ability to meet its bills, including military pay, Social Security, contractor wages, and interest expenses in full and on time.

When the government reaches the contact date, it can draw from three main resources to meet its obligations. First, it can use cash it has on hand in the Treasury General Account (TGA), the government’s checking account held at the Federal Reserve Bank of New York. Since daily federal revenue and expenditures fluctuate dramatically, the future TGA balance is the most significant unknown variable in projecting the contact and X-dates. Second, the government still receives revenues through tax payments, which also change drastically from month to month. Third, the Treasury can use what are called “extraordinary measures,” specifically accounting and debt management measures authorized by Congress. For instance, the Treasury can suspend investments in federal retirement funds like the Thrift Savings Plan’s G Fund.

The cash flow of the federal government can fluctuate unpredictably, so projecting the contact date and X-date is difficult. The Fiscal Lab’s Parker Sheppard has simulated both dates and found a median contact date of March 31, 2027, and X-date of November 1, 2027 (see Figure 2).

Figure 2. Remaining debt issuance headroom—statutory debt limit minus debt subject to limit since July 4, 2025

The Treasury makes hundreds of billions of dollars of payments each week. If the federal government reaches the X-date, it will default on at least some of its obligations. Such a default could be devastating to financial markets because it would undermine Treasury debt’s status as the world’s safe asset. This shock to financial markets, along with the disruption to others owed federal money, could easily plunge the American and world economies into recession.

Nevertheless, Dickerson argued that there is real value in having a debt limit. The most significant deficit-reduction agreements of the past four decades all took place as part of debt limit increases. For example, the 1985 Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act established deficit targets through sequestration (across-the-board spending cuts). The 1990 Budget Enforcement Act established discretionary spending caps and pay-as-you-go (PAYGO) rules, which required projected deficit increases to be offset by equivalent amounts of spending cuts or revenue increases. More recently, the 2011 Budget Control Act imposed new discretionary spending caps and resolved a major debt limit debate.

Dickerson emphasized the importance of returning to the Hamiltonian norm, Congress’s historical commitment to defend the integrity of Treasury debt by balancing previous deficits with future surpluses. Hopefully, Congress will use next year’s debt limit discussion to return to this norm by coupling raising the debt limit with meaningful deficit reduction.

Firms and individuals alike are bringing large language models (LLMs) into their daily routines, but research into how AI affects the economy exposes a problem: The US statistical system doesn’t hold the data necessary to track AI’s impact. AI systems operate at the task level, changing just parts of a job’s responsibilities rather than the whole picture, but federal statistics mostly operate at the job level. In a new Fiscal Lab policy brief, based on work with Dr. William Beach and Michael Schultz, I argue that federal agencies should build a task-classification taxonomy that connects to existing classification systems, giving each task its own requirements and economic weight.

Nearly every question researchers ask about AI is a question of magnitude: How much are certain job sectors exposed? How much will firms stand to gain or lose? The current statistical system often labels task data rather than measures qualitative points, so it’s unequipped by design to answer those questions. Because of this, most industry-leading exposure studies often rely on privately collected data and internal sources.

Private data, however, often restricts opportunities to researchers already “in” with private sources. Private data also means proprietary data collection, making statistical accuracy harder to verify in a source. A federal system would allow for the democratization of economic data related to AI’s exposure and ensure a publicly reviewed collection process that supports the research.

Figure 1. O*NET rates each construction-laborer task, but not its share of the job

To illustrate the problem, the policy brief examines the listing for construction laborers in the leading task-level data source, the Occupational Information Network (O*NET). As illustrated in Figure 1, O*NET rates a task on importance, the share of workers who do it, and its frequency (not duration). Yet, there is a glaring omission: O*NET doesn’t track the shares of time or output that each individual task contributes to the job’s total. From this, any exposure found for a particular task cannot easily be traced to a finding about how time or output changes for jobs as a whole.

Most existing AI exposure research relies on various methods to work across this gap. For example, some approaches use human/LLM raters to estimate the task share of time and output, and others attempt to crosswalk O*NET with complementary datasets. However, the introduction of rating and/or differently sampled data increases the chance of statistical errors, as well as generally complicating the methods.

Figure 2. Real GDP growth in 1991 and 1992 was stronger than first reported

The current situation reminds us of the early 1990s, when the gains from desktop computing had not yet shown up in productivity statistics (the so-called Solow paradox). As seen in Figure 2, real GDP growth was originally reported far lower than what it was later revised to. A reported contraction of 1.2 percent in 1992 was later estimated to be 0.1 percent, and previously reported growth of 2.1 percent was later revised to 3.5 percent. The revisions revealed that the rate of technology adoption largely masked a chunk of growth.

Like then, the US economy may now be growing faster than measured because we lack the data required to track the change. Especially considering the acceleration of technological growth and the immense amounts of capital invested in tech ventures, data centers, and other AI-critical infrastructure, it is crucial that policymakers and businesses are well equipped to respond to how the economy really is. A task-based system would allow statistical agencies to trace changes caused by AI upward through occupations and industries, allowing faster response estimation and more accurate economic research.

Read the full brief, “Closing the Task Data Gap in Federal Statistics,” at fiscallab.org.

Figure sources

Fig. 1. US Department of Labor, Employment and Training Administration, “47-2061.00 - Construction Laborers,” O*NET OnLine, updated 2026, accessed October 19, 2026. Task statements and Importance scores as displayed; Core/Supplemental designation per O*NET. On the Relevance and Frequency scales, see National Center for O*NET Development, “Task Ratings,” O*NET Data Dictionary, and “Scales, Ratings, and Standardized Scores,” O*NET OnLine Help.

Fig. 2. As first reported: Joint Economic Committee, Economic Indicators, February 1993 (prepared by the Council of Economic Advisers; data available as of March 3, 1993), “Gross Domestic Product in 1987 Dollars,” annual levels for 1990–92, FRASER, Federal Reserve Bank of St. Louis, growth rates computed from the published levels. Today’s estimate: US Bureau of Economic Analysis, “Real Gross Domestic Product (GDPC1),” retrieved from FRED, Federal Reserve Bank of St. Louis, accessed October 19, 2026, annual averages of quarterly data. On the 1993 revision, see US Department of Commerce, Bureau of Economic Analysis, “Annual Revision of the U.S. National Income and Product Accounts,” Survey of Current Business 73, no. 8 (August 1993): 9–51.

This week we cover a jobs report with some mixed signals, Bill Beach’s case at AEI for Congress to lock in regulatory reform, and a new brief from Joseph McCormack on how Washington’s fiscal delays are already reaching household budgets.

Mixed Signals in the September Jobs Report

In his latest Fiscal Lab Jobs Report, former Bureau of Labor Statistics (BLS) Commissioner, Bill Beach, offers his insight on the September 2026 Employment Situation. Nonfarm payrolls came in well below economists’ expectations of 84,000, rising by just 29,000. BLS also revised the two prior months down by a combined 60,000. July fell from 21,000 to −10,000, the first negative print since February, and August dropped from 162,000 to 133,000. See monthly job growth below in Figure 1.

Figure 1. Monthly change in total nonfarm payroll employment (in thousands)

Beach points out though that the topline number hides more encouraging signals from the private sector. Private employers added 46,000 jobs in September, up from 28,000 in July. The decline was driven by government, which shed 17,000 jobs, mostly in local government, and is now down 216,000 over the past year. Manufacturing has been a bright spot this year, adding 72,000 jobs since January, all of it in durable goods. Similarly, construction is up 109,000 over the year, with specialty trade contractors tied to data center construction, contributing 84,700. Finally, healthcare anchored private-sector job growth with 371,800 new jobs, making up two-thirds of all private-sector growth since September 2025.

Nonetheless, there are gathering headwinds in financial services, information services, and computer design and management services, which together lost 259,200 jobs over the year. Beach expects continued restructuring as AI assumes tasks workers used to do. The unemployment rate rose to 4.2 percent, but it is important to point out that the actual increase was only 0.03 percentage points, just enough to round up, and it was not statistically significant. Labor force participation rose from 61.6 to 61.8 percent.

Beach’s takeaway from the September report is that the economy is still on a moderate growth path, and one soft month doesn’t change that. “That’s why it is crucial for policymakers and investors to have a longer time horizon,” he writes.

Beach at AEI: Can Congress Lead Regulatory Reform?

On September 30, Beach joined a panel at the American Enterprise Institute on whether Congress can lock in regulatory reform. AEI’s Jeffrey A. Rosen moderated the panel. Other panelists included Anthony P. Campau of Clark Hill Public Strategies and Daniel M. Flores, senior counsel on the House Committee on Oversight and Government Reform.

The executive branch has limited its own regulatory processes through tools like regulatory budgets, and the Supreme Court has ended Chevron deference. Congress, however, has not enacted regulatory reform legislation in decades. Reform bills passed the House in the 113th, 114th, and 115th Congresses, but none reached the president’s desk.

Drawing from his time as BLS commissioner, Beach argued that codifying reforms such as the REG Budgeting Act (H.R. 3279) could produce significant economic benefits. The bill would require the Office of Management and Budget to set annual government-wide and agency-level caps on new regulatory costs. A rule that pushes an agency past its cap generally could not take effect that year without congressional approval. The cost of regulation weighs on households and businesses much as spending does, and a clear budget for those costs would give Congress a way to identify these costs and limit them.

The Rising Cost of Delay

In a new brief, Joseph McCormack looks at how Washington’s fiscal failures are already weighing on household budgets. Persistent deficits add to inflationary pressure and push up Treasury yields, which raises borrowing costs for everyone. McCormack highlights that 30-year mortgage rates have historically run about 150 basis points above the 10-year Treasury yield. Recently, though, this spread has been closer to 200. For a family buying a house this can mean a much higher monthly payment.

Then there are the benefit programs that many households have come to depend on. Under current projections, the Old-Age and Survivors Insurance trust fund will be exhausted in late 2032. At that point payable benefits are automatically cut by 24 percent, reducing a $2,000 monthly benefit to roughly $1,520, as shown in Figure 2. And this is only the beginning with Medicare’s Hospital Insurance trust fund facing depletion around 2040.

Figure 2. Reduction in scheduled Social Security benefits through congressional inaction

McCormack also points out that annual budget fights consistently focus on the wrong part of the budget. Mandatory programs and net interest made up about three-quarters of federal outlays, but shutdown fights focus on the remaining quarter of discretionary spending. Meanwhile, interest costs keep compounding. Higher interest costs raise the deficit, larger deficits require more borrowing, and more borrowing means more interest. And so, the cycle continues.

The options that remain to Congress for reducing the debt burden inevitably require painful choices. McCormack argues the worst option is delay. Unfortunately, this is the option Congress has most consistently chosen. Acting now would allow reforms to be phased in, with protections for people nearing retirement and lower-income households. Waiting lets trust-fund depletion or market pressure decide who bears the cost. “The difference is not between pain and no pain,” he writes. “It is between limiting the pain through planning and allowing circumstances to impose it abruptly.”

If Congress wants to protect household budgets, the time to act is before the choice is taken out of its hands.

When the Fiscal Lab launched in September 2025, Parker Sheppard and William Beach asked the question: “How much would GDP [gross domestic product] have to grow to eliminate the deficit without raising taxes or cutting spending?”

One year later, the question is still timely. In August, when commenting on the federal debt reaching a new high, Treasury Secretary Scott Bessent said, “there’s nothing magic about the $40 trillion number. And we can grow our way out of that.”

Sheppard and Beach have updated their results from one year ago. While higher economic growth does lead to greater revenue and therefore reduces the budget deficit, growth by itself is highly unlikely to balance the budget.

They find that if Congress makes no changes to spending or taxes, real GDP would have to average 4.67 percent, up from 4.31 percent in the previous estimate, in order to eliminate the deficit in 10 years. The United States has only experienced such high growth in about 25 percent of the quarters since 1947. Put differently, GDP would need to grow a substantial 2.88 percentage points per year faster than the baseline of the Congressional Budget Office (CBO).

The authors also consider two other scenarios. First, Congress sharply reduces mandatory spending by 20 percent in the first year of the budget window and then allows it to grow at the same rate as in the baseline. Second, Congress reduces mandatory spending by 2 percent in the first year and then keeps its growth 2 percent slower than in the baseline. As shown in Table 1, these scenarios require average real GDP growth of 3.02 and 3.41 percent, respectively, to balance the budget.

Table 1. Real GDP growth needed to balance the budget in FY2036 (average annual percent growth, 2027–2036). Source: Authors’ calculations based on CBO’s February 2026 baseline.

Sheppard and Beach also consider a less ambitious and more realistic goal: achieving primary balance in which revenue covers all noninterest spending. As seen in Table 2, the real GDP growth rates needed to achieve primary balance under the same scenarios are closer to the CBO baseline.

Table 2. Real GDP growth needed to reach primary balance in FY2036 (average annual percent growth, 2027–2036). Source: Authors’ calculations based on CBO’s February 2026 baseline.

Gonshorowski on States and Medicaid Fraud and Program Integrity

On September 17, Drew Gonshorowski, the Fiscal Lab’s Senior Fellow in Means-Tested Programs, participated in a live podcast discussion on fraud and improper payments in Medicaid, co-hosted by Tradeoffs, a nonprofit news organization focused on healthcare, and the University of Pennsylvania’s Leonard Davis Institute of Health Economics. Gonshorowski, the former director of Medicaid and Long-Term Care for the State of Nebraska, was joined by Amir Bassiri, the director of Medicaid for the State of New York, and Kevin Lownds, the division chief of the Medicaid Fraud Division in the Massachusetts Attorney General’s Office.

All the participants agreed that fraud and waste in Medicaid are real and should be addressed. Gonshorowski, Bassiri, and Lownds each gave examples of problems they had dealt with, ranging from egregious cases of stolen patient IDs used to bill for services never provided to less sensational issues such as failure to sign documentation. They also discussed the Trump administration’s recent efforts to combat fraud as well as concerns some have that such efforts could disrupt legitimate patient care.

When asked if he was worried about people being hurt by excessive anti-fraud efforts, Gonshorowski observed that people are also hurt from inaction. “If you aren’t protecting your programs for the people that need them, and you’re also not policing whether or not they enter into services that actively harm them, you create a massive risk for your program.”

The Fiscal Lab Celebrates One Year at Nats Park

The Fiscal Lab launched on September 15, 2025. Since then, we have scored hundreds of bills for Members of both parties on issues including but not limited to taxation, means-tested programs, healthcare, infrastructure, drug policy, and housing. We have held dozens of private briefings with committee and Member staff as well as educational seminars on budget policy and the importance of fiscal discipline. The Fiscal Lab also educates through its YouTube channel, which includes short-form videos giving brief explanations of different budget concepts as well as longer-form conversations on economic and fiscal policy.

In July, the Fiscal Lab launched the Center for Strategic Fiscal Reform (CSFR), a regular meeting series to discuss pressing fiscal matters. CSFR is a successor to the Center for Strategic Tax Reform, headed by the late Ernie Christian, a prominent and tireless tax reformer. CSFR is designed to be a place for top minds to analyze the latest research and candidly debate the vast fiscal challenges that lie ahead.

While there is no shortage of work ahead of us, we also like to enjoy ourselves! To celebrate our anniversary, the Fiscal Lab team, along with family and friends, went to Nationals Park to see the Nats make an exciting comeback against the Los Angeles Angels on September 13. Fun was had by all. We also received a warm digital welcome!

Earlier in September, the Fiscal Lab’s Bill Beach analyzed the Bureau of Labor Statistics’s (BLS) August 2026 Employment Situation, which showed nonfarm payroll employment rising by 162,000 in August and upward revisions to job growth for both June (20,000 to 31,000) and, particularly notably, July (−23,000 to 21,000), with the unemployment rate holding at 4.1 percent.

We can also see rosy numbers when we look beyond the topline statistics. Manufacturing employment, which has seen a long downward trend over the past four decades, has increased by 56,000 this year. We see the three-month moving average of manufacturing employment in Figure 1. Beach also pointed to modest improvements in labor force participation.

Figure 1. Monthly Change in Total Non-Farm Payroll Employment (In Thousands)

Not all numbers in the report were good. The number of unemployed individuals rose to 7,031,000. These are people who are looking for work but remain jobless—and they deserve the attention of policymakers.

Of course, we’ll see what data revisions bring, but the latest report is a testament to the resilience of the US economy in the face of war, inflation, and financial market stress.

Hot Prices

While the BLS’s August jobs numbers look good, its Consumer Price Index (CPI) inflation numbers for the same month do not. The overall headline CPI rose 0.4 percent from the previous month and 3.4 percent over the past 12 months.

Much of the CPI’s rise owes to a jump in the gasoline index, which rose 3.9 percent over the month. However, the monthly core CPI, which strips out food and energy prices, also rose at a hot 0.3 percent, a tenth of a point above expectations (a 0.3 percent monthly rate is roughly consistent with an annual 3.5 percent rate).

Persistently high inflation is a major challenge for the Federal Reserve, whose primary job is price stability, but it is also a challenge for Congress. In a new Fiscal Lab video, Senior Fellow Parker Sheppard explained how both monetary and fiscal policy affect the price level.

Congress has given the Fed the power to print money, but if Congress continues to run large deficits, fiscal dominance could take hold—forcing the Fed to monetize that debt. Sheppard provided two starting points for how Congress can help reduce inflation. First, it could commit to a credible deficit target—such as 3 percent of GDP—to anchor expectations about Congress’s ability to pay off its debt. Second, the Congressional Budget Office (CBO) could count interest costs when it scores legislation, giving Congress a fuller understanding of a bill’s true costs.

The Deficit and Debt Are Family Affordability Issues

Recently, media outlets reported on a draft White House proposal to let low- and moderate-income families with a stay-at-home parent receive federal childcare subsidies. The proposal would modify the rules governing the Child Care and Development Fund (CCDF), which is designed to encourage parents to work by subsidizing their preferred childcare provider, whether a daycare center, the local church’s preschool, or a family member such as a grandmother. The proposal would let families use the subsidy even if a parent stays home.

Proponents argue that this change would make childcare policy more neutral by putting stay-at-home parents on a more equal footing with those who work. Critics counter that the choice to be a stay-at-home parent rather than participate in the workforce should not be subsidized by the federal government.

Although the proposal is about the flexibility of an existing program, the impetus behind it has much to do with affordability, which has been a top financial concern for many Americans. Whether it’s inflation, energy costs, housing, or healthcare, many citizens are anxious about their ability to make ends meet.

The Fiscal Lab does not weigh in on the merits or demerits of proposed program modifications like this change as that is for policymakers to decide, but we aim to be helpful to all parties in shedding light on the probable fiscal effects of policy changes. Given how central affordability is right now, it’s worth reiterating fiscal policy’s broader role in it.

Chronic, massive deficits and mounting concern over the US’s ability to service its debt have put sustained upward pressure on Treasury yields—pressure that spills over into the rates consumers pay on mortgages, auto loans, and credit cards. As the Fiscal Lab’s Joseph McCormack recently argued in a speech to the National Economists Club, the US’s worsening debt burden can only be resolved through some combination of lower future spending, higher revenue, higher inflation, or higher economic growth. While greater economic growth would be welcome, it would have to sustainably grow well above four percent—an extremely difficult feat—to balance the budget.

If Congress is to take affordability seriously, it will need to move in the direction of fiscal prudence.

The Fiscal Lab Expands

The Lab is thrilled to announce Drew Gonshorowski has joined as a Senior Fellow in Means-Tested Programs. Gonshorowski recently served as the Director for Medicaid and Long-Term Care for the State of Nebraska. Previously, he was a Senior Research Fellow with the Paragon Health Institute, where his work focused on Medicaid policy and budgetary analysis. He began his public policy career at The Heritage Foundation nearly 15 years ago, where he was a research fellow with the Center for Data Analysis.

Drew Gonshorowski joins the Fiscal Lab.

In Nebraska, Gonshorowski’s work focused on implementation of federal policy, prevention of fraud, waste, and abuse in Medicaid, and modernization and systems improvements for Medicaid programs. He led his program through a first-in-the-nation implementation of H.R. 1’s work requirements, designing end-to-end processes and solutions in state-owned systems. He also led his program in building a comprehensive set of policies, guardrails, and reimbursement structures to address issues around applied behavior analysis services, serving as a national model for program integrity reforms.

Gonshorowski joins the Fiscal Lab to apply his expertise in building reforms that ensure fiscal sustainability in means-tested programs. While his most recent work centered heavily on Medicaid, he will also work across all means-tested programs, including Medicare, Social Security, the Supplemental Nutrition Assistance Program (SNAP), and Temporary Assistance for Needy Families (TANF).

As someone who has built models to score federal legislation and then went on to run a state Medicaid program, Gonshorowski brings an extremely rare skill set to Capitol Hill. He is available to provide technical assistance to congressional offices as they build reform proposals regarding means-tested programs, and will bring his expertise to the Lab’s scoring services.

CR Seminar

Congress’s fiscal year ends at the end of September. Although Congress is supposed to pass 12 appropriations bills by October 1 to fund the discretionary side of the federal budget for the new fiscal year, it rarely follows the proper process. Instead, Congress frequently resorts to continuing resolutions (CRs), temporary measures that extend previously enacted levels of spending. Failure to fund the government through appropriations, CRs, or some other mechanism results in a government shutdown.

Although CRs may seem relatively straightforward, they can get complicated. To help congressional staffers better understand the ins and outs of CRs, the Fiscal Lab hosted a seminar, “Understanding Continuing Resolutions,” led by Senior Fellow Matthew Dickerson.

The Fiscal Lab’s Matthew Dickerson

Dickerson started with the history of CRs, noting that Congress has passed all 12 appropriations bills by the October 1 deadline only a handful of times since 1977—CRs, not on-time funding, are the normal state of affairs. And although people tend to think of a CR as simply extending last year’s funding at the exact same level, Congress can amend the standard rate-of-operations language to whatever level it wants—and has.

Even a CR that changes nothing on its face can still score differently from the prior year, because of scoring conventions like changes in mandatory programs (CHIMPs) and rescissions. CHIMPs let appropriators count savings from a mandatory program toward the discretionary total, freeing up room to spend elsewhere. Rescissions cancel funding Congress had already enacted in a prior law, which lowers the baseline a CR is measured against. Neither shows up as a change to the CR’s rate-of-operations language, but both can move the final number away from what “flat funding” would suggest.

Dickerson also discussed a “checklist” staffers should consider when reading a CR, how to review whether programs Members care about are included in a CR, and how a CR both expands and limits presidential discretion in using appropriated funds.

The House passed a Senate-approved CR on September 1, which President Trump signed the following day. This CR extends funding through December 11, so while a government shutdown has been averted for now, Congress will face another budget battle prior to the holidays. Therefore, knowing how CRs work is still especially relevant.

The Fiscal Lab has also published a video playlist on CRs to go along with the seminar.

Congress is considering a continuing resolution (CR) that would prevent a government shutdown when appropriations lapse at the end of the fiscal year (FY) on September 30, 2026. If enacted, this would be the 211th CR in the last 50 years.

Continuing resolutions are required because Congress is almost never able to complete the regular appropriations process on time. In the last 50 years, Congress has enacted all regular appropriations bills by the start of the fiscal year only four times. This feat was last accomplished 29 years ago in FY 1997 (as shown in Figures 1 and 2).

Figure 1. Continuing resolutions are common

Sources: Authors’ calculations based on Appropriations Acts and Congressional Research Service

Figure 2. Congress rarely follows regular order for appropriations

Sources: Authors’ calculations based on Appropriations Acts and Congressional Research Service.

The budget process is undeniably broken. Figure 3 shows the “regular order” of the budget process in blue and how many times those steps were successfully followed in the past 27 years. It shows the number of deviations from the process in red. Nearly every major step now routinely fails to be accomplished on time, if at all. Since fiscal year 2000:

· The president’s budget request was late 16 times.

· Congress has failed to adopt a budget resolution 12 times. Of the 15 resolutions it did adopt, 14 included reconciliation instructions. Only three budget resolutions were adopted by the April 15 deadline.

· Congress never completed all regular appropriations bills by the start of the fiscal year.

· There have been six government shutdowns, caused by failures to pass appropriations bills or a CR.

Figure 3. How many times the government followed “regular order” vs. deviated from law (2000–2026)

Sources: Congressional Research Service, US Government Publishing Office, and Congress.gov (updated through FY2026)

The process designed by the Congressional Budget Act of 1974 is aimed at promoting enactment of the annual appropriations bills. Moreover, it was crafted for different budgetary, economic, and political conditions than lawmakers face today. The current budget process is not focused on promoting sustainable fiscal outcomes or even ensuring that Congress spends its time on the most important policy issues. The consequences are clear: The drivers of rising deficits are left to grow on autopilot, leading to escalating budgetary stress.

1974 was the last year that discretionary spending made up the majority of annual spending. As shown in Figure 4, discretionary spending is now only 25 percent of the budget, while autopilot mandatory spending and net interest costs consume 75 percent of annual outlays.

Figure 4. Federal outlays by category, 1976–2036

Sources: Congressional Budget Office, The Budget and Economic Outlook: 2026 to 2036, Authors’ Calculations

Many lawmakers lament the breakdown of the “regular order” budget process and view the need to pass CRs as part of the problem. However, the prevalence of continuing resolutions is just a symptom of the larger problem.

The imagined “good old days,” when Congress routinely completed its budgetary work on time, were never the norm.

Even if Congress did diligently work to complete the annual appropriations process on time each year, that could misallocate lawmakers’ valuable time and attention because discretionary spending is a small and shrinking slice of the budget.

Congress should not necessarily measure the success of the budget process by whether lawmakers complete 12 appropriations bills on time. A modernized budget process would require Congress to confront the causes underlying the federal government’s unsustainable fiscal trajectory.

Continuing resolutions are a symptom of a broken process. The solution is not simply to restore the process of the past, but to modernize it for the fiscal challenges Congress faces today.

Presenting for the National Economists Club

Earlier this week, Joseph McCormack presented to the National Economists Club on the federal budget outlook. His lecture, “The Cost of Delay,” stressed that the federal debt will require deleveraging, which will put households under pressure. Moreover, the longer the federal government waits, the more painful this pressure will become.

The Fiscal Lab’s Joseph McCormack

McCormack discussed the broken budget process outlined above where Congress regularly fails to fund discretionary spending, an increasingly small part of the budget, on time, while mandatory spending and interest expenses grow as a fraction of federal spending. He also discussed the history of reforms Congress has tried before like the 1985 Gramm-Rudman-Hollings Act and the 1990 Budget Enforcement Act, which instituted deficit targets and discretionary spending caps, respectively. However, in both cases, Congress found ways to sidestep the rules put in place by these laws. For example, Congress can declare certain spending as “emergency” that does not need to be offset elsewhere. While certain proposals like a 3 percent deficit-to-GDP target are promising, McCormack argued that such rules need to be implemented in a way that Congress does not undermine them later.

McCormack pointed to current examples of the grim outlook having visible effects. For example, credit downgrades and a rising term premium have contributed to higher interest rates for auto loans and mortgages, driving up to higher costs of living for families. He also pointed to the different levers the government can pull to reduce the debt burden: 1) achieve future primary surpluses through fiscal reform (either reduce spending and/or raise revenue); 2) boost economic growth; 3) create surprise inflation to reduce the real value of debt; 4) hold government debt below market yields (what economists call “financial repression”); and 5) default.

Boosting economic growth would be beneficial, but it is highly unlikely that pro-growth reforms can alter the US’s fiscal trajectory on its own. Surprise inflation can work in the short run, but this is painful, and once markets come to expect higher inflation as a strategy, it will fail. Financial repression similarly punishes savers and could cause capital to leave the US, which would undermine investment, and default would be catastrophic because it would substantially weaken the dollar’s standing as the world’s reserve currency.

Fiscal reform is the only route that Congress fully controls. Moreover, it is essential to getting the US’s debt trajectory under control. The sooner Congress understands this and acts on this, the better.

Everything this week seems to come back to the price of borrowing. The national debt crossed $40 trillion, the Federal Reserve’s new chairman is moving in ways that could make servicing it more expensive, and Congress still scores legislation without counting the interest expense it generates.

The Road to $40 Trillion in Debt

This week marked a dubious threshold in our nation’s fiscal history, as gross federal debt exceeded $40 trillion for the first time in our Republic’s history. Since 1982, federal debt has grown from $1 trillion to $10 trillion in 2008, and it has quadrupled that staggering sum to our present level in just the last 18 years.

Figure 1. The road to $40 trillion in debt

These are big numbers, and we often see them exploited to score political points, without any real intent to make the difficult decisions that would improve our nation’s worsening fiscal condition. The Fiscal Lab remains committed to avoiding politics and helping Members of Congress and staff understand what the economic realities mean for our nation’s fiscal health, both at the national level and for everyday Americans.

The good news is that congressional staff are interested in reflecting upon and understanding the situation posed by our growing debt. Even during the August congressional recess, which is one of the few times that staff are able to take leave, the Fiscal Lab hosted a very successful and informative video conference with nearly two dozen influential staff from congressional Member, committee, and leadership offices.

The Fiscal Lab team addressed key elements such as borrowing costs, assets and inflation, the convenience yield, how debt affects the labor market, and the need to return to the Hamiltonian norm. Congressional staff were receptive to the considerations presented, and there was robust Q&A regarding economic growth, reforming means-tested programs, and elements related to the market for Treasuries. Equipping congressional staff with a greater understanding of the real-world effects and options for navigating a course back from the brink of fiscal crisis is among the most rewarding aspects of our work at the Fiscal Lab.

What Can Congress Do to Bring Down Inflation?

For the first time in eight years, the Federal Reserve has a new chairman, and bond markets have noticed. In a new video, Parker Sheppard explains what Chairman Kevin Warsh is doing and why the Fed cannot bring inflation down without help from Congress.

Warsh has outlined three key changes to try to curb inflation: a firm commitment to the 2 percent inflation target after years of flexible targeting, a narrower remit on the view that Fed programs addressing fiscal and social policy invite political interference, and a smaller balance sheet. Sheppard also highlights the direct budgetary implications of the Fed’s actions. With debt held by the public approaching 100 percent of gross domestic product (GDP), rates only a third of a percentage point above the Congressional Budget Office’s (CBO) projections, roughly where they are running this year, would add $1.3 trillion to deficits over a decade.

Congress delegated monetary policy but kept the borrowing power. Someone must set the price level, and someone has to balance the budget. Sheppard points out that if we run large enough deficits and the roles invert so that the deficit sets the inflation rate and the Fed prints to close the gap, we find ourselves trapped in a state of fiscal dominance. Perhaps the worst possible outcome is if Congress continues to create large deficits and the Fed refuses to accommodate them, both end up fighting inflation, and nobody balances the budget.

He concludes with two practical steps Congress can take. First, it should commit to a credible deficit target, such as 3 percent of GDP, a level it has achieved repeatedly in the postwar era. Second, when CBO scores legislation, it should include the associated interest cost of deficit spending.

Washington Math and the True Cost of Federal Spending

Parker Sheppard’s second practical step for Congress is the subject of a new essay by Joseph McCormack and Michael Schultz. Because scoring convention excludes the interest expense of a deficit-financed bill, Congress is left to debate the price of legislation without counting the price of borrowing to pay for it. To borrow a term popularized by the Economic Policy Innovation Center (EPIC), this is Washington math.

McCormack and Schultz illustrate the cost of Washington math by evaluating H.R. 2, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). CBO scored the bill at a net deficit increase of $140.9 billion between 2015 and 2025. Applying the average rate Treasury actually paid on its marketable securities in each of those years adds $18.8 billion that the score never counted, bringing the true cost to $159.7 billion.

Figure 2. Cumulative scored deficit and cumulative unscored interest of H.R. 2, 2015–2025

This still understates the problem, because MACRA was financed during a stretch of unusually low rates. Had CBO’s own January 2015 forecast held true, the cost would have been closer to $34 billion, or 24 percent above the headline score. Looking forward, CBO projects a $1.9 trillion deficit in fiscal year 2026, which, at an average rate of 3.5 percent, generates roughly $66.5 billion in interest in 2027 alone, a cost that recurs as the debt is rolled over.

CBO’s scoring convention is not wrong so much as incomplete due to statutory requirements put in place to provide a consistent basis for comparing proposals. The problem is that Washington presents the incomplete headline score as the full fiscal cost. A more complete score would show three figures: the direct budgetary effect, the debt-service cost that follows when that effect is deficit-financed, and a sensitivity range for rates above the baseline.

This week we look at two sides of the same problem—as well as the work we are doing to address it. In his latest analysis of the July jobs report, Bill Beach highlights that the labor force is shrinking, with fewer Americans working or looking for work than at any point since February. A smaller labor force may still support a rising standard of living, but only if those who remain can maintain a higher level of productivity. This raises an important question our statistical system cannot currently answer: Is AI actually making American workers more productive? The second half of this issue covers the Fiscal Lab's research project to build a measurement framework to answer this increasingly pressing question.

Cooling Labor Markets

Last week, Bill Beach reacted to the Bureau of Labor Statistics’ (BLS) July 2026 Employment Situation. The 23,000 decline in total nonfarm payrolls garnered the most media coverage, but the underlying data point to something more persistent than a single bad month.

Beach pointed to two other sets of numbers—downward revisions and slowing labor force growth—as further indicators of labor market softening. In addition to estimating negative job growth for July, BLS reduced May and June job growth from 129,000 to 63,000 and 57,000 to 20,000, respectively. We can see the slowdown in monthly job growth below in Figure 1.

Figure 1. Monthly Change in Total Non-Farm Payroll Employment (In Thousands)

Beach cited several examples of declining labor force participation. Since February, the civilian labor force has fallen by 1,371,000, and the labor force participation rate has dropped 0.63 percentage points to 61.4 percent (as shown in Figure 2). This trend is alarming because, as Beach pointed out, "the decline means that those who continue to participate need to be achieving ever greater levels of productivity to ensure growth in the nation's standard of living."

Figure 2. Labor Force Participation Rate (Percent of the Civilian Population)

National Task Classification

As highlighted in our latest labor report, a shrinking labor force places increasing emphasis on our ability to maintain and increase productivity. But the wave of AI technology potentially driving productivity gains is not currently captured in our official productivity statistics. Without a reliable way to measure the transformation of work at the task level, we cannot accurately gauge whether AI is delivering the productivity gains necessary to offset the shrinking labor force. AI is only the latest technological revolution to highlight this problem in productivity measurement. In the early 1990s, economists underestimated the productivity gains from desktop computing and consequently misjudged how fast the economy was actually growing.

We are increasingly convinced that the solution to this problem lies in the development of a national task classification system. The Fiscal Lab has spent much of the summer architecting just such a system that statistical agencies can implement to measure work at this level. We have had several productive meetings on the subject with both government and private sector groups, and there is a real and growing interest in this statistical measurement effort. Although there are a number of potential paths to building such a task classification system, there is a strong consensus that the currently available data are not adequate to answer the questions Congress is already asking about AI and jobs.

We propose that the federal statistical bureaus pursue the most expedient path to implementing task-level measures by building on existing sampling frames. Through the Quarterly Census of Employment and Wages, the federal government already collects data from millions of employers covering more than 95 percent of American jobs. Adding a set of questions about tasks to what already exists would allow us to follow changes at the task level up through occupations and industries to productivity. For a relatively small sum, policymakers would gain a much clearer view of what AI is actually doing to work.

Appropriations Basics

With Congress’s fiscal year ending on September 30, the Fiscal Lab recently hosted a seminar, “How to Read Appropriations Bills,” led by Matthew Dickerson for House staffers. The Fiscal Lab spends a large portion of its time on educating mid- and senior-level staff. High turnover in these positions fuels a steady demand for critical skills development, and the Lab’s training work helps build a staffer’s ability to support the House or Senate Member’s constitutional duties.

Appropriations provide agencies funding for particular purposes over specific periods of time (typically, but not always, one fiscal year or “full year”). Congress is supposed to fund the discretionary component of the federal budget—items including defense, disaster, education, and infrastructure—through 12 regular appropriations for the upcoming fiscal year (October through September). Dickerson went over what goes into the regular appropriations bills as well as related concepts including supplemental appropriations, which provide additional budget resources; continuing resolutions, which extend current funding when regular bills are not passed; omnibus bills, which are various packages of some or all 12 regular bills. He also discussed features of appropriations bills including riders and provisos, rescissions, and earmarks.

Fiscal Lab Senior Fellow Matthew Dickerson speaking to staffers on the federal appropriations process.

Importantly, Dickerson walked through how to interpret an appropriations bill. Staffers need three documents. First, they need the actual bill text, but it is often short and not detailed, despite authorizing billions of dollars in spending. Second, they need the corresponding House or Senate Appropriations Committee Report, an explanatory statement for how spending should be carried out. Third, they need the Report’s tables, which show detailed funding levels, the difference between actual spending and the president’s requested amounts, and the increases and decreases in spending compared to last year.

The Fiscal Lab has also created a video playlist going over many of the same topics Dickerson addressed.

Beach at NABE

On Tuesday, July 28, Bill Beach joined several distinguished speakers at the National Association for Business Economics (NABE) Foundation’s 23rd Annual Economic Measurement Seminar in Washington, DC. The seminar brought together expert data producers and data users for a practical discussion of the statistics, forecasts, and methods economists rely on to understand the economy. The program examined more than 100 data series, how they are applied, and how they provide a comprehensive understanding of the most important measures of economic activity, supporting better discussions around business decisions, policy debates, market analysis, and forecasting.

The NABE Economic Measurement Seminar

Beach addressed a large audience as part of the “Forecasting and Financing Fiscal Deficits” panel, moderated by Dana Saporta, retired economist and former NABE board member, alongside Joshua Stachura of the US Treasury Office of Debt Management. The panel focused on the underlying data and concerns surrounding the United States’ deficit and debt problem. Beach delivered an engaging and, at times, humorous presentation that focused on the very serious fiscal issues facing the country: rising deficits and debt, increasing interest expense, and the expansion of mandatory spending programs that are crowding out discretionary spending and private investment, and contributing to inflationary pressure.

Beach emphasized the need for a return to the “Hamiltonian norm,” the principle that Congress should not act over the long run in a way that endangers the public debt or weakens confidence in its convertibility into other assets. Unfortunately, the United States has moved away from this norm in recent decades. As Beach noted, deficits are no longer being driven primarily by discretionary spending, but increasingly by mandatory spending and interest expenses. He stressed that interest expenses now exceed all defense discretionary spending and will soon exceed nondefense discretionary spending. Moreover, while the Congressional Budget Office (CBO) baseline already shows a troubling rise in debt levels, even that outlook may be too rosy.

Despite these challenges, Beach argued that the country is not destined to follow the current debt forecast. Avoiding that path, however, will require credible analysis, discipline, bipartisan solutions, and the political will to act in ways that lead to better fiscal choices today.

The Hamiltonian Norm

In a new Fiscal Lab Update, Bill Beach argues that for Congress to turn America’s fiscal ship around, it needs to revive the Hamiltonian norm, the commitment to always defend the integrity of US debt. This norm stipulates a return to fiscal discipline after periods of deficit spending or excessive revenue reductions. The name comes from the United States’ first Treasury Secretary, Alexander Hamilton, who convinced European money markets in the 1790s to lend to the United States to pay off enormous debts incurred during the American Revolution and very early years of the republic.

Importantly, the norm does not mean that the incurring of debt is inherently problematic or that the debt needs to be paid off in full. Hamilton believed in refinancing existing debt to stay current on fiscal obligations, and that “a national debt, if it is not excessive, will be to us a national blessing” because a moderate debt would establish American credit worthiness.

We can see Congress’s commitment to the Hamiltonian norm for much of US history in the figures below, as well as its abandonment of the norm in recent decades. Figure 1 shows budget deficits (in red) or surpluses (in green) as a percentage of gross domestic product (GDP) from 1790 to 2025. Through World War II, we see a pattern where large deficits are incurred during wartime, but most other years see surpluses or very small deficits. We then see some surpluses in the postwar years as well as 1998–2001, but we otherwise see annual deficit after deficit, especially large since the Great Recession.

Figure 1. The federal budget as a percent of GDP

Figure 2 shows the ratio of publicly held debt to GDP over the same period. We see similar patterns. First, debt to GDP trends downward as the United States paid off its Revolutionary War debts. We then see spikes related to wartime spending followed by falls. However, beginning in 1974, we see debt-to-GDP rise again and become especially pronounced in the present day (with a brief respite in the 1990s and early 2000s).

Figure 2. Publicly held debt as a percent of GDP

As we have written repeatedly, the United States’ fiscal situation is expected to only worsen. Publicly held debt to GDP already is at historical levels, and absent change, it is expected to rise to a massive 175 percent by 2056. Unless there is a return to the Hamiltonian norm, Americans can expect some painful combination of austerity, higher taxes, and inflation in the future.

The New Center for Strategic Fiscal Reform

The Fiscal Lab launched a new program this past week: the Center for Strategic Fiscal Reform (CSFR). This program builds on a Washington institution, the Center for Strategic Tax Reform, that conducted monthly seminars on tax and fiscal issues for over 40 years. That Center nurtured many of Washington’s most important tax reform achievements of the past half century and is widely credited with lowering the tax burden on investment and innovation.

Like the earlier Center, CSFR will initially sponsor monthly seminars, but its focus will be much more on policy changes to enhance fiscal stability and economic growth than on changes to the tax code. The Center will be wholly housed inside the Fiscal Lab, which should encourage discussion across political parties of steps to stabilize federal finances. CSFR also will be keenly interested in research on how better to measure the effects of federal spending on the social and economic dimensions of American life. In that vein, improving the measurement agencies of Congress, principally the Congressional Budget Office (CBO) and the Staff of the Joint Committee on Taxation (JCT), will be a regular seminar topic.

Our inaugural meeting was a great success. About 45 people attended, and they were just the type of influential individuals you would want associated with this important undertaking. CSFR’s next meeting will be in September.

Actual Interest Rates vs. CBO Projections

In a new Fiscal Lab brief, Matthew Dickerson observes that current interest rates are above the Congressional Budget Office’s (CBO) February 2026 projection. For example, as shown in Figure 1, the actual 10-year Treasury note yield was 4.20 percent in the first quarter of 2026 (14 basis points higher than in the baseline) and 4.42 percent in the second quarter (33 basis points higher than in the baseline).

Figure 1. 10-Year interest rates above CBO projections

Dickerson estimates that if the gap between actual and projected rates persists, federal outlays would increase by about $1.3 trillion over the next decade. With publicly held debt now larger than the US economy, he warns that high interest rates will worsen annual budget deficits.

The National Debt Is Already a Household Problem

Joseph McCormack looks at a recent report from the US Government Accountability Office (GAO), which lays out the grim fiscal situation facing the country, in a new essay. As shown in Figure 2, not only is publicly held debt larger than 100 percent of GDP, it is expected to rise to a whopping 251 percent by 2056.

Figure 2. Publicly held debt as a percentage of gross domestic product

McCormack observes that the growth and trajectory of the debt have led to US credit downgrades and upward pressure on interest rates of not only US debt, but also mortgages, car loans, small business financing, and credit cards. Despite decades of warning signs, Congress has waited to confront budget deficits and to reform programs driving the deficit—Social Security and Medicare. McCormack points to potential reforms for Social Security, including benefit adjustments, means testing, and phased changes in eligibility. As he points out, “Gradual reforms, enacted today, may not be painless but are preferable to allowing the trust fund to fully deplete, which may force sudden reductions or rushed crisis legislation.”

Jaws as Budget Allegory

Writing in The Hill, Doug Branch argues that the 1975 classic Jaws is an analogy for the congressional budget process. After the first attack, the mayor of Amity Island claims the death was the result of a boating accident and refuses to close the local beach for fear that doing so would harm the local economy. After a second attack, the locals wrongly proclaim victory when they catch a tiger shark and ignore the warnings of consulting marine biologist Matt Hooper.

Like the mayor and locals who don’t want to recognize the real problem before them, Congress operates under a broken framework, the 1974 Budget Act, which fails to prevent chronic budget deficits. If we don’t move away from this flawed framework, the debt could swallow us whole.

A Puzzling Jobs Report

Job growth was frustratingly low in June as nonfarm payrolls rose by around 57,000, well below the 100,000 expected. In his latest jobs report, Bill Beach argues the report was full of surprises. Many observers thought the World Cup would produce more jobs in Leisure and Hospitality as soccer fans flocked to hotels, bars, and restaurants, but this sector fell by 61,000 jobs. On the other hand, Professional and Business Services, which is especially vulnerable to AI transformation and includes fields like consulting and computer systems design, grew significantly, adding 36,000 jobs.

Although the unemployment rate fell from 4.3 percent in the previous month to 4.2 percent, the decline is likely due to a falling labor force participation rate. Beach also points to especially low participation from people ages 16 to 24. While this decline actually began many years ago and has been stable since around the Great Recession (as seen in Figure 3), it is troubling because it means many young Americans are choosing not to work.

Figure 3. Labor force participation rate, workers aged 16–24

Why the Fiscal Lab

Regular readers of this Substack will know why we created the Fiscal Lab: to educate Members of Congress and their staff on the fiscal crisis facing the United States and to provide analytical support for Members’ ideas to address this crisis.

In a new Fiscal Lab Update, Beach goes over these two reasons and how the Fiscal Lab fills a gap on Capitol Hill. The Fiscal Lab puts on seminars and holds briefings with House and Senate staff to teach them about the budget process, the major drivers of the national deficit and debt, and how poor fiscal policy both harms households and compromises the government’s ability to provide critical functions like defense, public infrastructure, and a social safety net.

Working with both sides of the political aisle, the Fiscal Lab provides scores and analysis that the CBO and Joint Committee on Taxation (JCT) do not have time to give. As Beach says, the Lab is “dedicated to the proposition that no good idea for addressing our fiscal crisis should die for lack of analytical support.” The Lab has also assisted Members’ offices in making clearer requests to the CBO and JCT, which has led to more productive conversations between those offices and the scoring agencies.

We’re proud of the difference we’re making on the Hill, but the debt and interest rate trends covered in this issue make clear we still have far more work ahead.

Are the Working Families Tax Cuts Working?

July 4th is the 250th anniversary of the United States, but it’s also the one-year anniversary of the Working Families Tax Cuts Act (also called the One Big Beautiful Bill Act). In a new Fiscal Lab update, Matt Dickerson argues that this law has combined household tax relief with pro-growth tax policy.

He points out that the IRS has issued $50 billion more in refunds than it did at this time last year. The average refund for 2026 is $3,276, up $337 from last year’s $2,939. Moreover, as seen in Figure 1, this relief is broad based, as a whopping 96 percent of taxpayers who received a tax cut earned less than $200,000.

Figure 1. Most tax filers under $200,000 receive a tax cut

Dickerson also stresses the law’s restoration of immediate expensing for capital investment and research and development and allowed expensing for new manufacturing structures. These policies reduce the cost of building, hiring, and producing in the United States and improve economic growth.

A Whirlwind Tour of US Budget History

To celebrate America 250, Doug Branch gives an overview of the history of the US budget.

Modern federal budgeting begins with the 1974 Budget Act, which created the House and Senate Budget Committees as well as the Congressional Budget Office (CBO). Unfortunately, the 1974 law has failed to reduce annual deficits.

Branch turns to pre-1974 history to see if there are any lessons to be learned. Prior to 1921, the budget process included a mix of features including dispersed appropriations, the president sometimes spending money ahead of Congress, and project-specific bonds for major expenses like the Mexican-American War and Panama Canal. The Budget and Accounting Act of 1921 called for a single, consolidated budget and created the Office of Management and Budget (OMB) and the Government Accountability Office (GAO). Following the 1921 law, a shift occurred with executive branch personnel determining increasing levels of funding then approved by Congress.

As shown in Figure 2, Branch observes that the United States saw surpluses in 83 of its first 125 years, but it has seen deficits in 86 of the last 109 years. With the 1974 Budget Act failing to achieve fiscal balance, Branch argues budget reform is “ripe for consideration” as we look back on the last 250 years.

Figure 2. Federal budget balance percent of GDP, 1792–2026

A New Budget and Economic Model

The CBO’s baseline is a projection, built on certain assumptions set by law, of budgetary and economic outcomes. This baseline, which is the benchmark used to score legislation, relies on single point estimates, and it often does not report the uncertainty surrounding those estimates.

Last week, the Fiscal Lab unveiled a preview of the Fiscal Lab Aggregate Revenue and Expenditure model (FLARE). Developed by Parker Sheppard, FLARE is a budget and economic forecast model that includes a range of estimates, rather than just one point estimate, and is designed to complement CBO’s regular baseline.

The budget side of FLARE calculates aggregate revenues and expenditures for the federal government, while the economic side can be run with revenues and expenditures as inputs to forecast the economic variables. The macroeconomic effects on these economic variables then feed back into the budget estimates.

FLARE is designed to be simple, transparent, and easy to update. The model contains only six variables: real GDP growth, inflation, average interest on federal debt, population growth, aggregate revenue, and aggregate outlays. It also produces outcomes similar to the CBO’s baseline projection of real GDP, inflation, and the interest on federal debt as shown in Figure 3, where CBO’s baseline (blue) and FLARE’s forecasts under different rules (yellow and green) tend to be very close in the near term, though the interest rate projections diverge more in the outer years. This simplicity is a major strength of FLARE as it can produce quality forecasts with less information than CBO uses.

Figure 3. Economic outlook comparison

FLARE is still being developed. We are working to add greater detail to see projections of specific forms of revenue and outlays rather than aggregates. We are also working to expand its ability to capture economic volatility.

When FLARE is fully ready in the coming months, users will be able to interact with the model by specifying policy paths for the variables included in the model or by constructing simple rules for spending (e.g., a “current policy” rule where Congress keeps current tax rates and spending levels, adjusted for inflation, in place).

Happy Independence Day!

The Fiscal Lab is excited to announce the addition of a new senior fellow and two summer interns.

Matthew D. Dickerson

Matthew Dickerson has joined the Lab as a senior fellow in budgetary analysis. He comes to us from the Economic Policy Innovation Center (EPIC) where he served as director of budget policy.

Dickerson will be helping the Lab ramp up its educational programming to arm Members of Congress and their staff with practical skills and knowledge about the budget process and fiscal policy. He and colleagues at the Lab will host a briefing series, produce videos, and develop supporting resources.

In addition to the Lab’s scoring services, Dickerson can be available to provide technical assistance to congressional offices as they are crafting legislative proposals or thinking through fiscal policy issues.

Dickerson is also the founder and president of Baseline Policy and author of the Baseline Policy Brief.

Previously, Dickerson spent several years on Capitol Hill in different roles including serving as senior policy adviser on the House Budget Committee where he helped develop the fiscal year 2024 “Reverse the Curse” budget resolution. Dickerson was also the director of the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget.

Amy Liu

Amy Liu joins the Fiscal Lab this summer taking on a central role in two of the Lab’s key initiatives. A recent Princeton graduate with a degree in economics, with minors in statistics and machine learning and creative writing, Liu brings both quantitative rigor and a gift for clear communication to translate complex fiscal research into writing that policymakers and the public can actually use. Her senior thesis examined how regulatory stringency shapes financial sector outcomes, a line of inquiry that connects directly to the Lab’s focus on the institutional dimensions of fiscal policy.

Liu is helping to build out the Center for Strategic Fiscal Reform (CSFR), which will host regular convenings to examine critical budgetary issues alongside new research as it emerges. The CSFR succeeds the Center for Strategic Tax Reform, led by distinguished tax reform advocate Ernie Christian, and carries forward that tradition of bringing serious policy thinking to bear on the country’s fiscal challenges. Alongside that work, Liu is contributing directly to the Lab’s bill scoring efforts, where she has already provided substantive input on several draft pieces of legislation.

Will Martin

Will Martin is a rising junior at Seton Hall University studying economics and business analytics. Martin joins us this summer to help with an ambitious project to develop a national task classification system that links task-level economic activity to occupations, and from occupations to industry-level output. The goal is to create a more granular, adaptable framework for understanding innovation at the task level and how improvements at this level drive growth in the economy. Martin has already completed an extensive literature review and evaluated the strengths and weaknesses of existing classification systems. We expect to publish a research paper based on this work in the fall.

Previously, Will worked in sports coaching and leadership in high school, as a consultant and VP at Consult Your Community in college, and also led a commercial YouTube channel. Will has four years of experience in applied statistical research, using analytics to drive product development at his startup, Emerald. He is particularly interested in studying the impact of new technology, especially AI, on regulatory policy.

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.