One of our top themes of 2021 was the return of big government. The pandemic has required publicly coordinated solutions, which some have suggested could be productive in other arenas. The accumulation of deficits and debt to finance these endeavors no longer appeared to be a constraint.

Late last week, the limitations of this fiscal philosophy became apparent. The Build Back Better (BBB) initiative, a centerpiece of the Biden administration’s social agenda, hit a legislative wall. And while one senator has been credited (or blamed, depending on your perspective) for the blockage, the past few weeks have raised a number of difficult questions about public budgets.

The BBB included a wide range of measures covering day care, education, climate change and tax credits for parents. Financing was to come from debt and a series of revenue enhancements. The merits and economics of the BBB have been hotly debated, with impressions falling largely along partisan lines. But it was a non-partisan analysis by the Congressional Budget Office (CBO) that may have sealed the initiative’s fate.

Fiscal measures in the United States that are passed through the budget reconciliation process are limited by the Byrd rule, which places boundaries on deficit spending during and after a ten year window following adoption. Over time, legislation sponsors have used a range of budgetary tricks to work around this limit; among the most common of these are making generous assumptions about incremental economic activity that will be generated and sunsetting key components of bills after only a few years.

Weekly Economic Commentary - Chart 1