A new report by EPI Director of Research Josh Bivens aims to radically redefine how “fiscal responsibility” should be evaluated. Bivens argues that tax and budget plans are normally constructed almost solely for the purpose of showing how a mix of tax increases and spending cuts can lead to lower budget deficits—which shifts attention almost exclusively to national debt. This report, which examines EPI’s “Budget for Shared Prosperity,” however, explains why a new concept of “fiscal responsibility” needs to be embraced—one in which full employment and equitable distribution in the economy are primary goals of fiscal policy.

Bivens argues the main threats to a typical family’s economic success are chronic downward pressure on aggregate demand (decreased spending by households, business, and government), which makes it harder to reliably sustain low unemployment, and high levels of inequality indicating that rich households claim a disproportionate share of income growth. EPI’s Budget for Shared Prosperity aims to address the dangers posed by both of these threats. In addition to meeting these challenges, EPI’s budget also decreases the United States’ debt-to-GDP ratio over time—but Bivens notes that drives toward debt reduction should not allow policymakers to ignore—or even exacerbate—pressing problems facing working people.

“Myopically prioritizing debt reduction over other goals has real consequences for working people,” said Bivens. “Policymakers should realign their fiscal priorities to help working families reap the benefits of a good economy. Pairing progressive tax increases with increased public spending on things like infrastructure, health care, education, and transfers to low-and moderate-income households can meet all goals of fiscal policy, not just those focused on reducing debt.”

The first fiscal priority of the Budget for a Shared Prosperity addresses is ensuring genuine full employment. Bivens explains that full employment has been too rarely achieved in recent decades, and is getting harder for policymakers to reliably achieve. To get to full employment, policymakers should pursue more expansionary fiscal policy, which includes debt-financed spending during recessions and progressive tax increases aimed at rich households or corporations that finance greater spending on public investments and income support programs during nonrecessionary periods.

The second fiscal priority Bivens identifies is fighting economic inequality. He explains that federal spending can direct resources toward low-and moderate-income households that have not shared proportionately in the fruits of overall growth. Additionally, progressive tax policy should be used aggressively to reduce economic “bads,” such as greenhouse gas emissions, excess market power in the finance sector, and broader inequality.

Finally, after the other objectives are met, Bivens argues that policymakers can turn to minimizing the potential challenges posed by high debt levels. These challenges are often substantially overstated, but are still worth policymakers’ attention. For example, while the probability of interest rates rising in the near future looks quite small currently, a smaller debt ratio would even further minimize any damage from unexpected future interest rate increases. Crucially, however, lower debt ratios do not require balanced budgets or surpluses, but can instead be achieved with modest deficits. In short, the cost of high debt ratios is likely not zero, but the benefits of reducing these debt ratios are often quite overstated. Policymakers need the analytical tools to think seriously about these trade-offs, and this paper helps provide them.