The Economy Is Doing Fine, the Federal Budget Not So Much
Concrete Evidence (February 23, 2026)
Predictions are hard—especially about the future—and the Congressional Budget Office is hardly infallible. But for those who closely follow the American economy and federal debt, the CBO’s annual “Budget and Economic Outlook” report is required reading.
The 2026-2036 edition, out now, left me with a few major takeaways. One is that the U.S. is home to a powerful, growing economy—whatever immediate hiccups we may face, given the weak quarterly growth the Commerce Department just announced—and we should be grateful. Another is that our fiscal policy has been extremely irresponsible for far too long. A third is that the exhaustion of Social Security’s trust fund, now about half a decade away, will be a key opportunity to get on a better track.
America has long been one of the richest countries in the world, and the CBO sees these times as pretty tranquil. After inflation, it projects, GDP will grow around 2 percent annually for the next decade. The unemployment rate remains close to its historic low point, expected to run around 4 to 4.5 percent. By any reasonable metric, the American people are rich, we’re gradually getting richer, and the overwhelming majority of us have jobs if we want them.
With an economy like that, living within our means should not be a tall order. But for decades we’ve managed to spend a lot more than we tax—and with the Baby Boomers well past their prime earning years and into retirement, the situation is not going to improve on its own.
The CBO puts the 2026 deficit—not the total debt, just this year’s difference between what the federal government will spend and what it will take in—at $1.9 trillion. That means we’re borrowing more than $5,000 for every person in the country, and around $6 for every $100 in value the entire economy produces, over the course of the year.
In 2036, the deficit will be close to 7 percent of GDP. The total debt will be 20 percent larger than that entire year’s output and still headed up.
Since last year, CBO’s deficit projections for the 2026-35 period worsened by about $1.4 trillion, with the recent tax bill expected to reduce revenue (though it also boosts economic growth). Tariff hikes only partially make up the loss (with the opposite effect on growth) in the CBO’s estimates—which came before the Supreme Court struck many of the tariffs down. It remains to be seen how much money will be refunded and whether the administration can find alternative ways to keep high tariffs going.
Where do we go from here? Though it’s not intended as a policy roadmap, two of the new report’s appendices highlight a key opportunity ahead.
One focuses on the “trust funds” that pay for, among other things, Social Security—a program that by all accounts is in deep trouble and a substantial deficit driver.1
Social Security’s main trust fund built up a balance while the Baby Boomers were in their prime, although that money was borrowed by the rest of the government rather than actually saved. In recent years, though, Social Security has consistently spent more than its payroll taxes have raised, and CBO predicts the remaining trust-fund balance will run out around 2032.
That is a key fork in the road.
In theory, if Congress does nothing, Social Security benefits must be cut to match the program’s revenues—by about 7 percent in 2032 and 28 percent the next few years. The CBO generally assumes this won’t happen, but in another appendix, the agency finds these cuts alone would reduce the program’s spending by about 1 percent of GDP.
Of course, the CBO’s usual assumption is the right one, because there really is no way it will happen. The threat of it will force some sort of action. But will we get a lazy response from Congress or a serious one?
The lazy response would simply extend the status quo: We dispense with the notion of a trust fund, and we keep borrowing money to make up the difference between what the program brings in and what it spends. In that case, we’re going to find out how much money the federal government can borrow before a debt crisis hits or interest rates become untenable.
The serious response, of course, would be for Congress to work on a mix of spending cuts and tax hikes that bring Social Security—and ideally the rest of the budget—into sustainable long-term alignment.
Maybe the threatened cuts will give fiscal hawks the leverage they need to make that happen come 2032 or so. Or maybe we’re in for a wild ride.
From the Manhattan Institute
“State legislatures should expand oversight of their public universities,” say John Sailer and Tal Fortgang.
New York City’s system for special-education litigation is driving up costs, writes Jennifer Weber.
Other Work of Note
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A study of ghost guns in California, finding their growing prevalence might increase gun suicides, but with null results for gun homicides.
Is the effect of childbearing on women’s earnings overstated? (See also this writeup.)
Justin Nix summarizes what we know about police shootings.
Measuring lead exposure over 100 years based on preserved hair samples.
Why are kids with more siblings more likely to become delinquents?
If you pay high-performing teachers to move to low-achieving schools, do their skills transfer?
“[L]egally protecting the medical marijuana retail market reduced quitting by racial and ethnic minorities but not non-Hispanic whites.” The authors theorize that, since minorities are more often arrested for marijuana, legalizing it changes the risk of using it for them the most.
A Senate report on modernizing the FDA.
How the job market responds to changes in illegal immigration.
Medicare’s situation is a little more complicated: The CBO and the program’s trustees disagree on when its Hospital Insurance trust fund will run out, while other parts of the program spend a ton of money without having to worry about a trust fund running out.
What happened to the locked box Al Gore told us about in 2000?