CBO’s Long-Term Budget Outlook: What It’s Telling Us

June 5th, 2012 at 9:58 pm

While chatting with a colleague today about the new CBO long-term budget outlook, we agreed there wasn’t much new there, but then he said something that stuck with me:

“Of course, it shows that we can afford the entitlements.”

To hear everyone from the WaPo editorial page to Bowles/Simpson to all the R’s and many of the D’s, there’s an entitlement crunch, crisis, death spiral, or whatever…waiting for us out there in the future if we fail to muster the steely-eyed courage to face it.  And “face it” invariably means cutting benefits, privatizing, voucherizing, raising the retirement age, means testing…basically, fixing them by breaking them.

[EG, this AM's WaPo: "New estimates the Congressional Budget Office (CBO) released Tuesday underscore that Medicare must change, a lot."  A few lines in: "...a death spiral of ever-higher interest payments."]

Well, look at this chart, one I’m sure will be showing up all over the place.  It shows the debt as a share of GDP projected well into the future under two different scenarios.  Under the explosive scenario—the one on which all the scolds will focus—debt swamps the economy, reaching 200% by 2037.

But look at the other line.  Under that scenario, which in fact happens to be current law (meaning all the Bush tax cuts expire, for example), debt stabilizes as a share of the economy in a few years and then starts down a slow glide path.  And Medicare, Medicaid, and Social Security as we know them today are all in that bottom line.

Under that scenario taxes go up and spending is restrained compared to the alternative baseline.  Some of the assumptions—like we allow Medicare payments to doctors to fall sharply or all the tax cuts permanently expire next Jan—are wholly unrealistic.  But there are unrealistic assumptions under the other scenario too (the federal gov’t is not going to be spending 36% of GDP by 2037 (the historical average is about 21%)).

But generally speaking, and with some tweaks, there’s no reason why something like that bottom line’s baseline couldn’t prevail.  The Bush tax cuts would all have to eventually sunset, and we’d need to continue–and ramp up–what looks like early progress on slowing the growth of health care spending.

But aside from dysfunctional politics feeding a largely misleading public debate, we could do this.  If we, as a nation, decide that we want to achieve fiscal sustainability and preserve the entitlement programs, along with gov’t’s other critical functions, it is well within our means to do so.

So sayeth the CBO.

(H/t: JH)

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6 comments in reply to "CBO’s Long-Term Budget Outlook: What It’s Telling Us"

  1. Charles Becker says:

    As I understand it, the extended baseline scenario depends on letting all the Bush-era tax cuts expire. That’s a substantial amount of revenue, $500B/yr vs $100B/yr if only the top bracket doesn’t expire. Considering the miracle of compound interest, I don’t see any possible way to achieve the extended baseline scenario without that revenue. I don’t mean to bludgeon the author with his own words, but in terms of achieving anything like the extended baseline scenario, “Some of the assumptions … are wholly unrealistic” seems like quite an understatement.

    Maybe in 25 years from now the federal government won’t be spending 36% of GDP, but I wouldn’t dismiss it out of hand. The only prior time in history that we’ve spent as much as we are now (~24% of GDP) was during WWII. As I’ve written elsewhere, the combination of industrial automation, international telework, and the global transportation infrastructure mean that US workers are under pressure as never before. It’s entirely conceivable that 7-8% unemployment and zero increase in median incomes represent the future.

    Planning for that scenario means that if things turn out better, we can party.


    • Dan Tomkinson says:

      Isn’t it fair to ask WHY those assumptions are “wholly unrealistic”?

      Did we not, as a nation, generally enjoy reasonable prosperity under the tax code as we knew it in the year 2000?

      Pray tell, what happened between then and now to render us, as a whole, incapable of learning from our own actions from such a short time ago?

      I theorize that, rigid ideologues have captured our regulatory structure and have embedded themselves so deeply that honest self reflection, as a nation, has become impossible.

      Whether they caused the financial crisis (arguable), or are merely taking advantage of the crisis, these ideologues are driving an agenda to undo the meager American social safety net. An agenda they’ve publicly held for some 80 years now.


  2. wkj says:

    Is there any simple source for determining what the annual federal income tax increase would be for middle income individuals or couples with taxable incomes of (say) $50,000 to 150,000, if the Bush tax cuts were not extended?


  3. Marie Burns says:

    Not “entitlements,” please. This is a term the right uses to make these programs seem like handouts to the undeserving indolent. Say, after me, “social safety net programs,” or “safety net.” Let’s not help the gang that wants to snip away the safety net by embracing their nomenclature.


  4. Troy says:

    The problem here is with CBO’s projection of real GDP, which is on Sheet 3. Economic Vars and Population here:

    http://cbo.gov/sites/default/files/cbofiles/attachments/43288-LTBOSuppTables_0.xls

    $20.0T by 2020!

    Let’s say by some miracle employment (PAYEMS) rises to 150M by 2020, $20T real gdp is $130,000/job, ~12% more per-job productivity than now.

    We might get that growth nominally:

    http://research.stlouisfed.org/fred2/graph/?g=8aY

    but I don’t see how we can get that real GDP productivity this decade.

    And, semi-optimistically, PAYEMS looks to arrive at 140M by 2020:

    http://research.stlouisfed.org/fred2/series/PAYEMS

    requiring per-worker productivity to rise 20% by 2020 to meet that $20T projection. Are we going to be working an extra day per week or something?


    • Bruno says:

      Eum – isn’t the whole point about the pessimistic scenario that spending related to health and pensions would explode, and thus the comment that

      “But there are unrealistic assumptions under the other scenario too (the federal gov’t is not going to be spending 36% of GDP by 2037 (the historical average is about 21%)).”

      is a bit strange, no? The 36% is surely the consequence of entitlement spending going off the rails ?


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