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Fiscal Policy: The Long-Term Budget Outlook - Grasping Reality with Both Hands

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Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch July 11, 2010

Fiscal Policy: The Long-Term Budget Outlook Let us look at some numbers from the 2009 and 2010 versions of the Congressional Budget Office publication Long-Term Budget Outlook http://tinyurl.com/dl20100711b:

The first column shows (i) the type of projection--extended-baseline or alternativefiscal--(ii) the date at which the outlook was taken--summer 2009 or summer 2010-and (iii) the period of the forecast--50 years (they also do 25- and 75-year forecasts). The "revenues" column shows what--if the economy performs as forecasted--average federal revenues will be over that period in that scenario. The "expenditures" column shows what average federal expenditures will be. the final column, "fiscal gap" shows the difference: what CBO currently forecasts America's long-term budget problem to be. Let's look at the first block of numbers, the "extended baseline scenario" numbers. These are the numbers if from now foreward the U.S. Congress sticks to PAYGO: if everything that increases the deficit, either by boosting spending or cutting taxes, is paid-for by savings elsewhere in the budget. The estimated extended-baseline 50-year fiscal gap last summer was 2.6% of GDP. Today it is 0.8% of GDP. That is a big swing to see in a year. Where does this swing come from? It certainly does not come from any more optimistic long-run economic growth forecast by CBO this year than last year. As best http://delong.typepad.com/sdj/2010/07/fiscal-policy-the-long-term-budget-outlook.html

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as I can figure out, the big moving parts that have produced this 1.8% of GDP improvement in the long-term 50-year fiscal gap are three: 1. CBO's belief that the Obama health care reform bill--the PPACA--will produce a health-care system that (a) is probably more efficient and (b) certainly spends less on Medicare than would have been the case otherwise. It's up to us to see whether the slower rate of growth of Medicare and Medicaid spending now written into the law will be the result of a more efficient system that gets us more health care treatment for the same money or of a system that shuts its wallet on the sick more quickly, but we do now have a slower rate of growth of federal Medicare and Medicaid spending written into law. 2. Offsetting these savings achieved by passing the PPACA, the large pool of subsidy money to make it feasible for America's working poor and lower-middle class to purchase health insurance. These two pretty much offset each other--so expenditures as a share of GDP projected over the next fifty years are much the same now as they were last year. 3. Last, another piece of the PPACA: the excise tax on high-cost health plans to make it painful and costly for insurance companies not to worry about containing costs. This raises a lot of money by 2050 in CBOs projection. The net effect of all of these? Two-thirds of the long-term fifty-year deficit and debt problem that the Congressional Budget Office saw a year ago has been eliminated *if the U.S. Congress now sticks to PAYGO--as it did during the Clinton years--and doesn't pass new programs and amendments to old programs that add to the deficit. You would think that enormous action to bend the curve over the long run in the U.S. government's tax and spending plans--the greatest single act of fiscal conservatism in American history--would have deficit hawks partying in the streets, reeling drunkenly past the Capitol after midnight in conga lines blowing horns, wouldn't you? But no. It doesn't. Self-appointed deficit hawks--well, consider Clive Crook of the Atlantic and the Financial Times: his attack on my Clinton administration colleague Matt Miller will serve as an examplar: http://tinyurl.com/dl20100711a Stimulus Now, Cuts Later: Matt Miller makes some good suggestions for combining short-term stimulus with longer-term fiscal control.... His political analysis is not very even-handed, though. Lamenting that nothing can come of his suggestions, he... [complains that] Republicans are cynical and irresponsible, whereas Democrats are wise but outnumbered. As I said before, the mistake Democrats are making is to dismiss justified concerns about the longterm problem. It's worse than dismiss; they express contempt for those concerns. They are no more proposing "stimulus now, cuts later" -- is that a better slogan? - than the Republicans. Just as much as the other side, Democrats are failing to offer "answers of their own"... Since the start of the 2000s, the Republicans have busted the budget wide open with three major unfunded initiatives--the perpetual war in Iraq, the Bush tax cuts, and the unfunded Medicare Part D expansion. The Democrats have paid for their major initiative--health care reform--and more than paid for it, overpaid for it enough to eliminate two-thirds of the fifty-year fiscal gap if Congress sticks to PAYGO. Yet Crook attacks Miller for being "not very even-handed... [claiming] Republicans are cynical and irresponsible, whereas Democratas are wise..." The even-handed thing to say, Crook believes, is that "Democrats are faing to offer 'answers of their own'" "just as

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much as the other side." This is the knee-jerk reflex of the mainstream media. This is what led Paul Krugman to joke that if the Republicans were to claim this afternoon that the world was flat, the news stories tomorrow would open: "Opinions on the shape of the earth differ..." Here we have Clive Crook--who really is one of the mainstream media's best--singing like a canary along with the rest of them. Since 1980 there has been a huge difference as far as fiscal balance is concerned between the two parties in how they behave when in government. Yet Crook thinks that it is "not very even-handed" to point out or even admit that there is a big difference--certainly he never would! This is why you should--sad to say--never trust, but rather first verify and then verify again, before believing anything--anything--you read in the Atlantic or even in the Financial Times. The FT is as close as mainstream media outlets are these days to being a trustworthy information aggregator. But even it... Now there is another part to the story of the CBO's 2009 and 2010 Long-Term Budget Outlook documents. Look at some other numbers--this time not from the extended baseline scenario, assuming that Congress will stick to PAYGO and make sure that it taxes or cuts other spending whenever it wants to spend, but from the alternative fiscal scenario instead:

In the CBO's alternative fiscal scenario, the 50-year fiscal gap deficit has not moved a penny over the past year. What is the alternative fiscal scenario? Well, CBO says, it is current law plus: changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period... That is, there are some provisions that increase the deficit that have overwhelming congressional support. Why, then, are they not part of current law? Why are they always about to expire? Because a critical block of members of congress finds them very useful as fund-raising tools: "Draconian cuts to Medicare reimbursement rates are coming next year," they blast fax to doctors in their constituencies. "If I am not reelected this fall, I will be unable to fight for you to prevent these unfair and unjust cuts." And the money rolls in to the campaign treasury. The CBO started its alternative fiscal scenario because it was tired of painting a rosy picture because the current law as written always said that provisions--Medicare doc fix, middle-class portions of Bush tax cut, AMT relief, research and experimentation tax credit--that were very expensive and also very popular were about to expire. Thus last year the CBO said that its alternative fiscal scenario included: changes in policy that are widely expected to occur and that policymakers have regularly made in the past... But this year there is more in the alternative scenario. There are new words. The alternative scenario now includes: changes to current law... that would modify some provisions that might be difficult to sustain for a long period... http://delong.typepad.com/sdj/2010/07/fiscal-policy-the-long-term-budget-outlook.html

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What provisions will be modified? Basically, all of the cost-saving and revenue-raising provisions of the PPACA--of the Obama health care reform. The CBO's alternative fiscal scenario assumes that all of these come to an end in 2020: that they are then repealed or loophole-riddled so much that thereafter the growth of federal medical spending resumes growing rapidly at the same rate that they forecast last year. In short, CBO is now saying to the Congress: we know you passed these provisions--the Medicare reimbursement provision, the tax on high-cost health insurance plans, the constraints on the growth of the subsidy pool for working- and lower-middle-class Americans. We don't think that they are going to last. Given the strength of the lobbying interests that will be working to riddle them with loopholes, and given Congress's feckless record in the past, we don't believe that your successors will be able to sustain the policies you enacted. Since CBO works for Congress, that is a relatively gutsy thing to say. So is it right? Is the fact that the extended-baseline looks so good and shows so much progress since last year a distraction, because the Congress will never stick to PAYGO and will repeal the cost-saving and revenue-increasing provisions of the PPACA as soon as it can wriggle out of the spotlight? Or is the CBO unwarrantedly pessimistic with its alternative fiscal scenario, and we should breathe easier because of the improvements in the long-term budget picture over the past year? The answer to that question is in our hands. Vote November 2, 2010. Vote the first Tuesday of every year thereafter. And--given the extraordinary fiscal fecklessness shown by every single Republican in office since January 1980--I would really, really, really urge all of you to think very, very hard before voting for any Republican candidate. Brad DeLong on July 11, 2010 at 08:04 PM in Economics, Economics: Fiscal Policy, Information: Better Press Corps/Journamalism, Obama Administration, Political Economy, Political Economy: Social Democracy, Politics | Permalink Favorite

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Comments Min said... And the error estimates are: ????? Yeah, GIGO. Reply July 12, 2010 at 09:54 AM http://delong.typepad.com/sdj/2010/07/fiscal-policy-the-long-term-budget-outlook.html

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Min said... "the extraordinary fiscal fecklessness shown by every single Republican in office since January 1980" Fecklessness? They told us what they are doing. It's called "starve the beast". They are pursuing pro-cyclical policies to gut or destroy gov't social programs, no matter how much human suffering they cause. Reply July 12, 2010 at 10:43 AM Dave J said in reply to Min... I agree with Min. This has been their stated policy all along. And it's pretty brilliant, too. If anything, it has been our institutions, leaders, and electorate that are feckless. Reply July 12, 2010 at 05:27 PM Brooks Gracie III said... The first thing to consider is whether the Bush tax cuts for the wealthy will be allowed to expire. If so, the picture brightens, but Obama's comments indicate that at least some of the lost tax revenues will continue in force. The projections don't deal with Afghanistan, and any future wars that we may find ourselves in, especially since they are off-budget. Nor do they address future defense spending in general. As to the healthcare changes, everything is up in the air. Personally, I am not fond of a plan that mandates coverage, since it implies a guaranteed increased revenue stream to the crooked pharmaceutical industry. Had we enacted single-payor healthcare, the government could bargain with big pharm to cut drug costs. As it is now though, big pharm gets a guaranteed stream of customers, nationwide, with no one having the bargaining power to negotiate drug prices. I cannot see this as anything but being an intentional result. And why does no one point out the surpluses that social security provided for 50 years? Suddenly, when cash flow turns negative, benefits MUST be cut. Have the government restore the surpluses, plus interest into the calculations, and a very different result will be revealed. Reply July 12, 2010 at 07:49 PM Min said in reply to Brooks Gracie III... "And why does no one point out the surpluses that social security provided for 50 years? Suddenly, when cash flow turns negative, benefits MUST be cut." The purpose of the Social Security Trust Fund was to build up a cushion for the boomers. Just because the cash flow turns negative does not mean that benefits must be cut; that was the plan all along. The boomers are retiring and starting to draw down the cushion they contributed to. Social Security is not broke, nor is it broken. Reply July 13, 2010 at 09:43 AM Comments on this post are closed.

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Economics Is not a Morality Play

economics DeLong

Me:

New York Times (blog) - Sep 28, 2010 Brad DeLong catches someone wondering if I am actually advocating war as a solution to our problems. Against stupidity, the gods themselves … ... Related Articles » « Previous Next »

Economists: Juicebox Paul Mafia: Krugman Ezra Klein Mark Thoma Matthew Cowen and Yglesias Tabarrok Spencer Chinn and Ackerman Hamilton Dana Brad Setser Goldstein Dan Froomkin

Moral Philosophers: Hilzoy and Friends Crooked Timber of Humanity Mark Kleiman and Friends Eric Rauchway and Friends John Holbo and Friends

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The Long-Term Budget Outlook - Grasping Reality with Both Hands  

Fiscal Policy: The Long-Term Budget Outlook 10/24/10 2:19 PMFiscalPolicy:TheLong-TermBudgetOutlook-GraspingRealitywithBothHands Let us look...