Early summer each year, the Congressional Budget Office releases its Long-Term Budget Outlook. This year’s installment (found here), unsurprisingly, is particularly bleak. As you may recall, the CBO projects the numbers under two scenarios. The “extended baseline scenario” basically assumes that existing laws will remain in place and all core assumptions hold. The “alternative fiscal scenario” adopts a more pragmatic tone. As the CBO notes: “Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline scenario does.” Both scenarios raise significant concerns. But let us focus on the projections generated under the alternative fiscal scenario. The CBO projects:
With significantly lower revenues and higher outlays, debt held by the public would exceed 100 percent of GDP by 2021. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035.
The CBO admits in the introduction that its projections understate the depth of the problem:
CBO’s projections in most of this report understate the severity of the long-term budget problem because they do not incorporate the negative effects that additional federal debt would have on the economy, nor do they include the impact of higher tax rates on people’s incentives to work and save. In particular, large budget deficits and growing debt would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States. Taking those effects into account, CBO estimates that under the extended- baseline scenario, real (inflation-adjusted) gross national product (GNP) would be reduced slightly by 2025 and by as much as 2 percent by 2035, compared with what it would be under the stable economic environment that underlies most of the projections in this report. Under the alternative fiscal scenario, real GNP would be 2 percent to 6 percent lower in 2025, and 7 percent to 18 percent lower in 2035, than under a stable economic environment (p. xi)
Although the projections are more dire than in past years, they are consistent with the message the CBO has presented for quite some time (albeit with little interest from our elected officials).
With the fiscal crisis in Greece unfolding around us in all its glory and current debates over whether to raise the debt ceiling this summer, it is comforting to note that the CBO argues that the current trajectory “increase[s] the probability of a fiscal crisis for the United States.” It elaborates on the ramifications:
If a fiscal crisis occurred in the United States, policymakers would have only limited and unattractive options for responding to it. In particular, the government would need to undertake some combination of three actions: restructuring its debt (that is, seeking to modify the contractual terms of its existing obligations); pursuing inflationary monetary policy (that is, increasing the sup- ply of money); and adopting an austerity program of spending cuts and tax increases. Thus, such a crisis would confront policymakers with extremely difficult choices and probably have a very significant negative impact on the country. (p. 34)
The CBO does not provide specific policy recommendations (other than the obvious need to control entitlement spending and increase revenues). It does note that the longer we postpone significant reform, the greater the costs to the economy and the greater the likelihood of fiscal crisis. One might ask: Why delay the inevitable, particularly when the costs of adjustment will become increasingly unbearable?
The answer is simple. Consider the CBO’s discussion of how the generational distribution of costs is affected by the timing of reforms:
generations born after about 2015 would be worse off if action to stabilize the debt-to-GDP ratio was postponed from 2015 to 2025. People born before 1990, however, would be better off if action was delayed, largely because they would partly or wholly avoid the policy changes needed to stabilize the debt (with the exception of the negative effects stemming from a possible fiscal crisis and the government’s reduced flexibility to respond to economic challenges, which are discussed below). Generations born between 1990 and 2015 could either gain or lose from a delay, depending on the details of the policy used to stabilize the debt (again, with the exception of some other effects of growing debt). In the long run, a 10-year delay would reduce the well-being of all future generation by amounts equivalent to a cut of roughly 1 percent to 3 percent in their lifetime spending, depending on the specific policies that were adopted. (p. 33, emphasis added)
Given that those born before 1990 constitute the active electorate, postponing reform would appear to make great sense to those who operate on a two, four, or six year electoral calculus and know that voters (1) love their entitlements and (2) loathe taxes.
One only wishes that members of Congress would bother to read and reflect on the CBO’s Long-Term Budget Outlook. It is far too easy nurture puerile thoughts (e.g., this is simply a product of Bush’s tax cuts, Bush’s wars) and engage in the little arts of popularity (e.g., reform=throwing Grandma off a cliff). One only wishes that it would garner the same kind of breathless attention from the media as the “bipartisan CBO” received when it was releasing its projections of the Affordable Care Act (of course, how can long-term economic collapse compete with the Weiner scandal or the Casey Anthony trial in Florida).
Unfortunately, I think the probability of fiscal crisis is far greater than the probability that the CBO’s projections will gain any political traction. Those born after 2015 better get ready. Its going to be a long, hard, slog.