President Barack Obama won his budget pound of flesh in the “fiscal cliff” showdown. Taxes on the “rich” are going up. But that hasn’t solved Washington’s deficit crisis. Nor would approval of the new taxes that he proposed help avoid the impending budget sequester.
The Congressional Budget Office once had the reputation of a bland government bureaucracy, churning out detailed reports that only a policy nerd would read. Today CBO reports have taken over the literary genre of horror stories. The first movie can’t be far behind.
Earlier this month the agency published its latest fiscal update, “The Budget and Economic Outlook: Fiscal Years 2013 to 2023.” The only saving grace for humanity is that the agency’s analysis ends in 2023. Future budget projections would be too horrible to contemplate.
However, the next decade is bad enough. First, as if people hadn’t noticed, the economy remains sluggish, despite trillions of dollars in “stimulus.” Uncle Sam has run $5 trillion in deficits since President Obama first took office, while the Federal Reserve has gone on a funny money binge with “quantitative easing” and much more.
The result? Reported CBO: “the unemployment rate is expected to remain above 7½ percent through next year; if that happens, 2014 will be the sixth consecutive year with unemployment exceeding 7½ percent of the labor force—the longest such period in the past 70 years.” The more people out of work, the lower the tax collections and higher the outlays, making for a bigger deficit.
Second, spending will remain wildly out of control. Only in Washington could people predict devastation and doom from $85 billion in cuts to a budget of about $3.6 trillion. Obviously there isn’t the slightest bit of waste, duplication, fraud, or foolishness in the entire federal budget. Certainly there is not one program that isn’t the federal government’s business or is anything less than absolutely essential. Such is the fantasyland which Washington has become.
But surely the White House and Congress have achieved some deficit savings. In fact, explained CBO, “If the current laws that govern federal taxes and spending do not change, the budget will shrink this year to $845 billion, or 5.3 percent of” GDP. Wow, those radical, draconian spending cuts are having an effect! Alas, this is good news only relative to the awful news of recent years. Noted the agency: “the 2013 imbalance would be the first deficit in five years below $1 trillion.” Obviously cause for celebration. But wait, said CBO: “if the laws that govern taxes and spending do not change, federal debt held by the public will reach 76 percent of GDP by the end of this fiscal year, the largest percentage since 1950,” when the U.S. was carrying debt accumulated from World War II.
The numbers get better in the next couple years, but not because of spending restraint. That would be far too sensible. Instead, observed the agency: “With revenues expected to rise more rapidly than spending in the next few years under current law, the deficit is projected to dip as low as 2.4 percent of GDP by 2015.” But that still would be a hefty $430 billion. Indeed, that was roughly the deficit in 2008—which seemed outrageous at the time—before outlays exploded, first under George W. Bush and even more so under Barack Obama.
And the reduction would reflect the one-quarter revenue increase between 2013 and 2015. Reported CBO: “revenues are projected to grow from 15.8 percent of GDP in 2012 to 19.1 percent of GDP in 2015—compared with an average of 17.9 percent of GDP over the past 40 years. Under current law revenues will remain at roughly 19 percent of GDP from 2015 through 2023.” Indeed, total revenues are expected to more than double between 2012 and 2023. So tax collections already are going up. President Obama just wants them to go up faster.
Of course, the slowdown in piling up red ink presumes that Congress won’t follow past precedent and initiate another spending binge. Even then, the good times end in just two more years. Then the deficit begins another inevitable rise back to $1 trillion.
Explained CBO: “In later years, however, projected deficits rise steadily, reaching almost 4 percent of GDP in 2023. For the 2014-2023 period, deficits in CBO’s baseline projections total $7.0 trillion. With such deficits, federal debt would remain above 73 percent of GDP—far higher than the 39 percent average seen over the past four decades. (As recently as the end of 2007, federal debt equaled just 36 percent of GDP.) Moreover, debt would be increasing relative to the size of the economy in the second half of the decade.”
Don’t worry, however. The president says that we don’t have a spending problem. No, of course not. What could be more obvious? Except for the CBO’s inconvenient budget projections. The agency foresees outlays rising from $3.5 trillion to $5.9 trillion between 2012 and 2023. Expenditures increase every year. Total debt held by the public (which ignore intra-government debt, most importantly Social Security “loans” to the Treasury Department) rises from $11.3 trillion to $19.9 trillion over the same period. Debt as a percent of GDP goes from 72.5 percent to 77.0 percent.
Remember, there’s no spending problem.
However, there’s more to the CBO horror show. The likelihood of these numbers holding true is small, frankly vanishingly small, given past congressional behavior.
First, the deficit will be higher if Congress changes current law. The agency assumes that the automatic spending cuts will take effect, “sharp reductions in Medicare’s payment rates for physicians’ services will occur at the beginning of January 2014,” even though Congress has been putting them off since they were passed in 1997, and “certain tax provisions that have regularly been extended but are set to expire” will be allowed to expire. I am convinced. After all, legislators always choose the most fiscally responsible course.
Second, there’s the little matter of spending discipline, which Capitol Hill has never exhibited, at least in my lifetime. Discretionary outlays are appropriated every year and thus are the most enjoyable for legislators. The 2011 Budget Control Act established spending caps that “would reduce such spending to an unusually small amount relative to the size of the economy,” 5.8 percent of GDP, below the previous low that occurred back in 1999.
Third is the impact of a rising debt. The CBO doesn’t fall for the “we owe it to ourselves” silliness. Warned the agency: “debt held by the public is projected to be significantly greater relative to GDP than at any time since just after World War II.” And contra Alexander Hamilton, this debt will not be a “national blessing.” Explained CBO: “If the amount of debt held by the public remains so large, federal spending on interest payments will increase substantially when interest rates rise to more normal levels.”
That’s not all, alas. “Because federal borrowing generally reduces national saving, the stock of capital assets, such as equipment and structures, will be smaller and aggregate wages will be less than if the debt were lower.” That is, Americans will be earning less while having to pay more. Such a deal! Finally, “such a large debt poses an increased risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”
It would be nice to curb federal borrowing, but a fiscal crisis probably isn’t the best way to do so. Although this analysis is enough to scare anyone, the budget agency isn’t done. For an encore it peers into the more distant future, and it doesn’t like what it sees.
Noted CBO: “Under current law, the aging of the population, the rising costs of health care, and the scheduled expansion in federal subsidies for health insurance will substantially boost federal spending on Social Security and the government’s major health care programs, relative to GDP, for the next 10 years and for decades thereafter.” Without substantial policy changes, “debt will rise sharply relative to GDP after 2023.”
No worries, however. There is no spending problem. The president promises us.
CBO does fine analytic work, but its reports are a bit dry, even arcane. However, the agency’s budget reports have become the scariest pieces of literature around. Read the latest budget outlook and it’s like seeing Freddy Krueger bearing down on you.
But the president says not to worry. There is no spending problem.
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