The Magically Disappearing Deficit

The Congressional Budget Office (CBO) released its 2013 Long Term Budget Outlook today and there’s a lot of good news. Total public debt is projected to hit 100% of GDP in 2038, thanks to growth in entitlement spending and interest payments. However, this number is well below CBO’s estimate last year that public debt would hit 200% of GDP in 2037.*

This is thanks to slightly higher taxes and significantly reduced spending on entitlements and interest payments.

The fiscal cliff deal at the end of last year (officially known as the American Taxpayer Relief Act) made the Bush tax cuts permanent for most Americans and fixed the Alternative Minimum Tax (AMT) to limit its reach. However, the deal also allowed taxes to rise on the wealthiest Americans. Due to that, the CBO now projects that revenues will equal 19.7% of GDP in 2038, up from 18.5% in last year’s report.

On the spending side, two major developments drastically reduced the CBO’s projected spending totals.

First, health care cost growth has slowed considerably over the past couple of years and there is more and more evidence demonstrating that this slowdown is not a short-term result of the recession, but is a permanent bending of the cost curve. This led the CBO to lower its projected health care costs:

A particular challenge currently is estimating the extent to which the recent slowdown in growth can be attributed to temporary factors like the recession or instead reflects more enduring developments. Studies have generally concluded that a portion of the observed reduction in growth cannot be linked directly to the weak economy, and CBO’s own analysis has found no link between the recession and slower growth in spending for Medicare. Accordingly, over the past few years, CBO has substantially reduced its projections of spending on Medicare and Medicaid during the coming decade and slightly lowered its estimate of the underlying rate of growth for health care spending per person for the country as a whole. CBO’s estimate of that underlying rate takes into account spending trends since 1985 but gives greater
weight to the recent experience; because of the pressures to constrain spending growth, the underlying rate is projected to decline gradually in the long run.

The CBO’s 2012 Report projected Medicare and Medicaid spending (plus CHIP and the exchange subsidies) to hit a combined 10.4% of GDP in 2037. In this year’s report, the Budget Office expected those programs to be just 8.2% of GDP. That’s a significant drop.

Second, the extended baseline scenario assumes that sequestration is not repealed, compared to last year’s extended alternative baseline scenario that assumed otherwise. This projection made sense in 2012 when it was widely assumed that Congress would find a way to replace the sequester. But now, sequestration is already in effect and the parties aren’t any closer to finding a replacement. It’s more and more likely that sequester could be here to say. This reduces the CBO’s spending projections significantly:

The Congressional Budget Office (CBO) projects that if current laws generally continued without change, other federal noninterest spending would drop from a total of 11.3 percent of gross domestic product (GDP) in 2012 to 7.6 percent in 2023 and then to 7.1 percent in 2038.

Under the extended alternative baseline scenario in 2012, the CBO projected that spending to be 9.6% of GDP in 2037.

The icing on the cake is that all of this reduced spending will lead to significantly lower debt payments, compared with the CBO’s 2012 projections. Debt payments will still rise from today’s low level of 1.3% of GDP to nearly 5 percent of GDP in 2038 (that’s why it’s a sin we aren’t taking advantage of today’s low rates). But that is much less than the CBO’s 2012 projection of 9.5%.

Having gone through all of that, here’s the overall change in U.S. revenues and spending between last year’s Long Term Budget Outlook and this year’s report:

2013 Long Term Budget

The deficit has dropped by almost two-thirds in the last year alone!

Now, the sequester is still dumb policy and the current projections still leave us with an unsustainable budget (economists and budget wonks agree that we need to get our budget down to around 3% of GDP). But the overall picture is abundantly clear: we’ve already done a huge amount of deficit reduction.

*Note: I’m using the extended alternative baseline scenario from the 2012 Report because it more accurately represents the future policy of both taxes and spending. In this year’s report, I’m using the extended baseline scenario as the Fiscal Cliff deal cleared up the unrealistic assumptions that the CBO used under this scenario in 2012.

PolitiFact vs. the Liberal Blogosphere

There was a bit of a dust-up between liberal bloggers and the fact checking site PolitiFact yesterday over House Majority Leader Eric Cantor’s (R-VA) comment this weekend that the government should be “focused on trying to deal with the ultimate problem, which is this growing deficit.” The deficit isn’t growing. It’s shrinking at a rapid pace, but PolitiFact rated the statement as “half-true.” So, what gives? How can the deficit be shrinking and Cantor’s statement be half-true? Let’s take a look:

Steve Benen, one of the first bloggers to jump on PolitiFact today, wrote about Cantor’s comments the day before. In fact, he quoted the following exchange in his post:

CANTOR: Here is the problem. What we need to have happen is leadership on the part of this president and White House to come to the table finally and say, we’re going to fix the underlying problem that’s driving our deficit. We know that is the entitlement programs and unfunded liability that they are leaving on this generation and the next.

WALLACE: So, are you’re saying you are willing to get — you’re willing, if you could get a compromise on entitlements, then you would give up on the sequestration?

CANTOR: What we have said in the House as Republicans, leadership and members alike, is that we want to fix the real problem. The real problem is entitlements. We’ve also said sequester is not the best way to go about spending reductions. It was, as you know, a default mechanism because Congress couldn’t do the job it was supposed to a couple of years ago. We’ve always said that. But, in fact —

WALLACE: You’re willing to give up on sequestration?

CANTOR: But, in fact, Chris, we’ve always said, president, come join us.

The full interview is here. That exchange is right before Cantor made his false “growing deficit” comment. But clearly, Cantor isn’t talking about the current debt. He’s talking about the long-term deficit. Entitlements are driving our long-term deficit while our current deficit is the result of two wars, the Bush tax cuts, and increased spending on the safety net during the recession. That’s the context of Cantor’s comment and if you are going to grade its truthfulness, you have to take that into account.

That’s what PolitiFact did. They realized that Cantor’s remark was 100% false, but in the context of what he was talking about, Cantor is right. The ultimate problem with the deficit is entitlement spending. Cantor misspoke and that’s why his statement isn’t correct. But it also can’t be called a “Pants on Fire” lie. PolitiFact responded to the criticisms today and pointed all of this out.

Kevin Drum explained this as well and noted that this is the problem with fact-checking in general. When most people think about fact-checking, they want the specific comment checked for accuracy. But this isn’t really fair. How can you analyze something without including the context? Cantor’s comment taken out-of-context is flatly wrong. In context, it makes much more sense and is more Cantor mis-speaking than anything else.

What’s most frustrating about this is that as soon as Benen posted his critique of PolitiFact, it spread around the blogosphere quickly. Paul Krugman, Ed Kilgore, Greg Sargent and Brian Beutler all criticized the fact-checking. All of those are well-respected journalists whose work I read daily. But they chose to look at Cantor’s quote out of context (except for Sargent, who put it in context of the debt ceiling when it actually referred to the problems driving the long-term deficit). Kilgore relied upon Benen’s analysis while Sargent quoted Krugman’s. It’s easy to jump on PolitiFact and make fun of Cantor for his remark, but it just creates more partisan bickering and further harms PolitiFact’s reputation. That’s not helpful for anyone.