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.

The Debt Ceiling is Terrifying

I recently finished reading Robert Draper’s book, Do Not Ask What Good We Do, on the 112th Congress, focusing on the House of Representatives. Here’s a quick excerpt from a meeting with Joe Biden and Eric Cantor during the 2011 debt ceiling fight:

“Well, we’re giving you the vote on the debt ceiling,” said Cantor. “You may not think it’s a big deal. But you’ve got to understand, I’ve got a lot of guys who think that not raising the debt ceiling wouldn’t be such a bad thing – that in fact it’s just what we need.”

The Democrats weren’t sure what to say

Cantor added, somewhat abashedly: “We’re working hard to educate our guys.”

Here’s another passage about the debt ceiling:

Still, the disconnect between what Boehner himself had termed fiscal “Armageddon” and the bullheadedness of the tea partiers unnerved members like Jo Ann Emerson. She sidled up to one of the freshman one day and said, “I need you to explain why you don’t think there’s anything wrong with us defaulting on the debt. I can’t have this conversation with my constituents because I’ll yell at them and they’ll yell at me. So you tell me.”

The freshman’s reply bewildered Emerson. “We’ve spent way too much money,” he told her. “If this is price we pay, so be it.”

Emerson wanted to reply: You asshole! Do you really not understand what could happen?

Some House Republicans are entirely satisfied with defaulting on our debts. Now in January, the 113th Congress begins which is a bit more liberal than the previous one. But that leaves Boehner, presuming he keeps his Speakership, with three basic options:

1. Bring up a vote to raise the debt ceiling no-strings-attached. This would earn near unanimous support from Democrats and the Speaker could lose almost all of his party and still have the bill pass. It would also provoke massive blowback from the Right and jeopardize his power in the party.

2. Bring up a vote to raise the debt ceiling with very conservative strings-attached. This would earn very little support from Democrats and the Speaker would have to ensure that every Republican voted in favor of the bill. To that, it would have to be a very conservative bill. That means it will be DOA in the Senate. Boehner would, however, solidify his Speakership.

3. Bring up a vote to raise the debt ceiling with moderate strings-attached. This could earn moderate support from Democrats and the Speaker could lose some of his party and still have the bill pass. The bill would also likely pass the Senate. However, this would also provoke massive blowback from the Right.

The President has taken the stance that he will not negotiate over the debt ceiling. Obama does not want to create a precedent for the minority party to use the debt ceiling as a hostage to enact concessions from the majority. I believe he will stick by this.

That’s going to make this very scary though. It means that either Boehner choose Option 1 above and risks his Speakership or puts together a bill (possibly with the help of Nancy Pelosi or Harry Reid) that raises the debt-ceiling with moderate strings-attached. He’ll risk huge criticism from his base and still have to keep much of his caucus in line while working with Pelosi and Reid. At the same time, the President will refuse to even take his calls.

Otherwise, we default.

It helps that Boehner will likely keep his Speakership when the House votes on January 3rd. But he still has to whip votes for any bill and that’s very difficult to do with the current makeup of House Republicans, as seen by the failure of his Plan B. And this time, there’s no cheap tricks such as a Super Committee and Sequester to get a deal. It’s a very scary proposition.

 

EXTEND THE PAYROLL TAX CUT!

The last time I wrote an article asking for the President to extend the payroll tax cuts I didn’t use all caps in my title. So here’s try #2. I’m also angrier this time.

Here’s the President today talking about a potential deal on the Fiscal Cliff:


Here are the two lines that stuck out (and infuriated me):

Every American’s paycheck will get considerably smaller.

And:

The housing market is recovering, but that could be impacted if folks are seeing smaller paychecks.

Guess what is immediately going to hit the middle class the hardest?

The expiration  of the payroll tax cut.

I’ve supported the President against other liberals in his desire to compromise, but he never mentions the payroll tax cut. The Bush Tax Cuts don’t have an effect for months – until tax filing season. The sequester happens slowly over time. We won’t hit the debt ceiling for another month. But the end of the payroll tax cut is going to hit middle class families right away. That’s what’s going to hurt their paychecks.

The President is saying that he wants to avoid decreasing every American’s paycheck. He’s demanding just a small deal and at worst, just an extension of the Bush tax cuts for those making less than $250,000 and an extension of unemployment benefits. That’s what Obama is saying Congress needs to do to prevent every American’s paycheck from taking a hit.

He’s wrong. That still leaves a big weekly hole in every American’s paycheck as the payroll tax rises from 4.2% to 6.2%.

Matt Yglesias mentioned this in a post today as well. The parts of the fiscal cliff that have the worst immediate consequences aren’t even being mentioned.

It’s a major political failure. But it’s also a media failure? Hello MSM, where have you been? Do most Americans even know that the payroll tax is going up?

The entire thing is infuriating, but nothing is going to change in the next few days so I might as well get used to it.