Looking beyond the next decade, the budget outlook grows steadily worse. The costs associated with retirement and health programs mount. Over the next 75 years, the nation’s fiscal gap amounts to about 7 percent of GDP.
The main drivers of this long-term fiscal gap are, in order, the spending growth associated with Medicare and Medicaid, the revenue losses from the 2001 and 2003 tax cuts, and increases in Social Security costs...
Granted, projected increases in Social Security costs eventually exceed the size of the tax cuts. But do not conclude from this that the tax cuts are less expensive than the Social Security increases. In fact, the reverse is the truth.
The increase in Social Security costs mounts gradually as America ages. In contrast, the cost of the tax cuts starts immediately, and changes little as a share of GDP over time. So in present value, the actuarial deficit in Social Security is only one-fifth to one-third the cost of the tax cuts over the next 75 years.
we have had a permanent massive change in the fiscal circumstances of the country, but, at the same time, we have not even been able to engineer a robust recovery out of the current recession...
The tax cuts were passed with another fiction. That fiction is that the deficit poses no serious threat to social security. The reality is that social security is threatened. And, cuts in social security would be a serious problem.
From 2001 to 2003, the standard measure of short-run fiscal stimulus, the change in the cyclically-adjusted budget deficit, went from a surplus of 1.1% of GDP to a deficit of 3.1% of GDP, over a 4% swing. This was one of the largest and best-timed uses of fiscal policy in history, helping to prevent a much worse downturn; but it would have been better still if the tax rate cuts had been immediate and real spending controls enacted simultaneously to take effect well into the economic expansion.
In my book, I argued along similar lines. Concerning the widespread criticism of the Bush tax cuts, I wrote
Orthodox Keynesian policy in a recession would be to cut taxes. The Bush Administration has done that. Orthodox policy would be to increase government spending over what had been planned. The Bush Administration has done that, too. When a student hands in an exam that repeats almost exactly what the professor was saying in class, but the student still gets a low grade, then one can only conclude that the professor has something personal against the student.
For Discussion. Was the cyclically-adjusted deficit during the first Bush term too large, too small, or about right?