Bryan Caplan  

The Fiscal Prognosis

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Here's how bad the CBO's now expects the long-run fiscal crisis to be:
The unsustainable nature of the federal tax and spending policies specified in current law presents lawmakers and the public with difficult choices. Unless substantial changes are made to the major health care programs and Social Security, spending for those programs will equal a much larger percentage of GDP in the future than it has in the past. At the same time, under current law, spending for all other federal benefits and services would be on track to make up a smaller percentage of GDP by 2024 than at any point in more than 70 years. Federal revenues would also represent a larger percentage of GDP in the future than they have, on average, in the past few decades. Even so, spending would soon start to outpace revenues by increasing amounts (relative to GDP), generating rising budget deficits. As a result, federal debt held by the public is projected to grow faster than the economy starting a few years from now, and because debt is already unusually high relative to GDP, further increases could be especially harmful.
What would it take to avert crisis, starting in 2015?
To put the federal budget on a sustainable path for the long term, lawmakers would have to make significant changes to tax and spending policies: reducing spending for large benefit programs below the projected levels, letting revenues rise more than they would under current law, or adopting some combination of those approaches.

The size of such changes would depend on the amount of federal debt that lawmakers considered appropriate. For example, lawmakers might set a goal of bringing debt held by the public back down to the average percentage of GDP seen over the past 40 years--39 percent. Meeting that goal by 2039 would require a combination of increases in revenues and cuts in noninterest spending, relative to current law, totaling 2.6 percent of GDP in each year beginning in 2015 (without accounting for the economic effects of the reduction in debt or of the policy changes that might be used to achieve it); in 2015, 2.6 percent of GDP would equal about $465 billion. If those changes came entirely from revenues, they would represent an increase of 14 percent from the revenues projected for the 2015-2039 period under the extended baseline. If the changes came entirely from noninterest spending, they would represent a cut of 13 percent from the amount of noninterest spending projected for that period. A similar level of debt in 2039 would result under the third scenario discussed above (a $4 trillion total reduction in deficits excluding interest payments through 2024, with the amount of deficit reduction in 2024 as a percentage of GDP continuing in later years).
Bottom line: Not a catastrophe yet, but a probable catastrophe given the myopia of American democracy.


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COMMENTS (13 to date)
Steve Reilly writes:

Given that the CBO's a product of American democracy, should we give much credence to their thoughts on the future?

Kenneth Duda writes:

Bryan, did you look at the assumptions they make, and the sensitivity of the projections to those assumptions?

Predictions are hard, especially about the future.

-Ken

Kenneth Duda
Menlo Park, CA

vikingvista writes:

The CBO maybe deserves credit for recognizing a problem, even if the problem is rather obvious. But I don't think they've earned credibility for the accuracy of their predictions. We can't discount completely the short run optimists.

But whether or not we see a few punctuated reversals of the long term trend, is there any reason to believe that the incentives of this insatiable tumor of an institution are not sufficiently acquiesced, if not championed, that its ultimate death by consuming its host is not already a foregone conclusion?

A monarch, by suffering some consequences of his parastitic actions while he can still act, may choose to try to manage (or rather restrain himself from managing) his citizen cattle so as to sustain his own ends. But monopoly rule by factionally-chosen officials just seems like a grand tragedy of the commons, where rule is only achieved by those who strive to loot as much and as quickly as possible.

John Becker writes:

Does anyone understand the rationale of comparing debt or deficits to GDP? It seems to me that it would make more sense to compare these numbers to tax receipts. The government actually owns/controls tax receipts whereas they control only a portion of GDP.

Edogg writes:

John Becker,

I think the issue is this. If you're thinking about tax policy being adjusted, then the ratio of debt to tax receipts would be changing through both the numerator and denominator. Think about a raise in both spending and taxes so that the deficit remains the same. Then the debt to tax receipts ratio would go down even though the government hasn't really done anything to reduce the debt.

John Becker writes:

Edogg,

Debt to GDP has the same problem. If the government increases the deficit while GDP is growing, the debt to GDP ratio could stay the same or go down.

Thomas Sewell writes:

Inflation adjusted per capita government revenue is way up over the last 30 years or so.

The basic problem is that inflation adjusted per capita government spending has grown much more than even revenue has.

Perhaps we could just go ahead and stop spending so much and also along the way dismantle a big chunk of the regulatory state which is working to hobble the economy.

One can dream, anyway....

LD Bottorff writes:

Debt to GDP matters because we typically compare our own personal debt to our personal income. It is simply a better way to judge the size of the debt. John Becker's suggestion is good. Government debt should be compared to government income. The whole GDP is not available to the government.

Daublin writes:

Overspending never has a single moment where it's a catastrophe. You just sink slowly further and further into debt.

It's one of those issues where the U.S. government is doing so obviously badly, that it's become boring to talk about it. Yet, since it does not get so much discussion, many people don't in fact realize how bad it is.

I would have much higher confidence in the U.S. government if it could at least balance its budget. As things stand, they don't seem like a credible agent for making world-changing improvements in society. They're just too incompetent.

John Becker writes:

I think that the government typically uses GDP just because it's a big giant number that (used to at least) makes everything else look manageable. From a practical perspective, everyone evaluates their ability to service their debts based on their income and assets except the government. What the government does in comparing debt to GDP is like an individual saying, "My debts are manageable because they are smaller than the income of the company I work at." Comparing the government's debt to the income and assets it has to repay those debts would make everyone realize how important it is for the government to control the money supply.

JA writes:

GDP certainly looks larger than tax receipts, but it also represents the max the government could extract from its citizens. You can't tax more than the GDP (at least every year).

Related: Europe started including its black market (illicit drugs, prostitution (to the extent it's illegal in the EU), etc.) in its GDP. This is even more absurd, the government has little hope of being able to tax the black market.

Larry writes:

I have stopped thinking about SS in terms of accounting and now think in terms of stuff and and demographics.

We're going to have a rapid increase in the number of retirees along with a much slower increase in the number of workers (assuming you don't count robots).

The question is how much of the workers' output we went to xfer to the rest. We will have to tax those workers enough so that the retirees get that much stuff instead of the workers. All the talk of trust funds is just to get today's workers to keep transferring resources to those already retired. It's working! Individual accounts do help us allocate consumption among each generation of retirees.

AS writes:

It doesn't take a CBO analysis to know public finances are in disarray. This is clearly the result of democracies choosing bad policies like Bryan's book Myth of the Rationale Voter suggest, along with all the literature in Public Choice Economics. What we need is a free market oriented economy where government is limited by rule of law and has less discretionary power. But how? The Constitution was supposed to prevent many of the oversteps of government occuring today but it has been blatantly disregarded when convenient for the politicians. Hence the proverb, "Who will watch the watchers?"

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