Monday, June 27, 2011

Two CBO Projections

Hat tip here goes to Monique Magee (Marketsize). She alerted me to a Clusterstock or Chart of the Day. That led me to this Congressional Budget Office report, titled “CBO’s 2011 Long-Term Budget Outlook.” I have reproduced, above, the crucial chart. It shows public debt expressed as a percent of Gross Domestic Product, historically and then extended into the future based on two scenarios. The first of these is called the Baseline, the other CBO calls the Alternative.

The Baseline assumes that laws currently in effect will continue to hold force, as written. The Alternative, which CBO views as the more likely, assumes changes to current law. Baseline results in debt rising from 69 percent of GDP (CBO’s estimate) to 84 percent by 2035—which is, when you think about it, pretty grim! The Alternative results in public debt very near to 190 percent of GDP by 2035—which would be an ultimate record.

What struck me as most striking about this projection is that the grim but lower case assumes virtually no changes in law. As a consequence revenues would increase because the Bush tax cuts would expire and the alternative minimum tax provisions on the books would, as written, bring in increasing revenues. “At the same time,” quoting the CBO now, “under this scenario, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.” In other words we would allow taxes to rise and the health program on the books now to unfold as written, no new programs would be created, and the old programs would retain their funding at current levels. And that produces an 84 percent of GDP debt by 2035.

In the Alternative scenario, Congress will extend the Bush tax once again and take the bite out of the alternative minimum tax provisions. Minimum payments to physicians under Medicare—which would decline by a third under current law—would be permitted to remain at current levels. Further, shifting the burden for health care to the states, which is part of current law, will not take place as planned.

Now if you react as I did to the study of CBOs two cases, you might say, with Shakespeare—a plague on both your houses! The “good” case produces a ridiculously high rate of public debt. And the provisions that largely support it (letting tax cuts lapse, shifting burden to the states, and shorting doctors of their pay) are about as attractive as a sand-and-seaweed sandwich on the beach.

Revealingly, CBO lacks a third case, one that might actually produce really good results. It would have three legs. One would be increases in income taxes to the level of the early 1960s; two would be a Federal health care system applied with hard rules (cost control) and administered centrally rather than by insurance companies; and the third leg of this stool I’d gladly leave undefined. Any legislature with the guts and foresight to enact the first two could be trusted to get the rest of it right!

You wonder about the tax rates in the early 1960s? Check out this post on the old LaMarotte. Isn’t the current debt more like 98 percent of GDP? Well, I thought so too. But that number was for 2010. CBO, perhaps, has a sharper pen—and they’re projecting 2011 results.

1 comment:

  1. Were I one of those presumed "trusted, future legislators" in your three-legged stool scenario, I would propose and fight for the rapid closing of minimally two-thirds of our 700 plus military bases on foreign soil. And I would start with 245 of our bases and posts in Germany, as well as stopping onstruction of new ones in Afghanistan. I would shout again, because I am convinced that "YES, WE CAN!" bring down our debt!