Saturday, June 25, 2011

The best way to fix the deficit may be to do nothing

The non-partisan Congressional Budget Office (CBO) has released its latest long term projections of Publicly Held Debt as a Percent of GDP.  Here is the graphic from the GDP report showing the scary prospect that debt as a percent of GDP could reach a totally unsustainable nearly 200% of GDP by 2035.  That is the Alternative Fiscal Scenario that assumes the Bush tax cuts and other temporary tax cuts will be made permanent.  But, look at the solid blue line.  That’s the Extended-Baseline Scenario.   It assumes that Congress just leaves everything alone.  The Bush tax cuts expire and we don’t tinker with anything.  By 2035, our debt is about 85% of GDP, not great but a hell of a lot better than 200%.  So, the best way to fix the deficit, or at least not make it much worse, could be to DO NOTHING.

Source: CBO long term budget outlook:

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), released the following statement on the latest CBO projections:

"The new long-term budget projections from the Congressional Budget Office (CBO) show once again that the major problem facing the both the budget and the larger economy is out-of-control health care costs, not any inherent fiscal crisis. As was the case last year, the CBO baseline shows that the long-term debt to GDP ratio levels off in the baseline scenario. In the 2011 projections, the ratio of debt to GDP actually begins to decline after the early 2040s. The graph shows the sharp drop in future deficit projections following the passage of the Patient Protection and Affordable Care Act (PPACA) in March of 2010.  [Notice the change in CBO projections from 2007 and 2009 compared to 2010 and 2011 in the graph below.]

The Economic Policy Institute had this to say about the latest CBO projections:

[T]he CBO report shows that if Congress simply did nothing new on revenue—in particular, if they did not extend the Bush-era tax changes nor other temporary tax reductions—then the deficit would be on a sustainable path over the 25-year horizon (with debt at a reasonable 84% of GDP in 2035). On the other hand, if we were to continue with current tax policy for the next 25 years, debt would spiral up to nearly 200% of GDP. (Over the long-term, rapidly rising health care costs are another prime driver of deficits, in addition to inadequate revenue.)  The contention that revenue should not even be under discussion is at odds with economic reality.

One final thought.  Let's assume that not only did we NOT extend the Bush tax cuts but that we did away with  many of the tax expenditures/tax breaks that I talked about in a previous post [See Two Deficit Reduction and Job Creation Ideas Well Worth Considering].  Doing these two things along with making some gradual long-term cuts in discretionary spending could put us on track to getting the debt down to 60% of GDP which would be perfectly sustainable.  The only reason anyone would consider the kinds of drastic cuts to spending on social safety net programs that the Republicans are insisting on would be if you wanted to destroy those programs.  In short, the Republicans are not concerned with the deficit.  If they were, they would be doing what I am suggesting.  Republicans are concerned with radical social re-engineering.  Just like Newt said.

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