This is a syndicated repost published with the permission of The Baseline Scenario. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
By James Kwak
Ezra Klein yesterday highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.”
The basic problem is that the alternative fiscal scenario simply assumes, without further support, that laws will mysteriously change in ways that reduce tax revenue and increase spending (relative to current law). As I put it a while ago,
“ The definitive report on our long-term budget gap implicitly assumes that we do nothing about that budget gap — that we keep cutting taxes and blocking spending cuts at every opportunity.”
Or, in other words, it assumes that Republicans win every fight over taxes and Democrats win every fight over spending.
Things weren’t always this way. For example, the immaculate assumption that tax revenues will remain constant as a share of the economy—despite, for example, real bracket creep, which moves people into higher tax brackets as their inflation-adjusted incomes rise—was only introduced in the past few years: as recently as 2009, the alternative scenario did not assume these mysterious tax cuts. (See this earlier blog post for an explanation.)
I didn’t realize until reading Klein’s blog post that the CBO changed its spending assumption just last year. In 2011, this is how it projected spending other than on Social Security and health care: “Beyond 2021, other spending stays at the same share of GDP projected for 2021 . . .” And this is how it changed in 2012: “For projections beyond 2022, CBO assumed that such spending would, during a five-year transition period, gradually return to its average share of GDP during the past 20 years.” The net difference from this one assumption is about 2 percent of GDP. This is a huge amount—equivalent, for example, to all of the growth in Medicaid, the Children’s Health Insurance Program, and health insurance subsidies over the next twenty-five years.
It’s almost as if, as Congress does things that reduce the long-term national debt (like the Budget Control Act of 2011, which may be a stupid bill, but did reduce the debt under current law), the CBO moves the goalposts further away so the problem remains the same size. This is why, in White House Burning, we adjusted the CBO’s projections, and we showed scenarios with and without the Bush tax cuts (rather than simply assuming, as most people did, that the Bush tax cuts would be made permanent for everyone).
As Klein says,
“Because everyone was used to a fake baseline that assumed their full extension, a supposedly deficit-obsessed Congress managed to resolve the so-called ‘fiscal cliff’ in January by passing a huge tax cut that added trillions to deficits while calling it, amazingly, a fiscally responsible tax increase.”
If only more people had pointed that out beforehand, maybe Congress wouldn’t have been able to get away with that one.