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U.S. Budgeting Scenarios

I’m late to the game on this one, but it’s worth mentioning anyway. The nonpartisan Congressional Budget Office, created to be a counter voice to the White House’s Office of Management and Budget, recently released its long-term outlook for the U.S. budget. Included was this fantastic set of charts (click to embiggen):

The green portions are what happens if current law goes into effect (in budget language, this is the baseline)–the Bush tax cuts would expire on Jan. 1, 2013, the budget sequestration created in the budget deal last year would go into effect at the same time, all of the savings from the Affordable Care Act would accrue, there would be no doc fix for Medicare, etc.

The green portion, in essence, is what happens if Congress and President Obama do nothing. Nobody likes the baseline, though. It entails a lot of pain for everyone. It even has a name: Taxmageddon. The CBO, along with most economists, estimates it would cause a recession next year. Taxes would go up for everyone, rich and poor. Defense spending would be cut, as would spending on various domestic programs, including the social safety net, that most Democrats like. Old people would receive fewer health and social security benefits. Doctors would lose pay. Lots of pain for everyone.

You don’t win elections with this much pain. Instead, you win elections by promising to do things that voters (i.e., your constituents) want, which is generally the opposite of pain. Thus the orange portion of the charts–the alternative scenario. The orange represents what happens if the various proposals by Republicans (e.g., the Bush tax cuts are made permanent) and Democrats (e.g., little entitlement reform) and historical patterns of legislating (e.g., the doc fix) go into effect.

The y-axis in the middle graph is the national debt as a percentage of GDP. A value of zero means that there is no national debt (most economists would argue you need some debt to have a functioning economy). A 100 means that the total debt of the federal government is equal to the size of the total national economy. A 200 means that the total debt is twice as large as the national economy. For comparison, the number for Greece, which just said it was going bankrupt, is currently about 160 percent.

If nothing happens, if the baseline goes into effect, then debt to GDP ratio declines. By 2037, the debt to GDP ratio falls to 53 percent compared to 73 percent today. If what the various political actors want happens, then it skyrockets. By 2037, the debt to GDP ratio is almost 200 percent. Normally, the CBO projects out at least 30 years from the current date. They didn’t do that this time because the numbers become nonsense–debt to GDP goes over 250 percent, at which point we no longer have any semblance of a functioning economy.

I leave you with the CBO’s statement on the forecasts and a note. First, the CBO’s statement:

The aging of the U.S. population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future . . . To keep deficits and debt from climbing to unsustainable levels . . . policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.

Second, the note: Republicans have basically ruled out tax increases and defense cuts as a way to solve the problem. Democrats have basically ruled out spending cuts to Medicare, Social Security, and other major social programs.

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