Tuesday, July 21, 2009

More CBO truth 

For much of its history, the United States devoted only a small fraction of its resources to the activities of the federal government, apart from fighting wars. But the second half of the 20th century was a period of sustained higher federal spending during peacetime. Over the past 50 years, primary federal outlays (which exclude interest spending) have averaged 18 percent of GDP. In fiscal years 2009 and 2010, spending on stimulus legislation and on efforts to stabilize the financial markets will result in unusually high outlays (primary spending will account for 26 percent of GDP in fiscal year 2009), but outlays are projected to fall back near their historical average after a few years.

In later years, primary spending rises again in both of CBO�s long-term budget scenarios. Under the extended-baseline scenario, primary spending would increase from 20 percent of GDP in fiscal year 2012 to 24 percent by 2035 and 32 percent by 2080. Primary spending would be even higher under the alternative fiscal scenario, reaching 26 percent of GDP by 2035 and 34 percent by 2080. Those higher levels occur largely because the alternative fiscal scenario assumes greater spending on federal programs other than Medicare, Medicaid, and Social Security than the extended-baseline scenario does.

From CBO last week. Permit me to point out a little economics here. We can divide the deficit between that which goes to paying interest on the debt and that which pays for everything else. The primary deficit is equal to the deficit minus the interest payments that service the national debt. In order for a government to be solvent in the long run, you must have the primary surplus project to be enough to some day pay off that debt. If you don't, your government's debt is in essence a Ponzi scheme.

The CBO is offering the warning on page 15 of the document:
Under the assumptions of the extended-baseline scenario, annual deficits would fall below 2 percent of GDP by fiscal year 2013. Debt would remain roughly stable as a share of GDP for the next decade. After that, however, growing spending on Medicare, Medicaid, and Social Security would lead to higher deficits, and debt would once again increase faster than the economy. By 2035, it would equal 79 percent of GDP. Federal debt peaked at 113 percent of GDP shortly after the end of World War II, a mark that would be passed in 2046 under the extended-baseline scenario.

Under the alternative fiscal scenario, deficits would decline for a few years after 2009 but then grow quickly again. By 2019, debt would reach 83 percent of GDP. After that, the spiraling costs of interest payments would swiftly push debt to unsustainable levels. Debt would exceed its historical peak of 113 percent of GDP by 2026 and would reach 200 percent of GDP in 2038.

Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation�s
underlying fiscal policy than the extended-baseline scenario does�because, for example, it does not allow the impact of the AMT to expand substantially. To the extent that such a belief is valid, the explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid corrective steps to put the nation on a sustainable fiscal course.
You'll note that 83% number for 2019 in the alternative fiscal scenario is in fact the CBO's original estimate.

CBO notes that between 1959 and now revenues have been between 16% and 21% of GDP. For us to pay down the debt, expenditures have to fall back to the 20% level and revenues get to 21%. This means raising revenues as a share of GDP that surpasses anything in peacetime even if we hold to an expenditure path that CBO itself doesn't really believe.

UPDATE: Ed notes that the CBO seems to be working outside its usual parameters. I'm between appointments, but I'll put some calls in to see if this is that unusual as Ed suggests. I'm not so sure.