Posts Tagged ‘Doc fix’

Helpful Explanation Of Congressional Budget Forecasts.

Wednesday, July 6th, 2011

Over at the Baseline Scenario blogsite, author James Kwak posts an article explaining some basics involved in CBO long term forecasts.  Kwak explains that the CBO’s baseline extended forecast is one made according to the laws already on the books.  The problem is that Congress frequently doesn’t follow its own laws for one reason or another, so the CBO has to make an alternative fiscal scenario where the CBO must make an attempt to guess which laws won’t be followed, based on what Congress has done in the past.  Kwak illustrates his article with two charts:


Now, when people say that the federal government faces a long-term budget gap, they (including me) are generally starting from the bottom half of this picture: the CBO’s “alternative fiscal scenario.” The alternative scenario is widely considered the most likely path the budget will follow under current policy (although the CBO itself makes no such claim*). That’s probably a close enough approximation for most purposes. But if you’re going to think hard about long-term budgetary paths, you need to be a bit more careful about what it means.

To start off with, you have to understand what the “extended baseline scenario” — the top half of that picture — means. That’s pretty simple: it means under current law. And the first thing you should notice is that, under current law, there is no long-term budget gap. From 2015 into the indefinite future, the government’s primary spending equals its revenues. The only spending not included in primary spending is interest on the debt. Since the debt stabilizes at about 75-80 percent of GDP, interest payments are only about 3-4 percent of GDP, which is barely above real economic growth; under these conditions, the debt will grow very slowly.

But everyone knows this is not going to happen. Most obviously, Congress will patch the alternative minimum tax so that it does not suddenly hit one-fifth of the population,** and it will pass the “doc fix” so that Medicare reimbursement rates do not suddenly fall by 28 percent on January 1.***  The former will cost $800 billion over the next decade and the latter will cost $300 billion — money that is not reflected in the extended baseline scenario. (See the CBO’s January 2011 Budget and Economic Outlook, Table 1-7.)

Kwak then goes in to some details, citing some of the CBO assumptions about what Congress will or will not do.

As I said, virtually everyone agrees that the AMT and Medicare reimbursement rates will continue to get patched because Congress does it every year – AMT since 2001 or so, Medicare since 2003. Another obvious one is that spending on the Iraq and Afghanistan Wars will decline, saving over a trillion dollars over the next decade. (The rules governing the CBO’s baseline projections force it to assume that war-related spending grows with the inflation rate, regardless of conditions on the ground.) But after that, things get murkier.

On the revenue side, the CBO’s alternative scenario assumes that all of the 2001, 2003, 2009, and 2010 tax cuts are made permanent, except for the two percentage point payroll tax cut passed in December 2010, at a cost of about $3.8 trillion (in addition to the AMT patch, assuming the AMT is patched). If I were to guess what would happen to tax policy, that would be my best guess, too, given politicians’ love for tax cuts. But this feels much more like a bet than a foregone conclusion. But then there’s an even bigger assumption: that total tax revenues will remain constant at 18.4 percent of GDP beginning in 2021. See the flat line in revenues in the bottom half of the picture above? That’s due to that one assumption.

Beezer here.  Long term forecasting is problematic of course.   Remember the CBO forecasts of the late 1990s when surpluses began popping up at the end of the Clinton era?  My how things can change based upon what Congress does (two tax cuts not paid for by spending cuts) one major increase in Medicare (also not paid for in tax hikes), and two wars also not paid for.  Now it’s deficits as far as the eye can see, unless Congress enforces compliance with its own legislation.  Maybe all the political sturm and drang we’re constantly having today could be solved if Congress simply went on an extended vacation and did nothing. 

*****So what does Kwak do, he writes another post based on the 2000 Budget Projections of CBO!!!  Even though CBO at that time saw surpluses into the near and intermediate future, it still predicted deficits by 2060 if Congress kept saving its surpluses, or by 2030 if Congress changed its ways (which it did, of course).

On an annual cash-flow basis, yes they did. The 2000 surplus was $236 billion, and only about $180 billion of that was due to the various Social Security and Medicare trust funds. (See Historical Tables 1.1 and 13.1 to the 2012 budget.) But on a long-term basis, the government very clearly had a budget gap. The CBO’s 1999 Long-Term Budget Outlook already had this now-familiar picture (p. 4):

As you can see, even if the government saved all of its surpluses — no tax cuts, no additional spending, just save the money for the future — the national debt would shoot up in the 2060s. At the other extreme, if the government gave back the surpluses, either through tax cuts or additional spending (but still balanced the budget for the next decade), the debt would spike in the 2030s. And the reasons were already clear: demographics and health care costs.

In other words, today’s long-term debt problems should not have been a surprise. And back in 2001 when the Bush tax cuts came up for a vote, every Congressperson should have known about these two pictures. That includes Senators Baucus, Feinstein, Kohl, Landrieu, and Nelson (Democrats), and Senators Blunt, Burr, Chambliss, Cochran, Collins, Crapo, DeMint, Ensign, Graham, Grassley, Hatch, Hutchison, Inhofe, Kirk, Kyl, Lugar, McConnell, Moran, Murkowski, Portman, Roberts, Sessions, Shelby, Snowe, Thune, Toomey, Vitter, and Wicker (Republicans), all of whom voted for the 2001 tax cuts (some of them as members of the House). (Sources here.) Senator Nelson and all of the Republicans (except Snowe and Thune) also voted for the 2003 tax cuts, too. Of course, John Boehner and Eric Cantor also voted for both tax cuts.

That doesn’t necessarily mean that the 2001 and 2003 tax cuts were necessarily bad policy (although I think they were). But it does mean that if these people are going to complain about the long-term deficit, they should admit to being part of the problem.

* Actually, you can now get CBO reports back to the 1970s online. The previous time I checked, the website only went back about ten years, which is why I went to the library for older versions.

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