Has the long-term fiscal challenge not gotten worse in the past two years?
"On the budget, we have known about the long-run fiscal challenge facing the country for 40-plus years, and that problem has not gotten materially worse in the last two years. That problem is rooted in the aging of the population, the acceleration of health care costs, and I would argue, some of the tax policy choices made in the 2000's."
--Austan Goolsbee, chairman of the Council of Economic Advisers, June 10, 2011
On the face of it, this comment that the nation’s fiscal challenge “has not gotten materially worse in the past two years” appears strange--and certainly provocative.
Indeed, when Austan Goolsbee, one of President Obama’s chief economic aides, made this assertion this month, one reporter covering his speech felt compelled to note: “The national debt has increased from $10.4 trillion to $14.3 trillion since Obama took office in 2009.”
Still, Goolsbee’s comment raises an interesting question. As negotiations to reach a budget deal heat up before the United States breaches its debt limit, are lawmakers and administration officials too focused on the recent run-up in the debt? There have been some proposals this year to deal with long-term health costs—notably the controversial House Republican plan for Medicare—but overall the debate has revolved around current spending.
A White House official, speaking on condition of anonymity, defended Goolsbee’s comment as not controversial at all.
“The baby boom's implication for future imbalance has been documented for decades and has gotten two years closer but the demographics haven't changed,” the official said. “The deficits caused by the business cycle over the last two years and the added debt only impacts our long run fiscal situation by, essentially, the interest we pay on the additional debt. The $10 to $14 trillion is not the long run fiscal challenge.”
So we decided to test the question of whether the fiscal challenge has gotten “materially worse” under President Obama. We will try not to get too wonky.
Both left-leaning and right-leaning economists agreed that the best source for the answer to this question are regular studies on the fiscal challenge done largely by Alan Auerbach, an economics professor at University of California at Berkeley, and William Gale, an expert on federal economic policy at the Brookings Institution.
One study, written in 2008 (along with Jason Furman, now an aide to Obama), showed that based on Congressional Budget Office budget projections, the fiscal gap was 2.93 percent of the Gross Domestic Product, through 2085. (The GDP is the broadest measure of the economy.) That translated to $400 billion per year in current terms, or a present value of $20.8 trillion.
We then compared that with a study that Auerbach and Gale published this month. That showed the fiscal gap as being 3.58 percent. That translated to $500 billion a year in current terms, or a present value of $27 trillion.
That certainly looks like a shift, but the picture is more complicated when different CBO budget projections are considered. CBO generally has to assume current law will be maintained, but Congress constantly defers hard decisions, such as extending tax cuts that are due to expire or postponing Medicare cuts that are due to take place.
CBO’s adjusted baseline in the 2008 study showed a gap of 5.76 percent of GDP though 2085, or $40.9 trillion in present value, versus a slightly different “extended policy” baseline in the 2011 study of 5.87 percent of GDP, or $44.3 trillion. That difference is fairly insignificant.
The trouble started when we asked economists whether these numbers showed a material change had taken place under Obama.
Auerbach said “it was a very hard question to answer,” in part because the alternative numbers were not directly comparable. (One of the Medicare projections was not available in 2008.)
“There is a narrower question, which is how much (1) the accumulation of debt and (2) the adoption of new policies over the past couple of years have worsened the long-run outlook,” Auerbach wrote in an email. “On (1), we know from the arithmetic that a couple of years’ debt accumulation doesn’t increase the long-run problem that much. As to (2), it’s hard to think of any new policies that have made the long-run problem appreciably worse (as opposed, for example, to the adoption of Medicare Part D [prescription drugs] in 2003, which created a huge new unfunded liability).”
Goolsbee’s comment is “certainly a defensible statement,” Auerbach concluded. “I’ve certainly made statements over the past couple of years to the effect that the short-run deficits associated with the recession itself and the policy responses to it are small in comparison to the long-run imbalance.”
Gale was even more empathic that Goolsbee was correct.
“It is, as you say, a judgment call, but I would agree (strongly) with Austan’s statement,” he said. “What happened in the last couple of years is that we’ve had the short-term deficits that have galvanized attention to the ‘deficit’ problem – arguably, the wrong deficit problem, since the short-term deficits are not the real concern, they are actually helping the economy, and if there were no medium-term or long-term deficits, no one would really care about the short-term deficit “
Gale acknowledged the long-term problem might have gotten worse in the last couple of years, but not because of Obama’s policies. “Every year we delay makes the problem harder” and if the recession affects medium or long-term economic growth, that will make the long-term problem worse. “It is ironic that the attention to the deficit problem has arisen for the wrong reason, but as you know, in DC, you take the attention to the issue however you can get it,” he said.
We got different answers when we checked with two of Goolsbee’s predecessors, N. Gregory Mankiw, an influential professor at Harvard University who wrote one of the most popular economic textbooks for college students, and R. Glenn Hubbard, dean of the Columbia University Business School. Both headed the Council of Economic Advisers under George W. Bush.
Mankiw thought the question was silly: “As I understand the numbers you cite, you say the problem has gotten over 20 percent larger (that is, from 400 to over 500 billion in current terms). And you are asking me whether that sized change is material? Is that really the question? I suppose the answer is partly semantic, but if the size of my debts were to rise by 20 percent, I would certainly view that as material.”
Hubbard also said Goolsbee was wrong. He noted that while Goolsbee blamed the Bush tax cuts for part of the current problem, that “can't be someone else's fault going forward -- Obama signed extensions of the tax cuts.” Hubbard said “the deterioration is not entirely Obama's (or any one president's) fault, though the stimulus package and new spending on health care have contributed. The biggest indictment of Obama is his lack of attention to the long-run fiscal situation.”
The Pinocchio Test
We admit we are stumped on this one and have spent a lot of time thinking about it.
There is clearly something of a shift, but we would have hoped that for a bipartisan consensus on how much is due to current administration policies and how much stems from new information about the impact of the retirement of the baby boom generation. The key examiners of the data –Auerbach and Gale—think there is support for Goolsbee’s point. But very qualified GOP-leaning economists do not.
Still, we think it was a bit uncharitable of Goolsbee to blame tax cuts that Obama has now extended--and which even in his budget would not fully repeal. (The tax comment was a bit of an aside; his main point focused on the aging of the population and rising health-care costs.) But we would agree the Bush tax cuts—now generally agreed to have been remarkably inefficient—did not help prepare the nation for the fiscal crisis ahead.
Maybe it is still too early to reach a conclusion about this fact. So—sorry to disappoint anyone-- we will label it