CBO report suggests a different ‘grand bargain’

Bloomberg

(Bloomberg News)

A Congressional Budget Office (CBO) report released today tells us we have a big, long-term debt problem and the parties are missing the point by obsessing about the sequester.

The CBO finds:

Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy. . . . Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.

The administration shouldn’t kid itself. The imposition of the sequester (which it opposes) will drive down the debt to 68 percent of gross domestic product (GDP) just before the president leaves office  — and then will soar. (Coincidence? I think not.) As in many areas, he’ll leave the next president with a mess to clean up.

House Budget chairman Paul Ryan of Wisconsin said in a statement, “CBO has posed an important question: Are we going to get control of the debt before it reaches a breaking point? The President and Congressional Democrats want to wish the problem away. But that’s simply irresponsible. The report reiterates the obvious: Government spending, especially on health care, is driving our debt.”

It is critical to locate where the debt problem originates. Although the sequester makes the president look good in the short run, it is entirely beside the point when it comes to the serious, long-term debt problem. The CBO tells us: “Federal spending for the major health care programs and Social Security would increase to a total of 14 percent of GDP by 2038, twice the 7  percent average of the past 40 years. In contrast, total spending on everything other than the major health care programs, Social Security, and net interest payments would decline to 7 percent of GDP, well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.”

We are starving functions of the federal government that many consider its most important and that enjoy the public support (e.g. the Food and Drug Administration, defense, national parks) for no good reason.

Nor is the problem a shortage of revenue. The CBO points out:

Under CBO’s extended baseline, federal revenues as a share of GDP are projected to rise from 16.9 percent in 2013 to 18.5 percent in 2023, reflecting scheduled changes in tax law and the ongoing economic recovery.After 2023, revenues are projected to continue to rise faster than GDP under current law for two reasons: growth in real (inflation-adjusted) income and the interaction of the tax system with inflation would push a greater proportion of income into higher tax brackets; and certain tax increases enacted in the Affordable Care Act would generate increasing amounts of revenues relative to the size of the economy. Federal revenues are projected to reach 19.7 percent of GDP by 2038 and to continue rising thereafter. . . . By comparison, revenues have averaged 17.4 percent of GDP over the past 40 years.

Just as discretionary spending restraint on a sliver of the budget is largely irrelevant to our long-term debt problem, taxes don’t seem to be the problem with regard to the debt. (There are other reasons, including growth promotion, to reform the tax code.)

Why are Republicans fighting tooth and nail to keep the sequester, and why are Democrats fighting tooth and nail for more revenue? The energy and time spent on something the other side won’t agree to is not commensurate to the benefits if the parties could agree.

This is largely why we have favored a different kind of “grand bargain.” Instead of trading tax hikes for entitlement reform, why not trade discretionary spending increases (including defense) for entitlement reform. In other words, Republicans get more in defense spending, Democrats protect items such as National Institutes of Health, and they both agree on entitlement reform.

There are many benefits of such an arrangement. First, it gets both parties out of the business of cutting visible, popular discretionary items. Second, it addresses income inequality (the expanding entitlement boom has tipped federal expenditures away from the poor to the middle class and rich). Third, it doesn’t hurt growth by imposing new taxes. And, finally, it actually gets at the real driver of the debt.

It was thought that we needed restraint on discretionary spending to show we could do something about the really big problem. It hasn’t worked out that way, and cuts to discretionary spending aren’t necessarily advisable (e.g. defense).

Entitlement reform is no walk in the park, but we don’t have to do it in one bite. A few meaningful reforms (e.g. raising the Medicare age) would have a substantial impact on the budget.

After five years of nibbling around the edges of the debt problem (which is real) with non-solutions that annoy almost everyone, perhaps relenting on the sequestration and making a down payment on entitlement reform (enough to more than make up for restoration of the sequester cuts) could be the basis of a deal.

Throw a one-year delay (rather than defunding) of Obamacare into the mix, and conservatives could defy expectations. Or, GOP lawmakers could keep fighting over the wrong things, shut down the government, ruin the country’s credit rating and convince the public the GOP is entirely irrational. It’s their choice.

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