Debt Bomb From the CBO

Oh dear. Here we go … again.

The Congressional Budget Office just lobbed a debt bomb into the fire that already consumes Washington. The timing, just a couple of weeks before we hit the debt ceiling could not have been more ill-timed. Talk about politically inept. Get ready for breathless headlines using the austerity crowd’s favorite “U” word. U is for unsustainable.

So here we go again.

I imagine that we will be told we have to cut social programs now in order to fend off the day when we have to cut social programs. No, I still don’t get the logic. We have to burn the village to save it? We have to cut Social Security in order to avoid cutting it? Where does this make sense?

So, what, exactly did the CBO say?

Don’t rely on your average cable news jockey to tell you. That would require that they read the CBO report. Since it is 126 pages long I doubt they will. At any rate not before launching the “U” word across your TV screens.

Luckily for you I have read the darned thing. Here’s what it says in a nutshell:

• The federal deficit is falling quite quickly. It reached a peak of just under 10% of GDP in 2009, and is now roughly 4% of GDP. If everything stays the same with respect to policy – i.e. no tax changes or more spending cuts etc – the deficit will decline to a paltry 2% of GDP by 2015.
• This means that the total federal debt owned by the public – a big chunk of the debt is owned by the government itself and so doesn’t count – which is about 73% of GDP right now, will also decline to around 68% by 2018.
• But: a variety of social program cost increases, especially health care driven costs, will cause the decline to halt and a small increase to begin. This will result in the deficit going back up to around 3.5% of GDP by 2023, with the debt outstanding rising to about 71%.

That’s it.

So where does the “U” word come in?

Because the CBO, unusually, started to meddle with even longer term guesswork. They carried their numbers out to 2038, twenty-five years hence. Plus they assumed that there would be no changes in policy along the way. And they ramped up interest rates from their current historic lows. In other words they were as pessimistic as they could possibly be.

Now as an ex-planner I realize that these activities are useful to do. They inform policy debates. They help sharpen the focus we need on upcoming issues. But I also realize that none of this means anything beyond a few years. Events have a habit of undermining the best laid plans a year or two out. Anything beyond ten years borders on fantasy.

And it is out there in the far reaches of fantasy that we learn things get “unsustainable”.

The CBO acknowledges – sort of – this point when it says:

“How long the nation could sustain such growth in federal debt is impossible to predict with any confidence.”

So why launch the “U” word? When you have no confidence in what you’re saying, and when you know full well the political maelstrom into which you are launching that “U” word. Worse: the CBO says it realizes the problems with long term projections. It has a whole section entitled to the ‘Uncertainty of Long-Term Budget Projections’. But the opening paragraph of that section ends thusly:

“Because the uncertainty of budget projections increases the farther the projections extend into the future, this report focuses on the next 25 years.”

So, apparently, the CBO thinks the next twenty-five years is within the realm of solid forecasting.

Rubbish. It’s fantasy. Let’s all say so and move on.

We are finding it next to impossible to have a sensible discussion about the federal budget without doomsday scenarios that are fantasy at best being lobbed about by the supposedly neutral and bi-partisan CBO.

In any case, the key budget movements that are imagined by the CBO are these:

• Federal spending on social programs will double as a percentage of GDP from the current 7% to around 14% by 2038. Over the past forty years they have averaged that same 7%.
• Spending on other stuff – truly discretionary spending – will drop over the same time. It will decline to 7% of GDP from the 11% it has averaged over the past forty years. This would mean the smallest level of discretionary spending since 1930.
• The combination of more debt and rising interest rates – both entirely speculative – will drive the amount the government pays in interest up from its current 2% of GDP to 5%.

Those movements are all highly suspect, but are the basis upon which the CBO utters the dreaded “U” word.

You simply cannot make policy based on such long term guesswork. Ten years out is the longest we should worry about. We can turn our minds to 2038 sometime around 2028. To think we can tinker with 2038’s debt levels from our base in 2013 is absurd. Yet the news media are already beating the drum and proclaiming the urgency of structural reforms to social programs.

That means they are advocating cuts now to save us from having to make cuts later.

No I still don’t get that logic.

Meanwhile, shame on the CBO for adding fuel to the raging inferno. I imagine they think they are helping by feeding us facts to inform the debate. But these aren’t facts. They’re fantasy. Which is why the Republicans will believe them so readily.

Oh. I shouldn’t have said that should I? Gratuitous commentary isn’t useful.

Nor is the CBO report.