The Long-Term Budget Outlook

The CBO's new report on the long-term budget outlook is gloomy reading. Something has to give, is the message. CBO director Douglas Elmendorf summed it up this way in a recent presentation at the NY Fed:

Given the aging of the population and the rising cost of health care, the United States cannot achieve all of the following objectives in the future:

  • Keep federal revenues at their average share of GDP during the past 40 years.
  • Provide the same sorts of benefits for older Americans that we have provided in the past 40 years.
  • Operate the rest of the federal government in line with its role in the economy and society during the past 40 years.

More gloom: Jonathan Chait explains why a deal on the debt ceiling might not happen. Everybody (including me) is assuming that something will be cobbled together. Maybe not, says Chait.

The debt ceiling is inherently a difficult vote for members of Congress -- their constituents don't understand it, and nobody wants to do it. Republicans and deficit hawks seem to think that attaching it to deficit reduction makes the vote easier. But that's only true if the deficit vote gets to be entirely on their terms. And it can't be -- it also requires approval by the majority-Democratic Senate and the Obama administration.

So the end result is that the deficit reduction winds up as an unpopular compromise, and you're simply adding one unpopular vote to another. If the negotiations fail, the Republicans have talked themselves into a position where the leadership can't fall back on just raising the debt ceiling or else it risks a revolt. And the Obama administration enabled this, first by failing to include a debt ceiling hike in last year's tax deal, and second by opening themselves up to an unprecedented hostage negotiation. The markets currently seem assured on the understanding that people in power are responsible and know what they're doing. I'm far less assured.

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