.Is the deficit no big deal? Is the debt we’re piling up, from George W. Bush’s war through Barack Obama’s stimulus package nothing to worry about? A couple of graphs in the Congressional Budget Office’s annual Long Term Budget Outlook, published Wednesday, have supplied some ammo to people who think so. (Judging from his Preface to the volume, which is straight from the Deficit Hawk Handbook, CBO director Douglas Elmendorf clearly is not among them.) One graph, on the cover, seems to show that the national debt as a share of GDP levels off in a couple of years and stays that way until at least 2035 even if we do nothing about it. The other, on page five, seems to show that under current policies, federal revenues and federal spending will be more or less equal for the next 75 years. So what does that tell us about what we should do over the next six months? Those who believe it would be madness to reduce the deficit just as a still-fragile economy is starting to revive, say, “There is no budget crisis. Let’s party!” Deficit hawks say, “What? Let me look at that thing again.”
On closer inspection, it seems that if the CBO is correct about economic developments over the next 75 years (and it is careful not to claim clairvoyance), in 2084 Federal revenues will be 30.3 percent of GDP and outlays will be 36.5 percent of GDP. That’s six points—not very close—but better than our current gap of closer to 10 points. What this graph actually compares, though, is revenues and what they call “primary spending,” which means all spending except for interest on the national debt. The idea is that if you are at least covering your current expenses, it’s OK to roll over the interest. In 2084, the CBO projects, primary spending will be 30.0 percent of GDP—only half a point from revenues.
There are limits to how much comfort we can take from this. As the CBO points out, interest payments on the national debt are real money “that could otherwise be used to pay for government services.” Now they take up 1.4 percent of GDP. If everything goes according to plan for 75 years, they would take up 5.6 percent. Keep in mind that this is the optimistic “do nothing” scenario. CBO offers a second projection using different assumptions and all of those numbers come out much, much worse. Keep in mind, too, that the first scenario assumes no policy changes: nothing new for the environment, for education, for infrastructure, for any military threats that might arrive. For 75 years. And it’s 30 percent of GDP! Throughout the past few decades, with all the talk about tax increases and tax cuts, both revenues and outlays have stayed in a fairly narrow band around 20 percent of GDP. I’m comfortable with that—it’s low compared to other advanced countries—but I’m not so sure about 30 percent. Especially if all we get for it is the same federal government we have now. And I doubt that a change of that magnitude can be sneaked past the Republicans masquerading as a mere extension of current policies.
“Current policies,” it turns out, assumes unlikely things like a 21 percent cut in doctor rates under Medicare. It assumes that George W Bush’s top-bracket tax cuts, artificially set to expire in order to reduce their apparent cost, will actually be allowed to do so. And it assumes that Congress will leave the notorious (although unjustifiably so) Alternative Minimum Tax in place unmodified, which is unlikely. It also assumes, by the way, no new multi-hundred-billion-dollar stimulus.
As others have noted, we’re having an unnecessary argument about all this, to some extent. The most enthusiastic deficit hawk in the long run could still believe that we need another jolt of stimulus in the short run. In fact that’s more or less where I am. Among the academics and amateurs who have been weighing in on this subject (not the politicians, who have other fish to fry), you could probably get a consensus on something like a year or two years of stimulus, followed by serious deficit reduction. Trouble is, the two questions can’t be separated completely. Every dollar we refrain from spending may be the dollar that would have created a job. But every day we put off getting serious about the deficit increases the pain when we finally go to the dentist.