EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

The Value of Sticking to the Laws We Pass, At Least Eventually

June 30th, 2010 . by economistmom

cbo-long-term-outlook-extended-baseline-june20101

I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts which highlight the difference between CBO’s current-law baseline (pictured above), and their “alternative fiscal scenario” which is more of a “policy-extended” baseline–similar to the one the Obama Administration uses as the baseline relative to which they measure the costs (or savings) of their budget proposals.

As Ezra points out, current law, taken literally as CBO must assume, is fiscally responsible:

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues.  That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”–because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

So CBO is showing us we don’t have to do anything to achieve fiscally-responsible policy over the next 25 years.  It’s already set by laws we’ve already passed.  Congress can go home.  They don’t need to pass any deficit-reducing legislation, and President Obama doesn’t have to sign it.

Well, unfortunately life is not so simple.  As Ezra warns:

But current law is not likely to advance unmolested. You’ll notice, for instance, that there’s a big jump in current-law revenues next year. That’s because the Bush tax cuts are slated to expire totally. But few expect Congress to allow them to expire totally. They’re likely to preserve the bulk of the cuts, rejecting only some of the cuts that helped out the rich.

Ah, but here’s where the President’s fiscal commission can help us stick to the “simple” solution of holding onto current law.  They can make it simpler to hold onto this fiscally-responsible, current-law policy over the longer run by giving their blessing to letting go of current law (only) temporarily–letting Congress and President Obama enact a (popular) tax cut to help the recovering-but-still-weak economy: an only temporary extension of the bulk of the Bush tax cuts.  In exchange, the commission could require that the federal government get back on track in a couple years, recommitting to the picture above by getting back to the current-law baseline level of revenues.  That doesn’t have to mean sticking to current tax law, but it does mean that any deviations from that “script” will have to be revenue-neutral.  And that sounds a lot like an exercise in fundamental tax reform, which could boost the strength and sustainability of our federal revenue system even beyond the next 25 years.

In fact, this was a strategy that Bob Bixby, the Concord Coalition’s executive director (and my boss), recommended to the President’s commission today.  From his written testimony:

That leaves us with tax policy. Sticking to the CBO current-law baseline on taxes, 19.7 percent of GDP, gets the budget deficit to the commission’s target. Legislatively, that represents the easiest option, as policymakers simply need to do nothing and let current law play out.

However, that does not mean current law represents the most desirable policy path to achieve the baseline level of revenues. If reverting to the pre-2001 era tax policy (with its higher marginal tax rates) at the beginning of 2011 is deemed undesirable for political reasons, or out of economic concern for raising marginal tax rates during the early stages of economic recovery, tax policy could be reformed to achieve the same revenue levels without raising marginal tax rates.

The commission might find fertile common ground on steps to improve the tax code in ways that would increase efficiency and thus increase revenues. A thorough scrubbing of the system to identify preferences that serve no compelling use or that could be altered in a resetting of priorities is long overdue.

The fact that the commission’s short-term goal is to achieve a lower deficit by 2015 and not sooner suggests a tax policy strategy that could acknowledge the concern of many economists about the dangers of “unwinding” our currently stimulative fiscal stance too quickly. The 2001 and 2003 tax cuts that President Obama has proposed to permanently extend could instead be extended only temporarily. If done for one or two years, this would be long enough not just to allow for a more solid economic recovery, but also long enough to develop a more fundamental reform of the federal tax system that could more efficiently achieve current-law revenue levels by 2015.

This would provide an opportunity to enact a tax policy that meets the commission’s 2015 goal, while earning bipartisan support, while also building a tax system capable of remaining adequate and economically efficient over the longer term — boosting our chances for economic growth and a more sustainable fiscal future.

And so, Ezra’s take-away lesson from the CBO report is (emphasis added):

Either Congress can pass and implement policies that will bring the long-term deficit under control or it can’t. Those are the only two choices here. But there’s no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them.

I’ll have some of my own analysis of the CBO long-term outlook report later this week.  There have been some changes to the two baselines CBO defines, some of those changes a bit puzzling and even intriguing.

(My Concord colleague, Josh Gordon, blogged more comprehensively about the CBO report and Bob’s testimony on Concord’s Tabulation blog today.  As he emphasizes, our recommendations for achieving longer-term fiscal sustainability are not just “stick with current tax law” or the “stick with the current-law revenue baseline.”  The largest longer-term challenge remains health care spending.  But the biggest and most reliable “2015 lever” is clearly tax policy, and no matter how great the health-reform lever eventually works decades from now, we’ll still need the tax system to support that not-so-outrageous-but-still-expensive health care system over the longer run.)

4 Responses to “The Value of Sticking to the Laws We Pass, At Least Eventually”

  1. comment number 1 by: BillSmith

    Everyone thought Congress would fix the Estate Tax too…

  2. comment number 2 by: AMTbuff

    no matter how great the health-reform lever eventually works decades from now, we’ll still need the tax system to support that not-so-outrageous-but-still-expensive health care system over the longer run

    That presumes that the correct approach to health care is government funding. However all indications point to third party payment as the source of the cost explosion. It may be that health care costs can only be controlled by reducing the role of both government and private insurance in paying for health care. That would mean lower taxes and higher private spending on health care. People will limit and prioritize health care spending when it’s their own money they are spending.

    Obviously such a change would be painful, but so would be the gradual, comprehensive breakdown of an unsustainable system of third party payment.

  3. comment number 3 by: Arne

    People will put off health care spending, but until they actually run out of money, it is unclear that they will reduce spending.

  4. comment number 4 by: SteveinCH

    Of course, that baseline analysis assumes a few things….

    1. Interest rates that are lower than just about any nonrecessionary period in the history of the country.

    2. No recessions or other crises that require additional spending or depress tax revenue.

    And it also includes a few things that really are unlikely and are also material

    1. No doc fix

    2. No AMT patch

    3. Discretionary spending frozen at current levels of GDP (despite it’s increase over long periods of time)

    So, as I’ve said many times before, the notion of “primary balance” (an invention of people who aren’t serious about fiscal policy management) is silly. Only a fool would call something balance that is actually a 3% deficit and depends on so many factors that are unlikely to be sustained in order to occur.