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The New CBO Report: Still a Best-Case Scenario After All These Years

January 31st, 2012 . by economistmom

jan2012plaus2

The Congressional Budget Office’s new budget and economic outlook is out, and as usual, it really doesn’t seem all that bad when you look at their “baseline” numbers.  (Deficits as a share of GDP over the next ten years are still at economically sustainable–less than the growth rate of the economy–levels.)  Oh, except that the CBO baseline is (by law) a projection of current-law policies, which assume a lot of very optimistic (some might say “delusional”) things about Congress’s proclivity toward fiscally responsible behavior.

You see, in current law there are lots of costly policies that expire after a year or two…or nine, or two–as in the 2001 Bush tax cuts which were first scheduled to expire at the end of 2010 and now again are scheduled to expire at the end of 2012.  Expiring tax cuts have been the most fashionable way to deficit spend in this town ever since.

In their budget outlook, CBO assumes any tax cuts scheduled to expire actually expire.  That could mean CBO’s assuming they will actually expire, or it could mean (more realistically but still very optimistically) that if Congress and the president extend the tax cuts in the future, that they will fully offset their cost, by cutting spending or raising other taxes–a novel concept known as “pay as you go.”  Once upon a time, Congress followed strict pay as you go rules–on both tax cuts and mandatory spending–and they complied with discretionary spending caps, too.  By the way, that was the last time we were actually running budget surpluses, at the end of the Clinton Administration.

Now Congress prefers to make policies look less costly by making them “temporary,” with official expiration dates that CBO has to officially score as being less costly because they (are supposed to) expire.  But a more realistic “business as usual” projection would assume that these previously-always-extended-and-deficit-financed tax cuts will continue to be extended and deficit financed.

Enter the Concord Coalition’s “plausible baseline” (illustrated above), which we’ve been calculating for many years now, and which has told (really) the same old story for many years now, just the numbers keep getting worse because the fraction of the tax cuts that are on unofficial time (past expiration dates) vs. official time keeps growing.  Every year it seems that the multiple of the deficits under Concord’s plausible baseline relative to those under the CBO official baseline keeps swelling.  Last year I remember saying that the plausible baseline’s deficits were triple the CBO deficits.  This year it’s closer to quadruple.

Most of the $8.7 trillion ten-year difference, $6.5 trillion, is due to tax policy.  The (expiring) Bush tax cuts and associated Alternative Minimum Tax relief alone account for over $4.5 trillion of the difference, even without associated interest costs.  (With interest, the deficit-financed extension of the Bush tax cuts and AMT relief would add almost $5.4 trillion to the ten-year deficit numbers.)

Some of you might remember what the so-called “super committee” was trying to do: they were trying to “go big” and find, hmmm, maybe $4 trillion worth of deficit reduction relative to the “business as usual” or “policy-extended” baseline.  The “go big” solution is that which most economists feel is necessary to get deficits back down to economically-sustainable levels… like those very ones that are shown in this new CBO report.  So that would have been a piece of cake for the super committee–or anyone else in Congress who might want to be a fiscal superhero–if they just looked at the CBO baseline and figured out how to stick to it.  (Hint: PAYGO.)

So there’s not much new here.  The CBO report still provides us with a fiscal roadmap with one very clear route highlighted as the fastest one to the land of sustainability.  All the road signs point clearly to that one route, but all the policymakers keep missing that turnoff ramp, over and over again.  And none of them really want to talk about it.

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***Addendum:  Here’s the Concord Coalition’s press release on the CBO report.

12 Responses to “The New CBO Report: Still a Best-Case Scenario After All These Years”

  1. comment number 1 by: Jason Seligman

    …guess the first big litmus test will be a revisiting of the last big litmus test on the baseline - the sun-setting of early 2000’s tax policy…

  2. comment number 2 by: Vivian Darkbloom

    I agree with Economist Mom and the Concord Coalition that it is unreasonable to think that the “current law” with respect to projected tax revenues will remain unchanged. It is very likely that the “plausible baseline” is, well, more plausible.

    That said, the deficit is the result of the difference between tax revenues and government expenditures. So, why, in all these analyses, do we only look at the tax side of the ledger? Why don’t we give equal emphasis to the equally implausible “baseline” that government spending will not increase any more than the rate of inflation?

  3. comment number 3 by: SteveinCH

    Because if government spending increased at the rate of inflation, the budget would be balanced in 9 years with no change in current tax policy.

  4. comment number 4 by: AMTbuff

    The (expiring) Bush tax cuts and associated Alternative Minimum Tax relief alone account for over $4.5 trillion of the difference

    Imposing the 1993 AMT exemption amount without indexing it for 20 years of inflation is not a reasonable baseline by any reckoning. Treating it seriously is intellectually dishonest. And yes, Congress is intellectually dishonest. Analysts don’t need to follow suit.

    Our income tax has become permanently temporary. Our spending promises are temporarily permanent. It’s a perfect balance of two unsustainables.

  5. comment number 5 by: Jim Glass

    Our income tax has become permanently temporary. Our spending promises are temporarily permanent.

    Well put. :-)

    Why don’t we give equal emphasis to the equally implausible “baseline” [of] government spending

    Well asked. The “savings” in the Obama-care bill that were supposed to pay for it have already largely fallen apart (see the CLASS long-term care financing gimmick) and the Medicare actuary is on record as not believing in most of the rest of them. Obama-care in particular and other spending programs in general are full of gimmicks that falsely minimize their cost (”temporary” authorization, mis-matching years of financing and spending, future totally unknown cost savings assumed in current cost projections, etc.)

    CBO, Hennessey, others have very clearly shown that promised long-term spending increases are totally unsustainable at *any* plausible tax level.

    Any proposals to make the debt situation sustainable that don’t include real spending cuts comparable to tax increases are implausible and un-serious, both economically and politically.

  6. comment number 6 by: Vivian Darkbloom

    “Why don’t we give equal emphasis to the equally implausible “baseline” [of] government spending”

    Thanks for the subtle edit for it could have been better asked. Of course, the inflation assumption refers only to discretionary spending. With respect to non-discretionary spending, as SteveinCH also notes (subtely?) the issue is more the continued use of implausible prior assumptions made when these spending entitlements were enacted. Perhaps one should come up with a name for that sort of spending baseline.

  7. comment number 7 by: SteveinCH

    I have always favored the notion of a “baseline” for total government spending of constant real per capita spending. Government spending over that baseline should be considered an increase. Some programs may in fact need to increase spending but total spending should be held to that level in my view.

    If we could do that, balancing the budget should be easy. Indeed one thing I’ve never understood is why government is the only enterprise with negative economies of scale.

  8. comment number 8 by: Vivian Darkbloom

    Steve,

    That’s a good suggestion. I was curious as to what a chart of real per capita government spending might look like (I mean, I pretty much knew, but wanted to confirm it). I found some very eye-opening graphs produced by the St Louis Fed here:

    http://research.stlouisfed.org/publications/review/06/01/GarrettRhine.pdf

  9. comment number 9 by: Arne

    “why government is the only enterprise with negative economies of scale”
    There may be hyperbole in there, but also something worth discussion. Most of what the government does run up against diminishing returns. 100 percent literacy rate sounds laudable, but each additional percentage is harder than the last. Medicare and Medicaid is obvious. Our road system was extended past the point where keeping it maintained is no big deal.

  10. comment number 10 by: Jim Glass

    em>one thing I’ve never understood is why government is the only enterprise with negative economies of scale.

    It’s not. Negative economies of scale are very common. But other organizations that expand into negative returns suffer losses which force them to scale back, be broken up, or go extinct at the hands of competitors.

    Ronald Coase earned his Nobel for explaining this in detail, particularly the question of “why do corporations exist, as they do, at the size they are at, with shareholders, employees, creditors having their particular legal rights?”

    He discussed govt this way:

    Q: … you started your intellectual career as a socialist. Why and when did your political views change?

    Coase: They changed gradually. What was most important was the work I did on the economics of public utilities at the London School of Economics. I studied the results of municipal operation of utilities and the effects of nationalization, particularly in the post office. This led to grave doubts about nationalization. It didn’t produce the results people said it did…

    Q.: You said you’re not a libertarian. What do you consider your politics to be?

    Coase: I really don’t know. I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn’t like to say that all regulation would have this effect because one can think of circumstances in which it doesn’t.

    Q.: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

    Coase: This is a very interesting question because one can’t give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies–perhaps all the studies–suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been.

    I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had?

    I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn’t mean that if we reduce the size of government considerably, we wouldn’t find then that there were some activities it did well. Until we reduce the size of government, we won’t know what they are.

    Q.: What’s an example of bad regulation?

    Coase: I can’t remember one that’s good. Regulation of transport, regulation of agriculture– agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.

    The difference between govt and other organizations is that govt is a monopoly, and that the rent-seeking groups who direct it (politicians, bureaucrats, special interest groups using govt to protect themselves from competition, to obtain resources, etc) continue to profit from expansion of the govt’s size and regulatory power even as the nation as a whole suffers from it.

    To repeat myself, economics is about incentives. When the people directing the govt have incentives that don’t square with the welfare of the nation, the govt takes actions harmful to the welfare of the nation. As long as that condition exists, it will continue to do so. Eventually govts that go too far into negative returns do fail, of course … but that’s not pretty. Until then, as Smith said, there’s a lot of run in a nation.

    PS: I admit I’m a member of the Coase fan club. He’s my favorite economist of all. Three of the reasons…

    1) He won a Nobel in economics using no math! How many people do that? His little book, The Firm, the Market and the Law, collecting his most important essays, is the best economics book I’ve ever read by importance of content via ease of reading. No math!

    2) He has, um, spirit, personality. E.g., Econ textbooks, notably Samuelson’s that dominated for two generations, have forever given lighthouses as an example of a service that must be provided by government because of the “public good / free rider” problem. But Coase examined the historical record and wrote a famous paper showing that in fact the private market had long provided lighthouses in Britain until the govt nationalized them. From the same interview…

    Q.: What reaction have you had over the years [from] Paul Samuelson…

    Coase: Samuelson says I was wrong and he was right, and he froths at the mouth…

    My approach is to compare the alternatives. People like Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something. They stop their analysis at that point.

    3) He’s 101 years old and still working! Apparently as sharp and spirited as ever. There’s still hope…

  11. comment number 11 by: SteveinCH

    Jim,

    Excellent post. I guess I should have said that consistently survives ever increasing negative economies of scale.

  12. comment number 12 by: Patrick R. Sullivan

    ‘I guess I should have said that consistently survives ever increasing negative economies of scale.’

    Government has guns.