Bill Gale and Alan Auerbach are once again ruining another beautiful spring day. Bill, the Tax Policy Center’s co-director, and Alan, a highly-respected economics professor at Berkeley, have updated their federal budget outlook. And their projections—based on realistic assumptions of what may happen to tax and spending—are truly frightening.
In the short run, Bill and Alan figure that today’s deficit—roughly 10 percent of Gross Domestic Product—will ease somewhat as the economy improves. It will bottom at 2.3 percent of GDP in 2014, but after that, it is off to the races.
Without big policy changes, they project the deficit will be back to nearly 7 percent of GDP by the end of the decade, more than twice the Congressional Budget Office’s official forecast. At that pace, we will accumulate another $11 trillion in deficits through 2020. And by mid-century, the red ink will be 8 percent of GDP and rising. They see a permanent budget gap of 9 percent of GDP.
Matters would be slightly better under President Obama’s budget, but not very much. For instance, Obama would add a mere $9 trillion to deficits over the coming decade.
What could deficits like these mean? In another new article, Len Burman lays out one terrifying--but hardly improbable--scenario.
The bottom line: If Congress keeps doing what it has been doing, which is to say both spending and cutting taxes as if there were no deficit, be very afraid. If current policy does not change, Bill and Alan figure revenues will hover around 18 percent of GDP—where they’ve been for much of the past few decades. Spending, now about 23 percent of GDP, will fall to about 20 percent over the next few years, but then head rapidly north. By mid-century, the federal government will be spending about 26 percent of GDP.
The dollars may be incomprehensible but the math isn’t so hard. If Washington spends 26 percent of our economic output, but collects only about 18 percent in taxes, we’ve got a problem. We may not be Greece, where the deficit is now estimated to be about 13.6 percent of GDP, but we are not in a good place. Plus the weather isn’t as nice.
How do Bill and Alan come up with their numbers? They start with CBO’s budget baseline, which assumes current law. That is, the Bush tax cuts all expire at the end of the year, millions of middle-class households get hit by the Alternative Minimum Tax and the like. They then adjust the forecast to reflect what would happen if Congress, instead, continues current policy into the future. Thus, the Bush tax cuts would be extended, the middle-class would continue to get relief from the AMT, and dividend and capital gains rates would remain at 15 percent. On the spending side, they figure Medicare physician payment rates remain frozen at current levels but not cut, defense spending falls modestly, and non-defense discretionary spending (that is, government operations except for Medicare, Medicaid, and Social Security benefits) increase only to keep up with inflation and population growth.
My own best guess is that Washington will make some changes to current policy. For instance, I suspect Congress will raise tax rates for top bracket taxpayers, but will also give Medicare docs a raise. Add it up, and the bottom line won’t change much.
The point is, Alan and Bill have again added their voices to those warning that we are living Stein’s Law here. Herb Stein—who was top economic advisor to President Nixon and father to comic Ben Stein—used to have a well-known aphorism that went something like this, “If present trends can’t continue…they won’t.”
And to that, I propose we all stand and toast. Somebody pass the Retsina.
