Aei: The New Cbo Debt Study Is Way Worse Than The Media Is Telling You

[Wrong Direction]

Almost all media reports about the Congressional Budget Office’s new long-term budget analysis will highlight its forecast that the federal public debt, now about 73% of GDP, is on track to reach 100% of GDP in 2038. Now that’s scary enough. As Maya MacGuineas of the Committee for a Responsible Federal Budget puts it: “Today’s report confirms exactly what we have been warning — that the debt is on an unsustainable long-term trajectory.”

And perhaps news reports will mention how the CBO arrived at that number:

 

– By 2038 federal spending would increase to 26% of GDP under the assumptions of the extended baseline, compared with 22% in 2012 and an average of 20½% over the past 40 years.

– Federal spending for the major health care programs and Social Security would increase to a total of 14% of GDP by 2038, twice the 7% average of the past 40 years

– In contrast, tot

al spending on everything other than the major health care programs, Social Security, and net interest payments would decline to 7% of GDP, well below the 11% average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.

– The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2% over the past 40 years, mainly because federal debt would be much larger.

– Federal revenues would equal 19½% of GDP by 2038 under current law, CBO projects (see the figure below), compared with an average of 17½% over the past four decades.

 

So over the next 25 years, Americans will be taxed more to pay for a federal government that will more purely become a redistribution, wealth-transfer mechanism. Taxes and spending at record highs. America as a nuclear-armed insurance company.

 

But here’s the thing: that forecast, as the CBO notes, does not factor in “the harm that growing debt would cause to the economy.” Hey, that would be a good thing to know, right? Well, you have to dig deeper into the CBO study to find those numbers.

 

And when you take into account stuff like how deficits might “crowd out” investment in factories and computers and how people might respond to changes in after-tax wages, you find the debt is much, much larger, closer to 200% of GDP.

 

The CBO:

>Projected budgetary outcomes under the extended alternative fiscal scenario are worsened by the economic changes that result from its policies. With the effects of lower output and higher interest rates incorporated, federal debt held by the public under the extended alternative fiscal scenario would reach 190 percent of GDP in 2038—about 80 percentage points greater than that under the extended baseline with economic feedback— according to CBO’s central estimates.

 

Then there is this:

Assumptions leading to the most negative impact on GNP, debt would reach 250 percent of GDP shortly after 2038.

In CBO’s judgment, the agency’s model cannot provide reliable estimates of the economic impact of debt exceeding that magnitude:

The model incorporates responses of private saving and capital inflows to fiscal policy that are based on historical experience, and if interest rates and the debt-to-GDP ratio rose to levels well outside of that experience, the estimated responses would probably no longer be valid.

 

In other words, the models break down. And maybe the economy, too. Remind me again, why should Washington not use the current debt-ceiling limit as a handy opportunity to do something about entitlements?

 

See link for figure:

http://www.aei-ideas.org/2013/09/the-new-cbo-debt-study-is-way-worse-than-the-media-is-telling-you/