Correction to Long-Term Debt Projections

By James Kwak

Back in October, I wrote a post laying out my long-term projections for the national debt, which were basically an adjustment to existing CBO projections. Peter Berezin recently pointed out a misleading ambiguity in that post. There, I used the same long-term growth rate of tax revenues in both my extended-baseline scenario and in my “realistic” scenarios. I got that long-term growth rate from the CBO’s extended baseline scenario in its 2011 Long-Term Budget Outlook, which assumes that current law remains unchanged.

In my realistic scenarios, I assumed that the AMT would be adjusted through 2021 but that the long-term growth rate would apply thereafter. I didn’t say anything explicitly about the AMT after 2021, but by using the long-term growth rate from the extended baseline, I was implicitly assuming that the AMT would not be indexed after 2021.

This is certainly a possible policy choice, but I think it is optimistic (from a budgetary perspective), and a more conservative assumption is that the AMT will be indexed forever. This means that you would have to use the long-term growth rate from a world in which the AMT is indexed. Such a world is portrayed in the CBO’s 2009 Long-Term Budget Outlook, alternative fiscal scenario, Figure 5-1. (The 2011 alternative fiscal scenario assumes instead that taxes will remain constant as a share of GDP.) By my calculation (from the Additional Info spreadsheet), the long-term growth rate of tax revenues is 0.3 percent per year (over the 2021–2080 period). So I’ve adjusted my spreadsheet to use this growth rate instead.

This yields the projections shown in the figure above. As before, the red lines are the CBO projections from June, the green lines are my adjustments to those projections based on more recent information, and the blue lines are the scenarios that I think are more realistic—one assuming expiration of the Bush tax cuts, one assuming extension.

The most important point remains the same: If we let the Bush tax cuts expire, the national debt will be significant and rising in the long term, but will not be that much larger than today even in 2035. Which means that the national debt problem over the next twenty-five years is as much about tax cuts as about entitlement spending.

(This update also reflects a couple of small technical corrections, which barely changed the numbers.)

34 responses to “Correction to Long-Term Debt Projections

  1. I’m startin a collection of paulson and geithner one dollar bills, to be publicly burned at a chosen time in the future. Any and all contributions welcome.

  2. Bruce E. Woych

    http://rwer.wordpress.com/2011/12/30/chart-of-the-day-public-vs-private-us-debt-to-gdp-ratios/#comment-11411

    Chart of the day: Public vs. private US debt to GDP ratios
    December 30, 2011 Editor Leave a comment Go to comments

    from Steve Keen

    Separating out private sector and public sector debt in the USA

    http://rwer.wordpress.com/2011/12/30/chart-of-the-day-public-vs-private-us-debt-to-gdp-ratios/#comment-11411

  3. Bruce E. Woych

    http://rwer.wordpress.com/category/the-economy/debt/ (article index “debt” @Real World Economics)
    —————————————————————————————————-

    Richard Koo’s RWER paper “has gone viral on the Web” says the New York Times”.
    December 28, 2011 Editor Leave a comment Go to comments

    Richard Koo’s RWER paper The world in balance sheet recession: causes, cure, and politics already looks set to become a classic. In its first two weeks it was full-text downloaded over 30,000 times from http://www.paecon.net. Koo’s paper, reports the New York Times, “has gone viral on the Web”

    Here are some key passages from Koo’s paper.

    http://rwer.wordpress.com/2011/12/28/richard-koos-rwer-paper-has-gone-viral-on-the-web-says-the-new-york-times/

  4. Koo’s article was good. However, he advocates investment incentives for businesses. I think the best incentive for businesses is for consumers to have disposable income. Instead of the business incentives he suggests, just get the money into the hands of ordinary folks, with a requirement the money is spent on goods made in America. While the payroll tax cut does that, it undermines social security, and it doesn’t reach the unemployed. Income tax cuts only reach those that pay income tax. Restore the validity of the CPI, provide free college education, rebuild/modernize/expand the infrastructure, fund research and development of renewable resources and sell new discoveries to the highest domestic bidder with a requirement that they not be exported, reform farm subsidies to reduce food costs, etc.

  5. Come on James, national debt means federal government debt. Why focus on it? Discuss the entire debt situation for the whole national economy. Financial debt, personal debt, government debt and business debt compose the debt issue. There is a wealth of analysis and graphs out there illustrating the proportions and many analyses vary from each other. I look to you to reveal which is correct and then explain what it all means.

  6. Your asking for too much there Chuck, the #’s Kwak uses are so doctored that even a good day at the craps table can’t explain what is correct.

  7. Here we go – data gathering so you all can make your *projections* – compliments of The Arlington Institute (example of a military dude creating his own *job*)….

    http://www.whethermap.org/

  8. keep shuffling the deck – you might get it right…

  9. Chitter chatter all you want. Debt is not an asset, no matter how complex the conjurings of mastersoftheuniverse.

    Debt is debt
    Assets are assets
    Everything else is a PONZI scheme!

    Mask these charades in any elaborate colors or cloaks you want – only idiots or fiends would imagine that debt products could majikally be shapeshifted or transformed into an asset.

    Shame! Shame! Shame on those who promote, pimp, or propogate this insanity

    There will be s balancing and a reckoning,
    and there will be blood!

  10. Moses Herzog

    One of the reasons some of us like this blog so much, is that Sir Johnson and Sir Kwak are open to external views, criticisms (some valid, some not), and are willing to admit the occasional error. Many academics, “experts”, and “opinion leaders” refuse to admit error and prefer to put up an “eminence front”. As we see here Mr. Kwak and Mr. Johnson are not afraid to admit the rare error. It is one of their more appealing qualities.

    Now, silly guy, get back to teaching Law

  11. “Here are some key passages from Koo’s paper”

    Good stuff but one has to note pretty much mirrors what Krugman has been saying all along…

  12. “There will be s balancing and a reckoning, and there will be blood!”

    Please, we haven’t reached the pitchforks yet…

  13. “However, he advocates investment incentives for businesses. I think the best incentive for businesses is for consumers to have disposable income”

    Given that businesses are sitting on piles of cash, that would certainly make more sense. Granted I’m biased from “economics as a morality play” standpoint as well but…

    In any case, it’s a demand problem – so I agree.

  14. Bruce E. Woych

    As the saying goes…You get what you Pay For…(and as we all love to say…follow the money…): Here’s some graphs that will enlighten and perhaps frighten …but clearly is where the debt gets hidden:

    http://news.nationalpost.com/2011/10/28/graphic-mapping-a-superpower-sized-military/

    Graphic: Mapping a superpower-sized military
    Richard Johnson Oct 28, 2011 – 7:02 PM ET | Last Updated: Nov 1, 2011 12:35 PM ET

    (check out the one comment by ChipN at the bottom…scary but truth…)

  15. We hav e a litany of problems facing us in the years to come. However the potential likelihood that the dollar will be a second place currency after being removed as the “reserve” world currency is our greatest potential problem. The general budget including military, social security, and medicare can in fact be dealt with in incremental fashion with the right public policy approach. Nevertheless, the changing demographic of the America population will take their toll in years to come. We are just a few years behind Japan.

  16. @Dave – here are the age demographics:

    Age structure
    Further information: Children and adolescents in the United States
    0-14 years: 20.2% (male 31,639,127/female 30,305,704)
    15–64 years: 67% (male 102,665,043/female 103,129,321)
    65 years and over: 12.8% (male 16,901,232/female 22,571,696) (2010 est.)

    Let me do the math – 87.2% of USA population is YOUNGER than 64 years old. And do the 15-50 subset…

    You sucked up the Social Security fund of the baby boomers in an elaborate Ponzi scheme to fund a decade of non-MAD (mutually assured destruction) war games for RELIGIOUS PERSECUTION reasons (sharia law for the world – Iraq has NO CHRISTIANS left) – stop lying about who SHOULD be broke and why!

  17. @ Bruce – thanks for sharing – I agree the debt is hidden in our global military industrial complex.

  18. @ Annie – @ Bruce provided the facts – you filled in the blanks. Scary, but, I am sad to agree, true.

  19. It’s *eugenics* – the predators roam free, the civilized are soylent green (5 billion according to our tea leaves insider – owen owens)…good people are stupid and don’t *deserve* to own a home (ie. be responsible for managing a piece of life-sustaining heaven-on-earth)….

    So there’s the answer as to who is marked for *extermination* – the sane, the moral, the intelligent (cultures and people who have a minimum of 25% well-balanced *geniuses* accessing the earth’s resources in a sustainable manner) are ALL at risk of disappearing in the global economy of war lords, drug lords and slave lords who are ALL devil ass-kissing Nihilists.

    Gee, I doubt calling them a “devil ass-kissing Nihilist” is “politically correct” :-)) But, who would I apologize to since they are all sitting in some homeland insecurity bunker collecting data about people’s *dreams* and *intuitions* and running the world with THAT, er, *data*…IN SECRET…they know everything about YOU, you can’t know anything about them…all you know is that everything sane normal and life sustaining around you is UNDER ATTACK…

    This is raw Jim Jones-ing head games leading to mass-murder and we have a DUTY to make some noise…

    At least we are in agreement that we don’t have the data we need – anywhere – on which to make SANE decisions for the future of our own HUMANITY.

    But you know what? Neither do they! They don’t confirm or collect good data for themselves – so that’s why we watch them make the WORST decisions – the consistent screeching-prophecy psycho moves – every single time.

    SALT and MAD were SANE-MINDED global attempts at policy. The Rethug cabal pulled a 180 in POLICY through brute force…..we NEED a Nuremberg Trial – Rumsfeld, Wolfowitz, Cheney – merchants of death….the military men who wrote under the “Mr. Y” nom de plume have disappeared – and what they wrote (“A National Strategic Narrative”) has been deleted as a link from the internet and is now just a download with a spy virus attachment…

    So come out come out wherever you are – let’s see who is “really” in charge of the magic Presidential pen….

  20. Tony? Debt is not someones asset? That is just plain STUPID. If that is the case, PIMCO has almost no assets under management, sonce almost everything they hold is fised income aka debt. How about accounts recievabel, are they not an asset. They represent debt from somebody.

  21. Balance sheet placement of debt and receivables is one thing: when the world’s banks are “awash” in kited, worthless, toxic, (which some estimates places at exceeding $1.5 QUADRILLION…whatever the number, and no one knows, it is astronomical and insurmountable), it isn’t sophistry to view GAAP in ways the GAAPSTERS never could have envisioned, for the most part.

    I personally can’t see any future value in this financial diarrhea effluvia any more than my friend Tony Foresta, writing on this same board.

    As for Bill Gross and PILMCO: all these folks can come up with is the insipid “buy the dip you effing idiot” cartoon, distributed to thousands via email, and then up on YOU TUBE.

    Since there are no laws, all balance sheets represent are post-modern expressionist painting, sort of like the work of Richard Pousette-Dart.

  22. s/b….”toxic derivatives”…..

  23. Best “Tweet” of the Iowa Republican Primary Voting Day???? WE HAVE A WINNER!!!!!

  24. Also, I might add, while i’m dithering online, that the Minneapolis Federal Reserve has a quarterly publication that is quite good called “The Region” and I usually take the time to read from cover to cover (excluding Locherlakota’s usual egocentric intro). They have an interview with Esther Duflo in the most recent December 2011 issue. I know James Kwak is a fan of hers, and I also think she is quite an exceptional and remarkable woman.

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4785

    Miss Duflo is not what I would call a “hottie”, but she actually looks quite attractive on the cover (with a very fashionable scarf) and in the 5 or so pictures inside. Of course she is incredibly sharp. I would love to have some beer or liquor with her at a bar sometime. I imagine the conversation (if she was dumb enough to accompany me) going something like this:

    Duflo: “So, what do you think we can do to alleviate poverty, hunger, and the shelterless people?? You know, a low-cost idea to stop the spread of disease and suffering??”

    Me: “Man these Cheetos sure go good with generic brand beer. Uuuuuh, how ’bout we just give all the poor people some Cheetos???”

  25. Not a bad idea, we munched capt crunch as kids and then got to the dentist one day to find out we had a terrible case of ginginvitis, for which the cure was some idiot and and a carving knife to cheese it back. Now i’m not sayin my folks were stupid back then [life to them was/is just one big pick me up party or i’m suicidal], I mean I was the one eatin the stuff, plus there was another guy makin money off it and the law concurred about it all. Today’s politicians and many parents are more concerned with putting a load or burden on their offspring or citizens and protecting their wallet and hide. If there does come a day when we get enough leverage to audit the fed, its game over, and the arrogance and hypocrisy will consume itself. Watch Greece bring down the derivatives mkt as Germany will not agree to more than a 50% cut in principle bonds yesterday, today or tomorrow. 3 months of economic squeemin before the official declaration of leaving the Euro with America puttin the squeeze on world wide as to who can trade oil and who can’t.

  26. @woop – 1.5 quadrillion…? :-))

    Got a link I can send to the IRS so that they can take my taxes out of that batch of e-matrix fantasy mix of *god particles* so that they can continue to do *god’s work*…?

    I can just imagine the big thick hands of Santorum’s coal-mining Grandfather giving his arrogant and delusional, in-your-business-that-is-none-of-my-business, NEOCON GenX sociopath hothead who hears the dog-whistle of the war lords in the Middle East as *god*

    a slap on the head to WAKE HIM UP…

    He was soundly defeated in his run for the Senate, and all he will do in this run for the Prez is SOLIDIFY the determination of everyone in the USA to KILL the Rethug cosmically insane agenda for all eternity…so bring it on…

    Oil is a FINITE resource, you nimrods, and the people managing it are wantonly INCOMPETENT – doing nothing but wasting it and trashing the whole planet with the waste….

  27. @ Annie, those in the direct employ of “GOD” can reach far into the outer reaches of numerals to generate bogus trash wealth, but here, I think, I speak to the choir! : )

  28. Actually what you believe in as a “god” is far from it indeed. It’s actually many different forms of evil designed to trick YOU into thinking they/it are’is a god or doing gods work. We saw back in 1988 that it was going to take more than a God, to take down such entrenched people, and it’s really only gotten worse (as they promised) since then.
    Now it will take a God they don’t believe in to remedy the situation, buts that’s not going to help you any, unless that pleases you that your troubles will be answered long after you are gone. Sorry for the disturbing news, and I don’t want to hear about no facts either.

  29. Sorry – the FACT remains that God gave us free will. Which means that there is only one kind of *prophecy* – the self-fulfilling kind.

    We have a duty to use FREE WILL for something other than devil ass-kissing Nihilism.

    Oil is a FINITE resource. They *burned* off the natural gas they encountered while digging for the oil – that was incredibly stupid – scientifically.

    Nuremberg Trial, Part II….

  30. I’m under no illusions, mousy, notwithstanding mental gyrations so clumsily presented. :)

  31. I enjoy your columns, but really wish you would “declare” some of your acronyms the first time they are used in a post. Unless your posts are ONLY for experts or persons with deep/expert experience reading about international finance. It might broaden your readership, who knows?

  32. I think if you follow the navagator [you know, navagator, he lives in a swamp until he’s turned into a suitcase] you will find the abouts, and the intro’s, to answer your own question. Just a suggestion.