Tag Archives: CBO

Moving the Goalposts

By James Kwak

Ezra Klein yesterday highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.”

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How Big Is the Long-Term Debt Problem?

By James Kwak

Articles about the deficits and the national debt generally talk about unsustainable long-term deficits that will drive the national debt up to a level where scary things happen. Sensible commentators usually acknowledge that our current deficits are a sideshow and the real problems happen in the 2020s and 2030s due to modestly increasing Social Security outlays and rapidly increasing health care spending. I admit that this has generally been my line as well; for example, in a previous post I said that the ten-year deficit problem is entirely a product of extending the Bush tax cuts, but that even if we let them expire things will get worse over the next two decades.

But looking at the numbers, it’s not clear that the long-term picture is really that bad. Here I’ll lay out the numbers, and then, as they say on Fox News, you can decide. The summary is the chart above; the details are below.

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How Big Is the Deficit, Anyway?

By James Kwak

According to its CBO score, the Budget Control Act of 2011 (a.k.a. the debt ceiling agreement) initially reduced aggregate budget deficits over the next ten years (2012–2021) by $917 billion, with a provision that ensures that deficits will be reduced by another $1.2 trillion (either through an agreement in the joint committee that is ratified by Congress, or through automatic spending cuts). The chatter in Washington is that even with the $1.2 trillion, this is still too small, and there is still this massive deficit hanging over our heads. This is true to an extent, but not the way you are being led to believe.

The first question is this: How big is the deficit anyway? The answer is pretty complicated—complicated enough for S&P to mess up (although in my opinion they made a rookie mistake, as I’ll explain later). Warning: lots of numbers ahead, though the only math is addition and subtraction.

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Long-Term Budget Forecasts for Beginners

By James Kwak

In this season of debate over long-term deficits, this is ground zero:

That’s the key chart from the Congressional Budget Office’s Long-Term Budget Outlook, published just last month, which I read from cover to cover. The CBO is generally considered the authoritative source of budget projections, and CBO “scoring” has been an important aspect of legislative debates over the past few years. Although politicians from both sides criticize the CBO when they don’t like its results, I think it’s fair to say that it is generally both respected and nonpartisan.

Now, when people say that the federal government faces a long-term budget gap, they (including me) are generally starting from the bottom half of this picture: the CBO’s “alternative fiscal scenario.” The alternative scenario is widely considered the most likely path the budget will follow under current policy (although the CBO itself makes no such claim*). That’s probably a close enough approximation for most purposes. But if you’re going to think hard about long-term budgetary paths, you need to be a bit more careful about what it means.

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Is The Crisis Over Yet? The CBO Weighs In

Confidence is returning to most credit markets, consumer spending is likely to rebound for some items (autos and housing repair are leading contenders), and firms in the US are starting to sound more optimistic.  On NYT.com’s Economix yesterday, Peter Boone and I suggested that we are out of the panic phase of the crisis - in large part because the US fiscal stimulus has reassured people worldwide, but also because President Obama has had a broader calming effect.

Today, the Congressional Budget Office is pointing out that it would be premature to congratulate ourselves too much (disclosure: I’ve joined the CBO’s Panel of Economic Advisers, but none of the information here comes from them).  As you likely know, the administration is proposing to lend $100bn to the IMF, as part of that organization’s increase in resources following the G20 summit.  Peter Orszag, head of OMB, argued that there was zero probability of this money being lost, so $100bn should be “scored” for budget purposes as $0bn – which is how this kind of transaction has been handled in the past.  As the IMF likes to say, it is “the lender of last resort, but the first to be repaid.”

After considerable back and forth, the scoring issue was refered to the CBO.  The CBO has reportedly decided there is a 5 percent probability of default by the IMF.  This is an extraordinarily important statement.  Most informed people just assume that the risk of IMF default is zero, because that would essentially constitute a complete breakdown of the global economy and payments system.  But nothing is zero probability, particularly in a world of massive financial panics, incipient protectionism, and improvised global governance. Continue reading