The CBO released The Cyclically Adjusted and Standardized Budget Measures last Thursday.
As I teach my undergraduate students, the more appropriate measure of fiscal stimulus is not the budget deficit, which is an endogenous variable, but rather the cyclically adjusted budget deficit. In this regard, Figure 1 from the report appears to give reason for celebration.
Figure 1 from CBO, The Cyclically Adjusted and Standardized Budget Measures, February 2007.
However, as I have stressed on numerous occasions, and as the CBO makes clear itself in its publication, the “current law” baseline presented does not take into account likely legislative actions. For instance, if discretionary spending is assumed to grow with nominal GDP (which is more likely, from historical precedents) rather than with CPI, and the 2001 and 2003 tax cuts are made permanent (as the President has budgeted), then a more alarming picture is obtained:
Figure 1 from GAO, The Nation’s Long-Term Fiscal Outlook January 2007 Update — The Bottom Line: Federal Fiscal Policy Remains Unsustainable, GAO-07-510R (January 2007).
What drives this outcome? The usual suspects are there (and don’t forget the figurative “magic asterisk” that makes expenditures for Operation Iraqi Freedom drop to $50 billion in FY 2009…). However, Greg Mankiw’s recent laudatory post on the operation of Medicare Part D spurs me to quote this point:
Spending on the major federal health programs (i.e., Medicare and Medicaid) represents a much larger and faster growing problem. In fact, the federal government’s obligations for Medicare Part D alone exceed the unfunded obligations for Social Security. (emphasis added) (p. 3)
In other words, those who were concerned about the Nation’s fiscal outlook were not so much worried about the implementation and cost-effectiveness of the program (although from previous implementation episodes such as the absence of a pre-9/11 alert, post-Katrina rescue/recovery/rebuilding, the post-invasion stabilization program of Operation Iraqi Freedom, and administration of medical care for returning veterans, such concerns would be understandable), but rather the fiscal burden associated with starting a massive, new entitlement program, even as the Administration sought to adjust Social Security. A reminder of exactly how enormous this burden the Administration and Congress saddled us with is provided by Chart 1 from Comptroller General David Walker’s presentation on fiscal challenges.
Chart 1 from David Walker, Saving Our Future Requires Tough Choices Today, Fiscal Wake-Up Tour, Forum Club of the Palm Beaches, West Palm Beach, Florida, GAO-07-500CG (February 21, 2007).
Figure 3 from the GAO report presents the composition of outlays under the assumptions indicated.
Figure 3 from GAO, The Nation’s Long-Term Fiscal Outlook January 2007 Update — The Bottom Line: Federal Fiscal Policy Remains Unsustainable, GAO-07-510R (January 2007).
One additional statement from the GAO report sticks in my mind:
These figures also show that waiting makes the size of the problem worse. For example, even under GAO’s “Baseline extended” scenario-under which revenues rise to about 20 percent of GDP and discretionary spending falls to below 6 percent of GDP-waiting until 2040 to close the gap would require drastic change. Taxes as a share of GDP would have to increase by about 40 percent or total spending cut by almost a third in order to balance the budget in that year. Sudden, drastic changes of either kind — and revenues at such a level — are outside post-World War II historical experience in this country.
This suggests that if we had not embarked upon this fiscal experiment of running the Nation’s coffers dry, we would not be facing such dire fiscal straits.