海角大神

The Congressional Budget Office released their latest yesterday, and although the basic messages are not really new, they do show some new ways of presenting their numbers that help reinforce those basic messages.

First, Figure 1-1 above, from page 3 of the report, highlights the difference between deficits under the current-law baseline (the bottom segment of the deficit bars) and deficits under the CBO鈥檚 鈥渁lternative fiscal scenario鈥� where scheduled spending cuts are bypassed and expiring tax cuts are extended.聽 What鈥檚 clear from this chart is that:

1. while current law produces economically-sustainable deficits (meaning deficits as a share of GDP that are lower than the growth rate of the economy), the alternative scenario produces hugely unsustainable deficits;
2. it is choices over tax policy, not spending policy, that account for the bulk of the difference between the two policy scenarios within the 10-year budget window;
3. by the end of the 10-year budget window, the additional interest payments alone associated with the extra deficit-financed policies under the alternative scenario swamp the entire deficit under the current-law baseline.聽 (Interest payments swell because: (i) the big difference between the scenarios starts immediately, (ii) interest compounds, and (iii) interest rates rise significantly over the 10-year window.)

Second, in Table 1-5 of the report (pages 18-19), a table showing the 鈥渂udgetary effects of selected policy alternatives聽 not included in CBO鈥檚 baseline,鈥� this year CBO offers a comparison of the cost of extending all the expiring Bush tax cuts (and continuing the related alternative minimum tax relief) with the cost of extending all but the upper bracket rate cuts.聽 The cost of extending all the tax cuts is $4.5 trillion over ten years.聽 The cost of extending all but the top bracket cuts is $3.7 trillion over ten years.聽 (Both costs are without associated interest costs.)聽 In other words, allowing the upper brackets to expire saves only about $800 billion out of $4.5 trillion鈥搊r just 18 percent of the total cost.聽 In other words, change the choice to extend the tax cuts to one extending just the 鈥渕iddle-class鈥� tax cuts, and you only shave less than one fifth from the tax policy segments in the chart above, and policymakers would still be choosing to deviate quite substantially from the current-law baseline by extending and deficit-financing those tax cuts.聽 Based on the (over-)dramatic, political mud-slinging over the two parties鈥� tax policy positions, one would think there was a much bigger difference between extending the tax cuts 鈥渇or the rich鈥� and not.聽 (One big reason: the 鈥渘ot鈥� isn鈥檛 really a 鈥渘ot,鈥� because upper-income households still benefit the most, in dollar terms, from the lower-bracket rate reductions.)

By the way, it鈥檚 the data in Table 1-5 that the Concord Coalition uses to construct our 鈥減lausible baseline鈥濃�搘hich I have emphasized before is not necessarily a statement of what is most likely to happen, but what is at least very 鈥減lausible鈥� (possible, believable) from a 鈥渂usiness as usual鈥� perspective.聽 Concord鈥檚 updated plausible baseline, based on the updated CBO numbers, can be found .

Third, Table 2-2 in the CBO report, on page 37 in the economic outlook chapter, makes an interesting comparison of the economic effects of the two different baselines at the beginning of the 10-year budget window (2013) and at the end (2022).聽 Because the alternative fiscal scenario involves higher deficits throughout, in 2013 GDP growth is higher and unemployment is lower, compared with the current-law baseline, because of the benefits of the continued stimulus to the demand side of the still-recovering economy.聽 But by 2022, GDP growth is lower and interest rates are higher under the alternative fiscal scenario, because of the longer-term economic cost associated with the higher debt and lower national saving.聽 This is a useful reminder that while the particular timing of the 鈥渇iscal cliff鈥� (and sticking to current law, literally, over the next year) is problematic for the current economy, this shouldn鈥檛 rule out achieving the same amount of deficit reduction over the 10-year window that is implied by the current-law baseline.聽 (I鈥檝e made this point before, and I鈥檒l make it again and again until policymakers address the fiscal cliff appropriately.)