Monday, August 01, 2011

Is the debt ceiling deal really a deal?

It depends on what your definition of "is" is...

From the CBO:
"CBO estimates that the legislation, with the proposed amendment, would reduce budget deficits by about $915 billion between 2012 and 2021." (this is the scoring on the Boehner bill, but my understanding is the final deal agreed upon is set up the same).

The thing to keep in mind is that CBO's projections assume current law stays on the books. That means the projected $915 billion in deficit reduction assumes:
1. The Bush tax cuts expire next year (marginal tax rates and taxes on dividends/capital gains rise dramatically (see chart here).
2. The AMT is not "patched," so that millions of Americans who didn't pay it this year will end up paying it.
3. Medicare/Medicaid payments to doctors are reduced dramatically, ie: there is no "docfix" after this year.

How likely is it that those three assumptions happen? ( #2 and #3 are "patched" every year.)

So, if the majority of congress ensures that these assumptions don't hold, then the deficit reduction is dramatically less. According to the plan, the "super committee" has to come up with further spending cuts or find other ways to make up the difference. Otherwise, you have automatic massive cuts to the budget, primarily to defense. Theoretically, the "super committee" could push tax reform to increase tax revenue without raising the rates, but they have to be able to match or beat the revenue increase from the expiration of Bush tax cuts, otherwise they will have increased the deficit.

It's also worth remembering that this CBO graph from 2010
also assumed #1-3 above, and we still had a long-run problem. The negotiated deal shifts the curve down a little, but the slope is still the same. The driver is health care inflation and its effect on Medicare/Medicaid outlays. You fix that, you fix the debt problem. Otherwise, nothing effective has been accomplished.

*Update*- here's Will Wilkinson saying essentially the same thing, but everyone liked his piece better. What I left out of the above was also that CBO assumes some baseline rate of GDP growth, which I take from previous documents to be around 4% after 2012. If we don't get 4% growth tax revenue is less than projected and the long-term problem is much worse. Unless the Fed gets much more pro-active, 4% is not a realistic assumption for 2013.

**UPDATE 2** - via the magic of Twitter, Binyamin Appelbaum was kind of enough to send me the CBOs baseline numbers. They're assuming 3.33% growth in 2011, peaking at 3.64% from 2014-2015, and then declining to 2.05% by 2021, basically 2% average annual growth after 2020.

Wow, that's depressingly realistic. I'd forgotten that is often a criticism of the Left of the Medicare Trustees-- they (conservatively) assume fairly low rates of economic growth.

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