Dire Deficit Straits

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The Congressional Budget Office today released its long-term budget outlook, confirming what we already know: Something’s gotta give. The report contains projections for how spending and revenue will look over coming decades. According to their number crunching, we’ve set a course toward superlatively unfortunate ratios of debt-to-GDP, and not just because of the attempts to stanch Great-Recession wounds with federal cash. The government’s plans to combat future problems catch some blame from their analysts, too:

“But over the long term, the budget outlook is daunting. The retirement of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is very uncertain). Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.”

The CBO compares two different scenarios based on extending current law or adopting several changes to existing law (many related to Social Security, Medicare/Medicaid and tax cuts) that they deem likely to occur. Under that alternative set of assumptions, they predict the debt-to-GDP ratio to skyrocket past post-WWII records (109%) to 185% by 2035. And they predict the levels to hit 62% by the end of the year in any case. But many of the predictions, especially those longer-term ones involving how Congress will vote in coming decades, rest upon an awful lot of complex, fairly unknowable assumptions.

In points 3 and 4 in his statement on deficit reduction, directed toward the president’s financial commission, Huffington Post economist James K. Galbraith takes aim at the CBO’s methods, concluding that “In sum: the economic forecasts on which you are being asked to develop a credible plan for reducing deficits over the medium term are a mess. The unemployment and growth forecasts are implausibly optimistic, while the inflation and interest rates projections are implausibly pessimistic and mutually inconsistent.” He suggests basing a recovery model on increasing private credit — another risky plan, but one that might become less so given the consumer protections laid out in the financial reform bill, including an independent board whose sole purpose is to protect Main Streeters from deceptive big-bank practices.