Monday, October 12, 2009


Scary CBO Chart

You know those CBO projections getting bounced around, saying the debt as a share of GDP is supposed to double in the next ten years? Well, things don't exactly turn around after that. (That's one of the reasons that Krugman's "Why worry?" posts on the deficit projections are misleading. He does show that it wasn't simply a cut in WW2 expenditures that allowed that figure to fall, but right now Medicare etc. are runaway trains. The economy isn't going to simply outgrow them, unless Ron Paul becomes president in any event.) Here is the CBO's long-term budget outlook, as of June:

Here's the CBO's explanation of the two different scenarios:
The figure on the cover shows federal debt held by the public under the Congressional Budget Office’s alternative fiscal scenario and its extended-baseline scenario. The former incorporates some changes in policy that are widely expected to occur and that policymakers have regularly made in the past; the latter adheres closely to current law, following the agency’s baseline budget projections for the first 10 years and then extending the baseline concept for the rest of the projection period.
And keep in mind that government forecasts typically underestimate how much tax hikes and other interventions will kill revenue collection. If I'm right, and the economy has not yet begun to recess, then I don't even want to think about how high the dotted line should be...

That's why Obama is going to legalize--and tax the heck out of--marijuana.

UPDATE: Sorry, the above is ambiguous. (The CBO description on the inside is better, and I didn't realize pasting in the explanation for the front cover wasn't as clear.) The line referring to the Obama administration's plans is the top (scary) line! To see this, look at the forecast for 2019. The top line is the one hitting 80% or so; that's the number the press is reporting, when they say, "CBO says Obama will double debt in a decade." The bottom line means, if Congress does nothing ever again, and let's stuff run on autopilot. So that means no health care (which adds trillions in expenditures over a few decades), no cap and trade (which CBO says will shave off GDP growth), expiration of Alternative Minimum Tax exemptions on the middle class, expiration of Bush tax cuts, etc. Note that this is my quick explanation, and I leave open the possibility that I am wrong about the different things going into the assumptions. But I'm pretty sure that if you ask, "Where is the Obama administration taking us?" then the CBO points you to the bigger debt line.

So which line is "the latter"?
The Blackadder Says:

Presumably the scary line is based on the "we do nothing" assumption, and the non-scary one is based on the "we do what we've always done in the past" assumption. Since the non-scary assumption is more likely, the overall chart doesn't scare me too much, though I admit that the CBO probably meant for it to scare people.
Oh sorry for the confusion; the explanation of the graph inside the report itself is clearer than on the cover.

Actually Blackadder you got it backwards; if politicians behave as they have in the past, then it's the huge line.

I don't know exactly what assumptions are different. If I had had to guess, I would have made the same mistake you did, Blackadder, but I think the CBO is trying to say that extending the baseline is misleading, because politicians never adhere to the long-range budget plans.

One specific example I can give you is the Alternative Minimum Tax. It was set up back in the day to prevent millionaires from getting away with paying no income tax (through loopholes), but after bracket creep etc. it would hit middle-class families. So every relevant period (not sure if they do it every fiscal year), Congress exempts people from the AMT.

So if you ask, "What happens if Congress does nothing, and we let all policies revert to their defaults and let the thing go on autopilot?" then you bring in more revenue once the current AMT exemptions expire.

But I admit, I have no idea what's driving up the one line versus the other. You would assume that the top one would mean, "If we don't get entitlements under control."

Oh you know what? I betcha a lot of it is factoring in what the Obama administration says it's going to do, like health care etc. Technically that stuff isn't law yet. So I bet that's the reason for the huge difference.

To see this, note that in 2019, the top line has debt/GDP around 80%. That's the figure being thrown around in the press for the Obama plans.

So really those two lines must be showing the difference between Obama and status quo!
The Blackadder Says:

I think I need a drink.
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