And, indeed, as he listened to the cries of joy rising from the town, Rieux remembered that such joy is always imperiled. He knew what those jubilant crowds did not know but could have learned from books: that the plague bacillus never dies or disappears for good; that it can lie dormant for years and years in furniture and linen-chests; that it bides its time in bedrooms, cellars, trunks, and bookshelves; and that perhaps the day would come when, for the bane and the enlightening of men, it would rouse up its rats again and send them forth to die in a happy city.
(Stuart Gilbert translation)
The public reaction to the revised baseline budget outlook of the Congressional Budget Office (CBO) has leaned overwhelmingly in one direction: The deficit and debt problem is in indefinite remission, maybe even cured. Action on the problem is on hold, if not off the table for good.
Jared Bernstein, former economic adviser to Vice President Joe Biden, was quoted in the first-day reaction story in the Washington Post as saying, “Certainly, if facts drove the day, this update would be a fire hose for the hair-on-fire austerity crowd [regarding] the near-term deficit… The patient is checking out of the hospital while [Republican leaders] are still preparing for major surgery.”
Jared, who is a good guy with deeply held principles (and a very quick wit), would surely say that my opening quotation for this post is way over the top. But in all honesty, considering the potential consequences of a runaway public debt, I would say that the closing words of The Plague are pretty much in scale. In fact, I would like to edit Jared’s metaphor: The patient, a cardiac case with a known arterial blockage, has had his palpitations calmed by medication. He is out of immediate danger, and has been reclassified from “critical” to “serious.” His physicians now have the luxury of time. They can choose a more deliberate approach than seemed essential a few hours ago. They can even postpone the next step somewhat. But the blockage is still there, and its consequences are still potentially terminal. Sooner or later – but not too late – it must be addressed.
To get closer to my specific point, and moving my medical analogy back to The Plague, the plague bacillus is not the annual budget deficit, but rather the accumulated public debt. It is still far too large; the CBO release has changed that fact hardly at all. The debt has retreated into the cellars and the bookcases, hidden by today’s very low interest rates. But interest rates will rise, and when they do, the debt will once again emerge into the streets. And because we have used this complacent interlude of low interest rates to pile up debt hand over fist, when interest rates do rise, the debt will emerge more virulent than ever.
So that is the big picture, but back to the present: What did CBO say, and why have people reacted so strongly (yet so blithely)?
CBO’s headline number was its estimate of the deficit for the current fiscal year (2013), which ends on September 30. Back in February, CBO said that the 2013 deficit would be $845 billion. Now, they estimate $642 billion – down by almost a quarter in three months. Five years ago, a $642 billion deficit would have been terrifying. But now, after four $1 trillion-plus deficits and another near miss, $642 billion feels like a mild early summer’s day at the beach. People who are not budget specialists probably see that improvement and wonder how much better it will look in another three months. This nation has climbed out of every jam unscathed; the deficit melted away in the 1990s; surely we will come out smelling like a rose again this time.
But here are the sobering details: Of the $203 billion improvement in the 2013 deficit, $95 billion comes from a unexpected payment to the Treasury from Fannie Mae and Freddie Mac. CBO reports that those payments will occur because of “accounting changes,” and assigns a probability of zero to any further payments at anything like that magnitude over the next 10 years. Another $105 billion (that is, essentially the remainder) of the improvement comes from higher revenues. Those revenues apparently arose because upper-income households shifted an unexpectedly large portion of their income from calendar year 2013 to calendar year 2012 to head off the increase in upper-bracket tax rates, and because corporate tax payments snapped back to normal from their depressed recession percentage of profits somewhat faster than CBO had anticipated in February. Neither of those developments will repeat itself to any significant degree, either.
CBO does today see lower deficits in each of the following 10 years than they did in February. But the margin is not large. And in most years, the fallout of lower debt service because of the 2013 windfall accounts for as much as one-third of the total improvement. The revenue surprise of this year trails down to essentially zero six years from now. There are welcome assumed future savings in Medicare, Medicaid and Social Security. But just as they had in February, CBO now expects the deficit to improve through only 2015, and then to begin to rise again. And by 2019, the deficit is again large enough that the public debt grows faster than the economy – that is, the debt-to-GDP ratio begins to rise again. From a local peak of 76.2 percent of GDP in 2014, it falls modestly to 70.8 percent of GDP in 2018, but then is back up to 73.6 percent of GDP in 2023.
Of course, all of these numbers are forecasts. And as Nobel Prize-winning physicist Nils Bohr (not Yogi Berra) notably said, forecasting is very difficult, especially if it is about the future. So we economists and budget-jockeys need to be appropriately humble about our projections.
Still, admitting uncertainty, it is hard to see a lot of upside in these numbers. Might there be still more revenues? Sure – but CBO already has raised its projection of revenues as a percent of GDP above their long-term average. And that is after the income tax rate cuts for the vast majority of the population were made permanent at the beginning of this year, making further revenue improvement less likely. And outlays could be lower, too; but CBO (as noted above) already has reduced its estimates for Medicare, Medicaid and Social Security.
There is a policy risk as well. CBO notes that most of the temporary law that threatened lower revenues and higher spending over the past dozen years has been made permanent, and so now is baked into the baseline cake. Most – but not all. CBO reports that renewal of expiring tax cuts and postponement of pending triggered spending cuts (including the suspension of the “sequester”) would add $2.4 trillion to the cumulative 10-year deficits, and at the end of 2023 leave the debt at 83 percent of the GDP – the highest debt burden since 1948, just after the nation financed the enormous cost of fighting World War II.
So if we cannot lower the river, what about raising the bridge? What if we had a larger GDP? There is no question that if the GDP autonomously raised itself, it would reduce the debt-to-GDP ratio. But many who seek a larger GDP to solve this problem want to achieve it by cutting taxes or raising spending – which would increase the debt directly. Getting enough additional GDP growth to come out ahead on net would be a neat trick. And that is especially true given that faster GDP growth would mean greater demand for credit, which would increase interest rates – increasing thereby the federal government’s debt-service cost, and blunting the benefit of the faster growth. Sadly, the debt already is so large that growth is not so much of an unalloyed benefit as it used to be.
In short: Our imprudence in piling up this debt, in failing to pay it down further when we had the opportunity, leaves us on the horns of a terrible dilemma. We have too much debt; and we cannot choke our weak economy. This is a monumental challenge for macroeconomic policy. The CBO report is a break in the palpitations, not the disappearance of the arterial blockage.
A closing thought: The Washington political environment has become so heated that it is difficult to build a productive dialog. I myself find that when the one-liners start flying back and forth, I can lose the subtleties and the nuance and the conciliatory, problem-resolving language. Areas of agreement are ignored because the conflict becomes an end in and of itself. For example, if I asked Jared Bernstein if he believed that the federal government could go on indefinitely accumulating debt at a rate faster than its GDP grew, as is forecast at the end of the CBO 10-year budget window, I am quite sure that he would say no. Likewise, if he asked me if I am secure in the current shaky economic recovery, I would say no. We probably are in fundamental agreement about the nature of the current policy dilemma. We have a lot of work to do to square this policy circle. And we need to make our plans now – while the palpitations are gone – because we will have far fewer (if any) good options once the heart monitor starts blaring its warnings again.
We – and others on both sides – need to find areas of agreement so that Washington can get off the dime. I should invite Jared out for a beer and see if we could get this started. You there, Jared?