CBO: Four Observations

about the federal budget were put up on the CBO Directors blog this morning, from a speech given by the Director this morning. Those points are:

• First, if current policies are continued, the gap between spending and revenues will remain very large even after we return to normal economic conditions.

• Second, fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; the policy changes that are needed will significantly affect popular programs or people’s tax payments or both.

• Third, policymakers face difficult tradeoffs in deciding how quickly to implement policy changes that would reduce future budget deficits.

• Fourth, there is more focus in Washington on federal budget problems today than there has been since the late 1990s, and that focus has led to a range of proposals for tackling the problems.

These messages seem fairly clear, but I think that Doug Elmendorf is giving some gentle nudges to the current political discussions in Washington about the budget negotiations. Here is my interpretation.

The first point means that the tax code that we now have has absolutely no hope of producing a balanced budget under any imaginable set of benefit cuts that could be sustained. In fact, if we extend the current tax code through 2020, we will have a budget deficit even if we have NO FEDERAL SPENDING other than health care (Medicare, Medicaid, insurance subsidies), Social Security, Defense and interest on the debt. Without an increase in taxes collected as a percent of GDP, we have no hope of a balanced budget.

The second and third points taken together mean that the current budget debate in Washington (how much discretionary spending to cut from the current budget) is both irrelevant to the long run budget deficit problem, and is therefore either a sideshow or harmful because we are reducing domestic spending during a fragile economic recovery. Put another way, without long term reform of health care, social security and consideration of how big a military we need, and a new tax code we have no hope of ever having a balanced budget.

The fourth point seems to be a gentle nudge toward everyone understanding that there is a big problem, different approaches to address it have been put forward, and these issues are not like fine wine--they are not getting better with age.

I think there is some developing conventional wisdom that the President is not serious about the budget because he is opposed to a good deal of the domestic discretionary spending cuts proposed by the House of Representatives. In fact, the passage of a health reform law that lays the framework for dealing with costs is far more important to any hope of a balanced budget at any point in my life than whatever domestic spending cuts may come about. Don't like the Affordable Care Act? Then what is your health reform plan that will expand coverage and address costs? Or, lay out a plan and a rationale to not expand coverage but to only address costs. Until the Republicans lay out a health reform plan, that can pass the 60, 218 and 1 test, they are far behind in terms of credibility on the deficit. However, they are once again getting away with talking noisily about cutting a miniscule part of the problem while not addressing the most basic issue. Curtailing health care costs is a necessary, but not a sufficient condition to ever having a balanced budget in the U.S.

I still believe that Progressives/Liberals have more to gain from a sustainable federal budget than do Conservatives because they believe that government has a key role to play in modern life. Republicans have shown themselves to be quite happy to cut taxes but not spending and then say the inevitable deficit proves government doesn't work. And then argue that more tax cuts are needed because spending is too high.

I think that the time to push ahead on tax reform, Social Security reform and remaining open to tweaks to the Affordable Care Act that could make it both parties way ahead on health care is now. I believe it is correct in policy terms and I also think it will help Progressives and Liberals in political terms because focus on the real issues will show that cutting domestic discretionary spending is like spitting in the ocean. Further, serious talk of tax reform, Social Security and openness on health reform tweaks will help smoke out the fact that Republicans have only said what they are against in health policy and have put forward no coherent health policy plan.

I don't think the serious issues are going to be addressed before the 2012, and the next election will be fought out over the same familiar ground as 2006, 2008 and 2010: each side essentially saying 'we are not as bad as them.' I hope I am wrong.