Monthly Archives: May 2011

Roberton Williams has a terrific post at TaxVox that’s worth reading in full. The gist of his argument is that historical revenues as a percent of GDP are, contra Paul Ryan, not a normative benchmark for the government going forward.

It is true, as Ryan’s plan noted, that that level of revenues matches the historical average for recent years. Over the past half century, the share of GDP claimed by federal taxes has ebbed and flowed, ranging from a high of 20.6 percent in 2000 to a low of 14.9 percent each of the last two years. The 50-year average was just a hair under 18 percent (see graph). But nothing says this should be the correct level of taxation going forward. [Emphasis added]

Absolutely right. The population is getting older. We’re no longer fighting the Cold War. The nature of the American economy has shifted dramatically in the last twenty years, to say nothing of the last fifty.

I’d also add this: If you look over the last fifty years – and there’s nothing that makes 50 years the “right” scope (why not 25? Why not 200?) – the weighted average of revenues-to-GDP is 17.8%. The corresponding spending-to-GDP figure over that period is 20.7%. In words, the historical average over the past 50 years has been a deficit of about 3% of GDP. There’s a lot of math involved, but the bottom line you would find is that the nation’s overall debt-to-GDP ratio stays roughly constant when you run deficits of 3% of GDP (remember that the economy grows too, so you can run small deficits and still maintain or even decrease the debt-to-GDP ratio). But if we want to decrease the debt burden, we’ll need to get to deficits below 3% of GDP. Simply reverting to average historical revenues and spending would thus be insufficient to reduce America’s debt burden. And of course, historical averages tell you nothing objective about the cause of the problem. Conservatives like to tout the historical comparison as evidence that we have a “spending” problem, but you could make just as convincing a case that the problem is insufficient revenues (up to today, that is; going forward, there’s far more consensus that the problem is one of runaway health care spending). Really, these statistics are just an inkblot test for one’s prior assumptions.

Baselines are confusing animals, even if they’re constructed with the best of intentions (which is often not the case). But if you want to see the effects of a policy in any year beyond the one you’re in now, you’ll need to make some economic and fiscal assumptions going forward. That’s all a baseline is.

The Congressional Budget Office’s 10-year baseline assumes that discretionary (basically, non-entitlement) spending grows annually at future rates of inflation (rates which, themselves, constitute another assumption).* So under the latest CBO baseline, which came out in March, discretionary outlays were assumed to rise from $1.36 trillion this year to $1.58 trillion in 2021.

But things have changed since March. There is one less terrorist mastermind in the world, for one. More relevantly, Congress passed and the president signed a budget deal that cut spending for 2011 below where CBO assumed it would be.

Now, the budget deal was only for 2011. For the most part, it didn’t affect spending in future years, for the simple reason that the federal government currently only budgets for one year at a time. However, by lowering this year’s spending, the deal also lowered future spending under CBO’s baseline assumptions. Since CBO won’t update its inflation projections until August, those same annual inflation projections would now be applied to a lower base, which would lead to lower deficits and debt through 2021. The question was, how much lower?

Today, CBO answered the question. Using their baseline assumptions, the budget deal lowered non-interest spending by $122 billion over the next 10 years. Were CBO to include an estimate of the interest savings from the budget deal, the cumulative savings would be higher.

To put $122 billion in context: if we assume that all the Bush tax cuts, the AMT patches, and current Medicare physician reimbursement rates are permanently extended, and we wanted the debt-to-GDP ratio at the end of 2021 to be the same as it was at the end of 2010 (about 62%), we would have to cut the deficit by a total of $8.3 trillion over 10 years. Even allowing for added savings from interest, the budget deal is not even 2% of that.

Bottom line: the work goes on.

* It’s a legitimate question whether this assumption is a good one; i.e. whether it actually matches the historical data. I think the data show that discretionary spending grows more closely with GDP than with inflation. But it’s a moot conversation: my understanding is that by law CBO must use this inflation assumption for its baseline.

Our team here at Pew released a report on Sunday – The Great Debt Shift [PDF] – that uses Congressional Budget Office data to show the drivers of the $12.7 trillion change in their projections of 2011 federal debt, going from a January 2001 projection of $2.3 trillion in savings to a March 2011 projection of $10.4 trillion in debt. The bottom line is that new legislation passed since 2001 represents more than two-thirds of this shift in CBO’s debt projections, but no single piece of legislation is overwhelmingly responsible for the growth in debt since 2001. We worked hard to come up with a clear way of visualizing all these different drivers, and it’s heartening that people like Ezra Klein think we succeeded. Figure 2, for my money, is the best takeaway from the report:

Also be sure and read Lori Montgomery’s story in the Washington Post that weaves an interesting narrative around these numbers.