Long Term Debt Outlook

Robert Waldmann

I’m not sure if I should post this here. I think it might be stimulating. However, I am ignorant and have no intention of learning (except from comments). I feel free to display my ignorance after the jump.

The conventional wisdom seems to be that we have to do something about the long term deficit, but that the parties can’t agree on what to do and the people aren’t willing to let them do what is necessary. I think the conventional wisdom is totally wrong on each count.

First, I don’t think we need to do anything. That is, I think that under current law, the debt to GDP ratio will stabilize and decline. Obviously I shouldn’t just think this. I can check CBO forecasts and know one way or the other. The standard view is that, under current law, the deficit would vanish in the medium term and return and grow to an unsustainable level as the population ages and Social Security and Medicare spending increases. This was true last year, but I don’t think it is true now. The change is that the ACA (health care reform)would (according to the CBO) bring the growth of Medicare spending under control unless the ACA is modified. The CBO forecasts that, under current law, Medicare spending will grow to about 6% of GDP and level off (from about 4% now). The CBO also forecasts that Social Security OASDI spending will grow 1.2% of GDP and level off.

So the long term current law deficits seem to me to be about 3.2% of GDP. The long term inflation forecast is 2% and the long term read GDP growth forecast is 2 to 3% s, it seems to me that the debt to GDP ratio is forecast to decrease 1 to 2% per year over the long term. That’s sustainable. I think the conventional wisdom has not accepted the CBOs forecast of Medicare spending under current law (of course the conventional wisdom has still not accepted the idea that Medicare and Social Security OASDI are two different programs). Or maybe “do something” includes “leave the current laws unchanged.”

I’d even guess that deficits will be sustainable forever under current law plus doc fixes and AMT fixes, but that really is just a guess.

However, there is no chance at all that we won’t do something and, in particular, no chance that Bush tax cuts for the non-rich won’t be extended. I’d say the main problem isn’t that the parties can’t agree on what to do but that they can agree to create unsustainable long term deficits.

As noted with more evidence in my post below, the US public seems perfectly willing to do what is necessary. They are eager to soak the rich supporting allowing Bush tax cuts for families with income over $250,000 to expire and removing the FICA tax cap (and I think applying FICA to capital income). I’m not sure a majority supports both measures, but I guess (again I am shamelessly guessing) that this would pretty much pay for the Bush tax cuts for the non rich and satisfy the Federal Governments intertemporal budget constraint.

Frankly, I think the long term deficit problem is that neither party is willing to follow the wish of the majority to massively increase taxes on the rich.

Please correct my errors of fact and logic in comments.