Publication of the CBO’s “The Budget and Economic Outlook: 2018 to 2028” has once again brought attention to the dire outlook for the federal public finances.
The challenge is best thought of in the following way:
1) there is a structural challenge associated with projections for debt‐to‐GDP ballooning in the coming decades due to unchanged entitlement programs interacting with an aging population
2) politicians have sailed us into these fiscal headwinds with a large, structural budget deficit, and debt held by the public is already at its highest level since just after World War II
The policy implications are clear: substantial entitlement reforms are, and always were, necessary if the US were to have any hope at preventing ever‐rising federal debt (as Brian Riedl indicates in this excellent post).
But running something much closer to an overall balanced budget sooner rather than later is needed if the aim is to get the debt‐to‐GDP ratio heading back down towards historic norms over the coming decades.
It’s in this context the CBO numbers are so gloomy.
Over the next 10 years, based on current laws, the CBO estimates that the deficit will instead increase from 3.5 percent of GDP in 2017 to 5.4 percent in 2022, before fluctuating between 4.6 percent and 5.2 percent from 2023 to 2028. This compares with an average annual deficit of 2.9 percent over the next 50 years. Debt held by the public as a result is projected to rise to 96.2 percent of GDP by 2028.
But note this is based on “current law,” and assumes substantial income tax increases in 2025 as individual tax cuts expire, and that there will be spending cuts too.
As the CBO notes:
If those changes did not occur and current policies were continued instead, much larger deficits and much greater debt would result: The deficit would grow to 7.1 percent of GDP by 2028 and would average 6.3 percent of GDP from 2022 to 2028…debt held by the public under that alternative fiscal scenario would reach 105 percent of GDP by the end of 2028, an amount that has been exceeded only one time in the nation’s history.
The CBO data clearly shows that revenue as a proportion of GDP was expected to have risen back to its 2017 level by 2023 even before the expiration of many tax cuts, showing that from then on its rising spending that is driving the worsening outlook in debt over this period.
If the Republicans really wanted to lock in their tax cuts, they needed spending restraint. Instead, now, the fiscal outlook is set to deteriorate, tax cuts are being blamed (even though projections show tax revenues will still increase as a proportion of GDP), and on current policies debt is heading north pretty rapidly.
“Trump’s tax cuts are rocketing us into the debt ceiling,” wrote Catherine Rampell in The Washington Post on February 1, because “withholding from employee paychecks will drop starting no later than mid‐February. Individual income tax revenue will therefore be about $10 billion to $15 billion less per month than the CBO previously estimated.” The suggestion that the debt crisis could be blamed on a mere $10–15 billion cut in monthly withholding got a Twitter shout‐out from budget hawk Stan Collender, who must know that errors in monthly budget estimates are commonly larger than that.
This was followed two days later by Heather Long’s extremely misleading Washington Post story, “The U.S. Government Is Set To Borrow Nearly $1 Trillion This Year, an 84 Percent Jump from Last Year.” The article goes on to say, “Treasury mainly attributed the [$436 billion debt] increase to the ‘fiscal outlook.’ The Congressional Budget Office was blunter. In a report this week, the CBO said tax receipts are going to be lower because of the new tax law.” According to that link to another Post story, “CBO said that the tax law is expected to lower tax receipts by $10 billion to $15 billion per month. Even though the tax cut law went into effect January 1, the large drop in tax receipts didn’t kick in yet because companies won’t start using new withholding tables until sometime in February.” Fiscal 2018 began last October, so lower withholding tax can affect no more than 8 of the remaining months. Contrary to the Rampell‐Long theory, the CBO’s revenue loss of $80–120 billion can’t explain her alleged $436 billion increase in Treasury borrowing.”
Where did all that added debt come from? What Ms. Long initially called “the exact” figure of $955 billion is later explained as “determined from a survey of bond market participants.” Asking about 23 bond dealers to guess Treasury “net marketable borrowing” is far from an official estimate, and it isn’t a measure of the deficit.
Robert Rector of the Heritage Foundation recently argued that the RAISE Act, a bill introduced by Senators Cotton (R-AR) and Perdue (R-GA), would save taxpayers billions by reducing lower-skilled immigration. Below I will argue that the RAISE Act does no such thing mainly because it does not actually increase skilled immigration, does not much alter the current education level of immigrants in the United States, and would result in removing at least 500,000 H-1B visas within a year of passage. Using the National Academy of Science (NAS) fiscal estimates, the RAISE Act is more likely to increase deficits over the next 75 years than to decrease them.
Rector makes two main claims in his post. The first is that “[b]ased on the National Academy of Sciences’ estimates, the average low-skill immigrant (with a high school degree or less) who enters the country imposes a net present value on taxpayers of negative $142,000.” A fiscal net present value (NPV) means that each immigrant in this education range would have to deposit $142,000 upon arrival that would earn 3 percent compounded annual interest to cover the full cost of social services that he or she will be expected to consume over the next 75 years. The second claim is that the RAISE Act could save taxpayers at least $1 trillion by cutting the flow of immigrants with a high school degree or less. The sections below will analyze these claims by using the National Academy of Sciences’ estimates and information from the Current Population Survey of the U.S. Census (CPS).
The U.S. is bankrupt. Of course, Uncle Sam has the power to tax. But at some point even Washington might not be able to squeeze enough cash out of the American people to pay its bills.
President Barack Obama would have everyone believe that he has placed federal finances on sound footing. The deficit did drop from over a trillion dollars during his first years in office to “only” $439 billion last year. But the early peak was a result of emergency spending in the aftermath of the financial crisis and the new “normal” is just short of the pre-financial crisis record set by President George W. Bush. The reduction is not much of an achievement.
Worse, the fiscal “good times” are over. The Congressional Budget Office expects the deficit to jump this year, to $544 billion.
The deficit is not caused by too little money collected by Uncle Sam. Revenues are rising four percent this year, and will account for 18.3 percent of GDP, well above the last 50-year average of 17.4 percent. But outlays are projected to rise six percent, leaving expenditures at 21.2 percent of GDP, greater the 20.2 percent average of the last half century.
President Obama has issued his final federal budget, which includes his proposed spending for 2017. With this data, we can compare spending growth over eight years under Obama to spending growth under past presidents.
Figures 1 and 2 show annual average real (inflation‐adjusted) spending growth during presidential terms back to Eisenhower. The data comes from Table 6.1 here, but I made two adjustments, as discussed below.
Figure 1 shows total federal outlays. Ike is negative because defense spending fell at the end of the Korean War. LBJ is the big‐spending champ. He increased spending enormously on both guns and butter, as did fellow Texan George W. Bush. Bush II was the biggest spender since LBJ. As for Obama, he comes out as the most frugal president since Ike, based on this metric.
Figure 2 shows total outlays other than defense. Recent presidents have presided over lower spending growth than past presidents. Nixon still stands as the biggest spender since FDR, and the mid‐20th century was a horror show of big spenders in general. The Bush II and Obama years have been awful for limited government, but the LBJ‐Nixon tag team was a nightmare—not just for rapid spending during their tenures, but also for the creation of many spending and regulatory programs that still haunt us today.
The budget deal announced last night offers two sets of potential cuts in military spending.
The first set of potential cuts, created by the budget caps, target “security” spending. That includes the Pentagon, State, foreign aid, the Department of Homeland Security and Veterans (the discretionary portion of Veterans spending, to be precise). The deal caps “security” spending at $684 billion for this fiscal year and $686 for the next. That requires little pain; the 2012 security cap is only $5 billion below what we’ll spend on those categories in fiscal 2011. The White House claims that the caps will generate $350 billion in savings from base defense spending for ten years. They get there, dubiously, by projecting security spending at the capped level across the decade, even after the caps expire, and counting as savings the difference between that spending trajectory and what CBO now projects. They are also assuming that all the savings go to defense, even though Republicans will try to make the other security categories absorb the pain.
The second set of potential cuts, which occur automatically if the Joint Committee fails to reach its spending cut goals, target defense spending directly. This could add $500 billion in defense cuts over ten years, the White House says.
Assuming that is true, the maximum amount of defense cuts possible here is $850 billion. That is a cut of roughly 15 percent compared to planned spending based on the president’s February 2011 budget submission — not including the wars. It is roughly on par with the cuts proposed by the Bowles‐Simpson Commission. The total savings are much lower, roughly half, if you compare the cuts to what we actually spend now, rather than the increases we were planning on in past planning documents.
And remember, that $850 billion is a maximum; it may not materialize. It will be lower, if, as hawks hope, the cuts fall on the non‐defense elements of the security category. It will be lower if the Joint Committee finds other accounts to cut, avoiding the triggers.
Still, that possible amount is enough to make hawks apoplectic. We are sure to hear more complaints about “gutting or “hollowing out” the force. But let’s keep some facts about military spending in mind:
The Pentagon’s budget has more than doubled over the past decade, and current projections call for the Pentagon to receive more than $6 trillion from U.S. taxpayers through 2021. If its budget got cut by 15 percent, that would return us to roughly 2007 levels. That hardly seems like “gutting”. After such cuts, we would still account for more than 40 percent of global military spending, and our margin of military superiority over any combination of rivals would remain unrivaled.
The focus should now shift to strategy. The White House says the Pentagon’s ongoing roles and missions review will guide the first round of security cuts. The aim is to eliminate military capabilities that are unnecessary or provided by multiple services. We should go deeper, looking to what missions, allies, and possible wars, we can jettison. The recommendations should guide not only the first set of cuts, but also the second. That means making recommendations for the Joint Committee on additional defense cuts and preparing for automatic cuts should they occur. There is nothing preventing those cuts from being achieved by retiring force structure required by needless missions—such as defending rich allies that can defend themselves.
We should also keep in mind that this deal hardly solves our deficit problem and does not exhaust the possible savings we should seek. Deeper military cuts are possible and could even enhance security given the right strategy.
The U.S. Postal Service is in financial trouble. Undermined by advances in electronic communication, weighed down by excessive labor costs and operationally straitjacketed by Congress, the government’s mail monopoly is running on fumes and faces large unfunded liabilities. Socialism apparently has its limits.
While the Europeans continue to shift away from government‐run postal monopolies toward market liberalization, policymakers in the United States still have their heads stuck in the twentieth century. That means looking for an easy way out, which in Washington usually means a bailout.
Self‐interested parties – including the postal unions, mailers, and postal management – have coalesced around the notion that the U.S. Treasury owes the USPS somewhere around $50-$75 billion. (Of course, “U.S. Treasury” is just another word for “taxpayers.”) Policymakers with responsibility for overseeing the USPS have introduced legislation that would require the Treasury to credit it with the money.
Explaining the background and validity of this claim is very complicated. Fortunately, Michael Schuyler, a seasoned expert on the USPS for the Institute for Research on the Economics of Taxation, has produced such a paper.
At issue is whether the USPS “unfairly” overpaid on pension obligations for particular employees under the long defunct Civil Service Retirement System. The USPS’s inspector‐general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector‐general have concluded otherwise. Again, it’s complicated and Schuyler’s paper should be read to understand the ins and outs.
Therefore, I’ll simply conclude with Schuyler’s take on what the transfer would mean for taxpayers:
Given the frighteningly large federal deficit and the mushrooming federal debt, a $50-$75 billion credit to the Postal Service and debit to the U.S. Treasury will be a difficult sell, politically and economically. Although some advocates of a $50-$70 billion transfer assert it would be “an internal transfer of surplus pension funds” that would allow the Postal Service to fund promised retiree health benefits “at no cost to taxpayers,” the reality is that the transfer would shift more obligations to Treasury, which would increase the already heavy burden on taxpayers, who ultimately pay Treasury’s bills. (The Congressional Budget Office (CBO) prepares the official cost estimates for bills before Congress. Judging by how it has scored some earlier postal bills, CBO would undoubtedly report that the transfer would increase the federal budget deficit.) For those attempting to reduce the federal deficit, the transfer would be a $50-$70 billion setback.
Sounds like a bailout to me.
See this Cato essay for more on the U.S. Postal Service and why policymakers should be moving toward privatization.