Yesterday, the nonpartisan Congressional Budget Office (CBO) released a lengthy report proposing 103 ways to cut the federal deficit.
The report contains plenty of red meat for partisans – from block-granting low-income assistance programs for savings of $404 billion over the next decade, on the right, to imposing a greenhouse-gas tax raising more than $1 trillion (more deficit-reduction than any other option), on the left. But CBO's analysis is most instructive on the question that precedes all that: Should we cut the deficit?
First of all, the CBO report makes clear that the rampaging deficits of President Obama's first term were driven largely by the demands of the recession and thus are fading now: The recovery and recent budget deals have dramatically reduced the deficit from nearly 10 percent of gross domestic product when Obama took office to only about 4 percent today. Without further policy changes, it will fall to only 2.1 percent in the next two years.
The combination of falling deficits and swelling economic growth means that debt as a share of GDP has now shrunk to 73 percent and will fall further to 68 percent by 2018. The notion that the deficit is so excessive that the U.S. is the next Greece is thus dangerously erroneous. But the economy, while not exactly booming, is also doing well enough for us to begin thinking about winding down the deficits' stimulative effect.
In fact, the CBO makes clear that, in the long term, the budget deficit – and, more crucially, the level of public debt – explodes. Deficits will start growing again at the end of the current Congress. Debt as a percentage of GDP will increase after 2018, and substantially: "Budget deficits would rise steadily and, by 2038, would push federal debt held by the public to 100 percent of GDP – close to the peak percentage, which was seen just after World War II – even without factoring in the harm that growing debt would cause to the economy."
Factoring in that economic harm – and, even worse, the likely self-inflicted wounds from extending current policies – would result in federal debt reaching 190 percent of GDP by 2038, CBO projects. Now, that ought to turn everyone's hair gray.
In fact, as the report also makes clear, it's graying – not the alleged socialism of the Obama administration – that already drives these numbers. Even in the next decade, as the deficit shrinks from current levels, entitlement spending will grow by about 1.5 percent of GDP: "Despite the significant expansion of federal support for health care for lower-income people over the next 10 years, only about one-fifth of federal spending for the major health care programs in 2023 will finance care for able-bodied, nonelderly people." The rest goes for the blind, disabled and – primarily – the elderly.
A subtext of the report is that deficits aren't the real problem – debt is. Despite the debt expansion caused by the recession, the declining (though still sizeable) deficits combined with economic growth mean that the level of debt relative to GDP is actually shrinking right now. This is an important point because it defies the simple government-is-like-your-household logic often employed by politicians: The country as a whole can continue running substantial deficits but still reduce the relative size of its debt problem by growing even faster. Believe it or not, that's exactly what we're doing right now, and we are likely to grow even faster in the future.
The problem is, so are the deficits (as well as interest rates, which, at record lows, currently make deficits easier to sustain). That means that the federal budget doesn't necessarily have to be balanced for the country's economy to do just fine.
In fact, appropriate-sized deficits used for investment purposes can actually support further growth (analogize, if you must, to borrowing in excess of your family income to fund an advanced degree in computer science) – but there is some less-exact deficit size you don't want to exceed because of the debt hole you'll dig yourself. The 65-75 percent debt-to-GDP range we're in now has proven fairly workable in most countries (and, as noted, is actually contributing to shrinking the debt as a share of national income); the 100 percent ratio we're heading toward, less so. Doubling down, so to speak, which is where CBO says we end up a generation from now without changes in our habits, would be catastrophic by anyone's reckoning, however.
That brings us to what can or must be done. I've suggested that we can probably eliminate about half the deficit long-term through cuts that the vast majority of Americans, left or right, wouldn't complain about, and, in fact, many if not most of the options raised by the CBO should be largely uncontroversial.
But some tough choices remain, and the CBO report reminds us of some basic math of which every American should be aware: Social Security, Medicare, and Medicaid (which has grown from being the health care program for the poor into primarily the long-term care program for the middle class) consume half the budget, and will grow to nearly two-thirds over the next 25 years. In other words, programs for Baby Boom retirees are the primary driver of the debt problem. If we want not to leave the country in hock a generation from now, it is therefore this generation that must change.
Both parties envision passing the buck to younger Americans 25 years from now, whether through denuded entitlements (Republicans) or increased taxes (Democrats). If those burdens started falling now, instead, on the generation just reaching retirement age – and thus at the peak of their earnings and wealth – through entitlement trims or tax contributions targeted to those who can best absorb them, the necessary sacrifice would be smaller and, of course, fairer. (Just asking today's top1 percent to start paying for their Social Security and Medicare like everyone else would generate $470 billion – a significant bite out of the problem.) In short, it's up to those now graying to save the country from the Grecian Formula.