CBO's Scary Debt Chart Not Looking Very Scary These Days

[Lasher]

By Kevin Drum Tue Feb. 5, 2013

The CBO's latest budget projections are out today. Here's the scary debt chart:



Hmmm. Not so scary after all. The CBO's projections are, of course, sensitive to both their economic forecasts and their reliance on current law. However, their economic forecast seems fairly conservative, and current law is a lot more reliable now than it was before we decided what to do about the Bush tax cuts. So CBO's projections are probably fairly reasonable.

You can decide for yourself, of course, whether you find this debt projection scary even though it's flat for the next decade. Maybe you think it needs to decline to give us more headroom for the future. Maybe you think it masks the problem of growing debt after 2023. Maybe you think we're likely to have another recession over the next decade, which will balloon the debt yet again.

Those aren't entirely unreasonable concerns. Still, the fact remains that debt reduction just isn't a five-alarm fire kind of problem, no matter how loudly the Pete Petersons of the world claim otherwise. In fact, if you go to page 23 of the CBO report, you'll see that federal spending is on a downward slope in almost all categories. Aside from interest on the debt, the only spending that's projected to increase is Social Security (a little bit) and healthcare spending (a fair amount). Of those, the Social Security spending is baked in the cake and there's nothing much we can, or should, do about it. Seniors should get the pensions they've been promised.

So, as usual, that leaves healthcare spending. If you're truly concerned about debt, instead of someone who just pretends to be concerned, that's pretty much the only thing you should care about. If we rein in healthcare spending, we're in good shape. If we don't, we have problems.

http://www.motherjones.com/kevin-drum/2013/02/cbos-scary-debt-chart-not-looking-very-scary-these-days

[Yo_Mama]

1. The CBO pointed out that they don't believe the above chart

They are projected debt held by the public to be more like 87% of GDP by the end of the period.

Read it yourself here:
http://www.cbo.gov/publication/43907

Budgetary outcomes will also be affected by decisions about whether to continue certain policies that have been in effect in recent years. Such policies could be continued, for example, by extending some tax provisions that are scheduled to expire (and that have routinely been extended in the past) or by preventing the 25 percent cut in Medicare’s payment rates for physicians that is due to occur in 2014. If, for instance, lawmakers eliminated the automatic spending cuts scheduled to take effect in March (but left in place the original caps on discretionary funding set by the Budget Control Act), prevented the sharp reduction in Medicare’s payment rates for physicians, and extended the tax provisions that are scheduled to expire at the end of calendar year 2013 (or, in some cases, in later years), budget deficits would be substantially larger over the coming decade than in CBO’s baseline projections. With those changes, and no offsetting reductions in deficits, debt held by the public would rise to 87 percent of GDP by the end of 2023 rather than to 77 percent.

CBO is also predicting quite high GDP growth rates in a few years, a prediction that is unlikely to come true.

[Benton D Struckcheon]

2. Disagree about GDP.

Projections look reasonable. No one can know the future, but we do know that we have yet to really start growing again after the recent unpleasantness. What they're projecting is a bounce and then a steady path after that. I would expect a bounce too once the drag from debt paydown and slow bank lending is finally behind us.
Steady, not so much, but as they say they're just projecting the average rate given adjustments for baby boomers retiring and a much slower rate of net gain from entry of women to the workforce. That's about as much as you can do and still be reasonable.

[Yo_Mama]

3. Their methodology is reasonable

But believing it is not.

The purpose of what they do is to provide data for Congress to figure out the likely effect of legislative alternatives. CBO states outright that it does not try to forecast business cycles. It does not try to forecast the economy - that is not its purpose.

But for anyone to believe that business cycles have ended is ludicrous.
http://www.nber.org/cycles/cyclesmain.html

The post WWII average for expansions is under 5 years. For anyone to believe that from 2009 to 2022 we are not going to have a recession is pathetically idiotic. Indeed, the reason the Fed is desperately throwing its monetary underwear into the crowd right now is to fend off the one we are due for, now that the monetary transmission is so broken. Over the next ten years we will have at least one, probably two, recessions. These will raise spending and cut revenues. and alone will invalidate the chart shown.

Without the monetary transmission mechanism, recessions come much more quickly. The average for the entire period 1854 to 2009 is less than 4 years. Without monetary stimulus, the business cycle is the inventory cycle.

Because the CBO doesn't predict business cycles, its projections have historically been too rosy:
http://articles.marketwatch.com/2012-09-06/commentary/33619000_1_cbo-estimates-debt-cbo-figures

CBO is very accurate at figuring out what Congress will "really" do, and even with the business cycles not accounted for, CBO believes that an increase in debt held by the public to 87% is a more reasonable forecast.

I would say we are going to be at least at 90%.

Take a look at this graph. We can raise taxes, but that lowers disposable incomes. We can't really restrain the growth of government expenditures because almost all of it as projected derives from retirement growth. We could knock out Obamacare and save about a trillion bucks over the next ten years, but even that wouldn't hope to do it.

The graph given in the OP assumes that Medicare reimbursements to doctors are cut by another 25% at the end of this year. It's not going to happen. It assumes a whole bunch of things that won't happen.

You don't have the same rates of GDP growth with higher debts, and if the economy does grow, then debt servicing costs would have to grow rapidly as well.

[Benton D Struckcheon]

4. You made me look at my post to see what I'd actually said

What I actually said was I expect a bounce sometime in the near future as we get to the end of paying down debt and are able to grow without that drag.
Then I said this:

Steady, not so much, but as they say they're just projecting the average rate given adjustments for baby boomers retiring and a much slower rate of net gain from entry of women to the workforce. That's about as much as you can do and still be reasonable.

Obviously I still believe there's a business cycle. All I said was that if you're doing the projection and you admit you can't tell the future, you make some assumptions and go from there.
I make all of my money now from trading. Believe me, I HAVE to know what's going on, and the last assumption I would ever make is that the business cycle went away. All I was saying is the CBO assuming a steady growth path was the best they could do given their mandate.
FYI, I use a base assumption of a four year cycle. I tried all kinds of other time horizons, but that one works best. Ed Hart, a commentator on the old FNN (predated CNBC), now dead, said "The most reliable economic cycle is the Presidential election cycle." From what I can see, he was right.

As to your pessimism, I've been hearing dire predictions of doom all my life from projecting out this that or the other trend. Never does happen. Somehow we make it through, sometimes in better shape than other times. Hemingway titled one of his novels "The Sun Also Rises" just because he got tired of doom & gloom. That was right too. There's as much chance of the public debt hitting 87% of GDP as there is of it going back to 50% of GDP. No one knows. The first thing you have to understand is you don't know. Once you admit that, everything else is easier.

[muriel_volestrangler]

5. However, that was written in February, and the spending cuts *did* take place in March (nt)