The CBO’s Report on the Budget and Economic Outlook

The Congressional Budget Office has issued its report on the outlooks for the budget and the economy for 2017 and beyond:

In fiscal year 2016, for the first time since 2009, the federal budget deficit increased in relation to the nation’s economic output. CBO projects that over the next decade, if current laws remained generally unchanged, budget deficits would eventually follow an upward trajectory—the result of strong growth in spending for retirement and health care programs targeted to older people and rising interest payments on the government’s debt, accompanied by only modest growth in revenue collections. Those accumulating deficits would drive debt held by the public from its already high level up to its highest percentage of gross domestic product (GDP) since shortly after World War II.

The near term decline in the deficit is likely influenced by two things: a modest increase in revenues and the spending freeze the Congress put in place. That’s a brute force, meat axe approach to budget management and is almost certainly suboptimal.

Whether you think the deficit’s ratcheting up, not only in absolute terms but as a percentage of GDP, is a disaster depends on your point of view. There is no longer any reason to believe that GDP growth falls off a cliff when debt reaches 100% of GDP but the preponderance of the evidence still suggests that higher debt has an adverse impact on growth.

If decreasing the deficit were easy, it would have been done a long time ago. You can’t decrease it much using the evergreen formula of eliminating waste, fraud, and abuse. Additionally, so much spending is dedicated to sacred cows, e.g. defense, entitlements, interest on the debt, there just isn’t that much to cut without provoking massive political pushback.

The revenue side of the equation is equally difficult. Tax cuts mean less revenue. The notion that tax cuts pay for themselves flies in the face of facts. You can get additional revenues if growth is great enough but that is likely to require something beyond what can reasonably be foreseeen.

As was learned in 2009-2011 the U. S. economy is darned hard to stimulate. You can’t really do it through infrastructure spending (infrastructure defined as roads and bridges) because we’re already overbuilt and there are diminishing returns to scale. How much additional growth will the 153rd bridge across the Mississippi spur? How much growth will providing an interstate for every city with a population of 25,000 provide over what we have now?

Because of the way the federal income tax is presently structured, all cuts in the personal income tax are necessarily tax cuts for the rich. Unless you can convince the rich to buy American and invest all of the proceeds of their tax cuts here, tax cuts won’t stimulate the economy much, either. The only tax cut that might actually stimulate the economy would be a cut in the payroll tax. Democrats decided not to do that, presumably for political reasons.