You may be aware that the Congressional Budget Office (CBO) is due to release its 2013 Long-term Budget Outlook in September. In “Previewing the Bad News That’s Likely to Complicate the Debt Ceiling Battle,” I offered an early look at what’s sure to be a significant change from the CBO’s 2012 report.
In this post, I’ll add a chart that seems to sum up our fiscal challenges as well as anything else. Like the charts in my earlier article, it’s derived from the CBO’s latest 10-year budget projections, last year’s 75-year projections, Social Security and Medicare Trustees’ Reports and other sources. Here it is:
If you happen to be a taxpayer, it may be unsettling to see your share of the government’s debt reaching $150,000 in two years and then doubling every 10-20 years thereafter. Of course, there are a variety of inputs contributing to this result, and I listed them in more detail here. And here’s a more general explanation in the form of a letter to your congressional representative (I know, how quaint):
Dear Honorable ______,
I write with two concerns:
- The trajectory of our nation’s debt
- The accuracy and usefulness of the information that the government provides about (1).
Perhaps you could address at least the second.
Consider that the CBO will soon release its 2013 Long-term Budget Outlook, which should include updated government debt projections for the next 75 years. Consider also that the CBO’s projections are notoriously inaccurate and commonly misunderstood.
Well, I’d like to suggest that the CBO can make its work more meaningful by publishing a chart in the following format:
The idea is to augment the usual information to include:
- A more tangible debt measure
- An allowance for budget slippage
- Recognition of trust fund debt
I’ll explain each in turn:
Using a more tangible debt measure
The usual approach of dividing debt by GDP is helpful in some ways but has two distinct drawbacks. First, GDP is a manufactured measure that depends entirely on how the government chooses to define it, as we saw in July when the Bureau of Economic Analysis (BEA) changed its methods and rewrote economic history. Second, it’s hard to develop an intuitive sense for how much debt-to-GDP is too much. Unless you are, say, a credit analyst accustomed to working with such ratios, debt-to-GDP is just another arcane statistic.
Although there’s no such thing as a perfect measure, the chart above is at least more easily understood than debt-to-GDP. It shows the U.S. dollar amount of debt per taxpayer, anchored to the 2013 purchasing power of the dollar. Each taxpayer’s share of the nation’s debt might grow according to the figures in the chart, which reflects both government commitments and economic realities. Needless to say, taxpayers deserve to see these figures.
Accounting for budget slippage
Notice that I just used the term “economic realities.” Unfortunately, the CBO’s debt projections are anything but reality. They’re based on the spectacularly false assumption that the economy will reach a hypothetical “full employment equilibrium” and then remain there forever. Like Steven A. Cohen’s dominance and Miley Cyrus’s innocence, recessions are a thing of the past according to the CBO. In fact, the CBO assumes that economic growth never dips below its long-term trend.
To correct for such a ridiculous assumption, the CBO should add an allowance for periods of sub-par growth. Research suggests that an allowance of 0.7% of GDP per year would have been sufficient historically. This was the average business cycle effect on the budget deficit between 1981 and 2010. It’s reflected in the chart above in the “recessions really exist” segment, which ratchets up the debt projections according to the estimated 0.7% per annum in budget slippage.
Acknowledging trust fund debt
This is another no-brainer. The CBO follows the common governmental practice of ignoring amounts that the Treasury Department borrows from various trust funds, such as the Social Security and Medicare trusts. These borrowings are said to be meaningless because trust funds don’t qualify as “the public.” Therefore, using the government’s definition of “debt held by the public,” the trust funds can be exploited to reduce reported debt totals.
I suggest being more transparent by pulling the trust fund borrowings out from under the carpet. Most people recognize that entitlement payouts to retiring baby boomers will soon overwhelm contributions, meaning that trust fund debt will need to be either paid down or defaulted on just like any other debt. And that it’s downright disingenuous to claim that trust funds don’t represent the public. Trust fund borrowing should be added to total debt, just as it is in the chart above by including the “trust fund debt counts” segment.
The remaining chart segments represent the CBO’s customary “baseline” and “alternative” scenarios. The baseline scenario, as you know, is mandated by law. The alternative scenario was introduced to correct problems with the baseline. While helpful, it’s often ignored in public debate and fails to address other limitations, such as those discussed above.
What’s needed, therefore, is for Congress to begin a dialog with the CBO about other ways to improve its work. In my opinion, a request from your office for an “official” version of the chart above would be an excellent start.
I look forward to your reply.
Feel free to send this letter or your own version to your congressional rep and let us know the response. Who knows, maybe we’ll blend some activism with the blogging.