Why We Need a Serious Budget Change

The Congressional Budget Office decided it wants Halloween in March. Last week, in a presentation to the National Association for Business Economics, CBO Director Elmendorf offered four observations on the federal budget:

  1. The gap between spending and revenues is likely to remain very large even after we return to normal economic conditions.
  2. Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; the policy changes that are needed will significantly affect popular programs or people’s tax payments or both.
  3. Policymakers face difficult tradeoffs in deciding how quickly to implement policy changes that would reduce future budget deficits.
  4. There is more focus in Washington on federal budget problems today than there has been since the late 1990s, and that focus has led to a range of proposals for tackling the problems.

The message from the report is simple: if we do not change from our current path, we will run straight off of cliff into serious fiscal instability. What this could look like has been outlined well by Reinhart and Rogoff in their book “This Time is Different” and the historical examples are not fun to think about. The presentation is laid out in bullet points and graphs that are easy to follow, but frightening to look at. Here is one example under observation 2:

Projected Federal Revenues and Spending in 2021 with a Continuation of Certain Policies

CBO graph

To read the whole presentation, see here.

Also, see here for my critique of the ratings agency portion of Dodd-Frank from last year.