The Congressional Budget Office (CBO) report released on Feb. 4, has a simple title, “The Budget and Economic Outlook: 2014 to 2024.” It’s a dry work with a lot of charts and graphs and more than a few assumptions, outlining the challenges for the next 10 years of governing.
Rather than being taken as an outline on the work that needs to be done, it quickly became the center of a firestorm over the Affordable Care Act, popularly known as Obamacare.
“Non-partisan CBO report admits #ObamaCare is hurting the economy, will cost 2.5 millions jobs,” the National Republican Congressional Caucus (NRCC) tweeted shortly after the report was released.
That tweet got the ball rolling. Speaker John Boehner (R-Ohio) released a statement saying, “The middle class is getting squeezed in this economy, and this CBO report confirms that Obamacare is making it worse.”
The actual statement from the CBO was much more neutral: “The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor.”
In other words, people will voluntarily leave jobs they hold because they will be able to get health insurance elsewhere. There will be no net loss of jobs.
Turning this report into a political tool masked its real purpose, which was to outline how current laws, regulations and policy look in the next 10 years against a fairly realistic economic outlook. There will be problems ahead if action is not taken, but these problems require a lot more thought and effort. They don’t play into nice soundbites and tweets.
There is plenty of good news and bad news in the report, depending on how you want to read it. Deficits will go down and the economy will grow, but interest on the debt already incurred is going to turn into a very large and crippling share of the budget.
“This year’s deficit (will) equal 3.0 percent of the nation’s economic output, or gross domestic product (GDP)—close to the average percentage of GDP seen during the past 40 years. …
Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades. That projected slowdown mainly reflects long-term trends—particularly, slower growth in the labor force because of the aging of the population. …
CBO projects that the federal budget deficit (will be) about 4 percent of GDP between 2022 and 2024,” the report states.
The projections are based on decent but hardly record-breaking growth in the economy over the next 10 years. The CBO assumed a shade over 3 percent growth in GDP for the next two years, and a shade under after that. After 2017, the unemployment rate (U3) is expected to be below 6 percent, but economic growth will slow because retired Baby Boomers are likely to be more careful with their money and spend less.
The deficit has already fallen from 10 percent of the GDP in 2009 to 3 percent today. That may sound like great news and a signal that it’s time to relax about deficit reduction, but it isn’t. There are problems ahead, especially after 2017:
“… revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP. In CBO’s baseline, spending is boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt.”
There is a problem with health care costs, driven in particular by the aging population. This is exacerbated by policies favored by the administration, including CHIP and Obamacare, that contribute substantially to the deficit as projected by the CBO.
“With no changes in the applicable laws, spending for Social Security, Medicare (including offsetting receipts), Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through exchanges will rise from 9.7 percent of GDP in 2014 to 11.7 percent in 2024,” the report warns.
The total net effect is that costs are expected to keep rising as a share of the GDP, and deficit-based financing of these costs, under current tax law and projected spending, will cause the deficit to start to rise again.
These projections are all based on current policy, so any increased revenue found by increasing personal or corporate taxes would change the scenario — as would cuts to the health care provisions as authorized today.
That’s what this report is about, after all, and it does show that very specific action is necessary to keep the federal government on track. While there was a lot of deficit reduction in 2013, perhaps more than a weak economy suggests is prudent, it came largely through sequestration. That isn’t going to be possible for these future deficits. The government is going to have to figure out a way to work together to head off the problems of the future.
This brings us back to the immediate reaction to the report, which did not focus on the difficult work needed to find a way to pay for promises that have been made. Instead, soundbites were issued on the key talking point being used as leverage for the next election.
That may be where the focus has to be if the current players can’t work together. There are congressional elections in 2014 and 2016, and we will certainly have a new president on Jan. 20, 2017. That is a bit late to head off all of the potential problems cited by the CBO, but not the most challenging of them.
The CBO has a lot to tell us about the next 10 years if we don’t do anything at all. It is best read as a warning, but the initial reaction to the CBO’s warning suggests that it is one that will not be heeded.