Economist Michael Feroli of JPMorgan makes a great point in a new report about the fiscal cliff. Almost whatever the outcome, he points out, it will do little to nothing to change the nation’s lethal long-term budget trajectory. Focusing, as the current negotiations do, on a completely arbitrary ten-year budget window is a complete distraction. The national debt will still be rocketing higher:
In the chart [above], the green line indicates the CBO’s projections for publicly-held debt as a percent of GDP assuming a continuation of current tax and spending policies. In this scenario debt-to-GDP is projected to reach 247% in 30 years time.
The President is currently pushing for $1.2 trillion of revenue over 10 years, or about 0.6% of GDP over that same horizon. Assuming that increase in revenue as a share of GDP persists after 2022, and taking account of the saving from reduced federal debt service payments, publicly-held debt (the yellow line) will still amount to 226% of GDP in 30 years.
If instead, a trillion dollars in higher revenue is coupled with a trillion dollar reduction in discretionary spending, and that revenue increase and spending reduction as a share of GDP is projected forward (again taking account of interest saving), debt-to-GDP (the dashed line) at the end of the thirty-year horizon is still 213%.
The point isn’t to argue the merit of either of these options, but rather to demonstrate the misleading nature of looking at ten-year budget horizons.
Policies that have important effects over the ten-year horizon may have comparatively small effects when things worsen in the 2020′s and 2030′s. Going in the other direction, policies that can bend down the debt hockey stick in the ten- to thirty-year horizon, such as gradual changes to entitlement programs, often generate relatively minuscule savings on a ten-year horizon.
Thus, the ten-year horizon may bias policymakers toward policy options that do little to address the projected explosion in debt coming in fifteen years. We’ll continue to closely track the fiscal cliff theatrics, more because of how the outcome could affect near-term growth rather than the implications for long-run sustainability; the focus on the ten-year window almost guarantees that longer-run sustainability will not be attained in the current budget battle.
We are missing a huge opportunity to do something right now about entitlements, particularly Medicare and Medicaid.