Fear mongering from the Congressional Budget Office?

June 18, 2012 — A recent report from the Congressional Budget Office (CBO) on the long-term budget outlook for the U.S. from now until 2037 has reheated deficit hysteria, with the Romney campaign promising to avoid the “path to fiscal ruin” by tackling entitlement “reform,” and with Democrats — most of them unwilling to speak plainly about the devastating consequences of perennially underfunding government operations — using the report “to call for a ‘balanced’ debt plan that includes spending cuts and tax increases.”  But the points of fiscal stress that the CBO highlighted were misleading, its alternative budget scenarios remarkably lacking in either range or nuance, and its focus on reining in “excess” growth in health care expenditures failed to emphasize appropriately the human cost that would be involved.

CBO’s principal visual aid showed a combined category of “Social Security and Health Care Spending” more than doubling its share of GDP by 2037 under either of the long-term budget scenarios it presented. The doubling, however, was not calculated in comparison to current year spending, but rather in relation to the 1972-2011 average — data that may have historical interest but that reflects demographics increasingly irrelevant to current day needs, let alone to future needs. (A comparison of current combined expenditures as against the CBO’s less optimistic revenue scenario showed a rise from 10.4 percent of GDP to 16.6 percent of GDP.)

Moreover, the decision to conflate Social Security costs with Medicare and Medicaid costs gave an even more misleading impression. In terms of Social Security alone, a look inside the report shows that the CBO predicted that Social Security as a percent of GDP would rise only from 5.0 percent to 6.2 percent.

And why shouldn’t Social Security consume a growing percentage of GDP? As the CBO acknowledged, “the aging of the population is the principal driver” of projected growth in Social Security spending. “Over the longer term,” the CBO wrote, “the share of people age 65 or older is projected to grow from about 13 percent now to about 20 percent in 2037.” That is a major increase, but not a crisis. 

On the contrary, a 1.2 percent increase in the share of GDP going to Social Security is a cost that most Americans, recognizing that coming demographic shift, are likely to be prepared to bear. And their willingness to do so would only increase if they were aware of a simple mechanism by which Social Security solvency could be assured for decades beyond 2037 (one that the CBO neglected to include as part of its analysis of potential revenue): removing the cap at which earnings are no longer subject to payroll tax (currently about $106,000 per year).

Medicare and Medicaid as percentages of GDP are projected to rise more sharply than Social Security over the next 25 years (from 3.7 to 6.7 percent and from 1.7 to 3.7 percent, respectively, under the CBO’s more pessimistic scenario), but here again, CBO found that fully 60 percent of the increase was due an aging population. The balance of the increase is due to what the CBO calls “excess cost growth.”  (The CBO first projected increased costs attributable to higher health care expenditure —more spending for each person enrolled in the program after adjusting for the changing age of the population. Then it projected a potential increase in GDP per capita. The difference represented the CBO’s definition of excess cost growth).

 “Excess cost growth” might sound at first blush like something that everyone would want to be rid of. But it is essential to read the CBO’s description of how medical costs are going to be contained. Some initiatives clearly make sense: for example, penalizing hospitals for longer patient stays caused by hospital-acquired infections. For a “sizable slowdown in excess cost growth,” however, the CBO painted this picture:

In the private sector, people will probably face increased cost-sharing requirements; new and potentially useful health technologies will probably be introduced more slowly or be used less frequently than they would without the pressures of rising costs; and more treatments and interventions may simply not be covered by insurance. In the public sector, people who would otherwise receive health insurance through Medicaid might become ineligible because of tightened eligibility rules or might be eligible but find that the scope of covered services has been reduced.

In short, there won’t be a magical medical efficiency bullet that gets people proper medical care; instead, more people will get, or be pressured to get (through higher co-pays and other means), distinctly less medical care than they need.

When the CBO turned to the revenue side of the equation, it again committed both sins of omission and conflation. Corporate income tax rates are near historic lows (see related visualization on corporate tax revenue and effective corporate tax rate), yet neither of the CBO’s scenarios includes any increase in rate (one scenario does allow for the expiration of tax breaks currently scheduled to expire in the course of the next 10 years).

To be fair, the Administration and many other Democrats have jumped on the “broaden the base, lower the rates” bandwagon, so elimination of unwarranted tax breaks and a restoration of some higher level of nominal corporate tax rate is hardly a likely scenario in today’s political environment. But if a document is intended to stimulate debate about the consequences of various policy options, saying only that, in one scenario, the CBO assumed that “unspecified policy adjustments will be made to keep revenues constant as a share of GDP” doesn’t do the job.

Critically, the CBO posits either the expiration either of all of the Bush tax cuts or none of the Bush tax cuts. Allowing lower tax rates for the wealthy to expire as scheduled, but preserving all or some middle class tax breaks was not put on the table.

Now this may have been the CBO’s tacit way of expressing its expectation that the Obama Administration will be as lacking in backbone at the end of this year as it was at the end of 2010 (when it let itself be blackmailed into extending the tax cuts for the wealthy). But the result is to have readers of the report lack the information to assess what would happen under a different method of “balancing” interests: for instance, one that allowed tax cuts for the wealthy to expire entirely; that moved capital gains rates back to that provided by the Tax Reform Act of 1986 (that is, a rate closer to the 28 percent of that law than the uncharacteristically low 15 percent currently in effect); that prevented growing numbers of middle class families from having to pay the Alternative Minimum Tax; that strengthened Social Security, as discussed earlier, by making income beyond $106,000 per year subject to the payroll tax; and that retains most but not all current tax breaks for the middle class (for example, placing greater restrictions on the mortgage interest deduction).

Perhaps the CBO’s staff really believes that a few percentage points more of taxation relative to GDP would actually make wealthy people decide that it is better to sit on the beach and thus wreck the economy, but at least let’s see what a scenario weighted heavily towards revenue increases and against benefit cuts would look like.

It is certainly the CBO’s job to do so. In describing its processes, the CBO states that it “regularly shows the effects of adopting alternative policies that have been discussed by the Congress, so that the impact of those alternative policies is clear.”  While the members of Congress who insist on retaining, enhancing, and paying for a safety net that defines a caring society don’t get a lot of press attention, they do exist. The CBO should be prepared to explain the budgetary and other impacts of that vision, not stack the deck with a choice of “unpalatable” versus some flavor of Bowles-Simpson.

If we had a full range of alternatives on the table, we could begin to decide which risks are worth taking, and which are not.