When Smart People Go Stupid

I don't often agree with Ezra Klein but usually I think he's fairly good on his facts if not his interpretation.  But this is far away from his best work

Passage of the Affordable Care Act last year brought us closer in line with our international peers. But not much closer. And consider the costs we continue to impose on ourselves in the interim: If the United States simply had the per-person health-care costs of Switzerland, which has the second-most expensive health-care system in the world, we would spend $3,000 less per person and save about $900 billion a year. Assuming we need to reduce deficits by about $4 trillion over the next 10 years, those savings would do the heavy lifting with about $5 trillion to spare.

Now, let's back up here and think about this.

Why S&P Looks Silly

I'm really pretty stunned by the S&P downgrade.  I know they had threatened it but I didn't really understand why.  Reading through their report, I get three potential reasons for the downgrade.

1.  The reduction in debt wasn't big enough ($2.1 trillion instead of $4.0 trillion).

2.  The process was ugly (right up to the wire, etc., etc.)

3.  The Republicans are intransigent on taxes and the Democrats are intransigent on entitlements.

Let me take these one at a time in an effort to show that there's really nothing new here

The Democratic Plan(?)

Some of you are probably thinking, "Oh NO!  Not another post from somewhere on the fact that the President has never presented a plan to manage the deficit/debt."  Rest assured, this is not that post.  It is however inspired by the recent debt ceiling and downgrade news.  Basically, I started running the following thought experiment with myself.  Assuming that the Democrats in Congress actually wanted to reduce the projected debt increase by $4 trillion over the next 10 years, what would they put together to do so.  Having thought about it and invited comment from folks on the left, I've pretty much come to the conclusion that it isn't possible.  Let me explain how I got there.

Crossing the Streams

OK.  Bad Ghostbusters reference but with all the talk of “cuts” and revenues in Washington these days, I wanted to return to the theme of “real” baseline budgeting.  One of the things that is often said is that balancing the budget will require “massive cuts.”  We must again remember that Washington defines a cut a bit differently than you or I might.  So I will counter with the following picture

Here we see projected spending are receipts based on three sources.  The spending line assumes 2010 spending as the base and grows spending by the rate of inflation plus population as projected in the President’s FY2012 budget submission.  The receipts line is based on the CBO baseline projection subtracting 2 percentage points for every year from FY2013 on to take an (aggressive) assumption of the reduced revenues from making no change in tax policy.  GDP is drawn also from the President’s FY2012 budget submission.

So what would this “spending only” approach tell us.

1.     Spending as a percentage of GDP declines rapidly over the period from 23.6% in 2011 to 19.4% in 2021.  This is without making any cuts in spending.  This is not to say that no benefit cuts may be required but simply that a COLA like view of government spending produces dramatic results.

2.     The government reaches “primary balance”, the goal the President has set for the budget process by 2016 (3.1% deficit) or 2017 (2.4% deficit).

3.     The deficit by 2021 is a mere 0.6% of GDP, suggesting that another couple of years would bring the budget to absolute balance.

Just something for those that argue that a cuts only solution is impossible to think about.  The budget can be nearly balanced with no cuts whatsoever as long as Washington chooses to live within a budget constraint.