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Bill Gale and Alan Auerbach are nice guys, but they sure know how to ruin a beautiful summer day. I’ve spent the morning reading through their latest long-term budget forecast. It’s not even Noon and I think I need a drink.
Gale, who is TPC’s co-director, and Auerbach, who heads the Burch Center for Tax Policy and Public Finance at Berkeley, have done this exercise for the past few years--each iteration more depressing than the last. The story this year: Long after the economy recovers and returns to full employment, long after the TARP and the auto bailouts are history, the U.S. will face massive and unsustainable deficits. Don’t let anyone tell you this is a temporary problem that will fade with the recession. It isn’t and it won’t.
Auerbach and Gale build their forecast on what they consider realistic assumptions about future policy. For example, they extend the Bush tax cuts (most of which President Obama vows to continue), they extend the “patch” for the Alternative Minimum Tax, they freeze but don’t cut physician payment rates under Medicare, and they allow the recent stimulus spending and tax cuts to end as scheduled.
And for all the recent arguing over baselines on TaxVox and elsewhere, Auerbach and Gale show that over the long run it doesn’t matter much which projections you use. Whether you prefer the Obama Administration budget or the policy assumptions of Auerbach and Gale, we will be in the same soup. And either way, we (and our children) will be neck deep in boiling broth.
A few of Bill’s and Alan’s numbers tell the story. Under the Obama budget, Washington will spend 24.5 percent of GDP in 2019, even with the economy operating at full speed. The projected deficit of 5.5 percent of GDP would be the highest in 60 years, except for the deep recessions of 1983 and today. This, they conclude, will be “problematic.” Indeed.
By 2019, we’ll be spending more than $250 billion on interest on the debt. Think about that for just a minute: We are in the midst of a historic battle in Washington over how to find $150 billion-a-year to pay for health reform. Yet, Treasury will be blissfully writing checks for $250 billion just to pay the vigorish to China and other increasingly nervous lenders.
The long-term bottom line is worse: Gale and Auerbach project that by mid-century, the chasm between revenues and spending will reach 8 percent of GDP. By the end of their forecast period, 2085, it will hit 11 percent. If you prefer the Obama budget forecast, the gap will be a mere 10 percent.
This is, of course, impossible. The only question is: What are we going to do about it?
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