Friday, July 01, 2011

We have a Congress problem, not a deficit problem, in one graph

As Ezra Klein has pointed out in the past, if congress does nothing the deficit problem is fixed! So the real question is whether Congress will act responsibly and not make the problem worse.
What you’re seeing here is the differences between doing nothing and doing what we expect Congress to do. The blue slope at the base of the graph is what our deficit picture looks like if Congress goes on permanent recess tomorrow. Every colored chunk above that is a deficit-increasing policy that the CBO thinks Congress might pass. Here’s [Mark] Goldwein’s rundown of those policies. [Goldwein is the policy director at the Committee for a Responsible Federal Budget.]

Doc Fixes: Under current law, Medicare physician payments are scheduled to be cut by 30% as part of something called the Sustainable Growth Rate. The AFS (and CRFB’s Realistic Baseline) assumes politicians freeze physician payments instead.

AMT Patches: The Alternative Minimum Tax is a secondary tax meant to capture high earners with low tax burdens. However, for a number of reasons, it now technically impacts middle-income families and so politicians pass annual “patches” to avoid this from occurring. Under current law, patches will stop while under the AFS (and CRFB’s Realistic Baseline) they continue.
Tax Cuts: Under current law, the 2001/2003/2010 tax cuts expire at the end of 2012, as do a number of temporary “extenders”. The AFS assumes that policymakers make both permanent (while CRFB’s Realistic Baseline only assumes the 2001/2003/2010 tax cuts continue).

PPACA Cost Controls: The health reform law included a number of cost controls for Medicare and the exchange subsidies which are now part of current law but may prove unsustainable over the long-run. The AFS assumes that they are effective through 2021 but are overridden thereafter (CRFB’s Realistic Baseline assumes they are partially overridden).

Discretionary Spending Growth: By budget convention, the current law baseline assumes discretionary spending grows with inflation through 2021 (as does CRFB’s Realistic Baseline). The Alternative Fiscal Scenario instead assumes it grows with GDP.

Revenue Freeze: Were all the tax cuts (and AMT patches) to be renewed, revenue would still grow as a share of GDP due mainly to something called “real bracket creep” -- as well as due to the effect of the health care excise tax. However, the Alternative Fiscal Scenario holds revenue constant at 18.4 percent of GDP after 2021, essentially assuming that policy makers will enact future additional tax cuts.

War Drawdown: By convention, CBO’s current law baseline assumes all discretionary spending — including for the wars — will grow with inflation. However, the Alternative Fiscal Scenario (as well as CRFB’s Realistic Baseline) assumes that troops will gradually be drawn down.
As you can see on the graph, the Bush tax cuts and the patch to the alternative-minimum tax are the biggest contributors to our future deficits. Ignoring the proposed freeze in domestic discretionary spending comes next. Then there’s the doc fix, and a future cap on revenue that holds taxes to 18.4 percent of GDP.

I want to be very clear: The do-nothing scenario is not the best way to solve our deficit problems. It raises taxes too high, and does too little to reduce health-care costs in a sustainable way. The Medicare cuts are completely unmanageable. But if every time Congress votes to change one of those policies, it offsets the cost, our problems are solved. That means we don’t necessarily need grand bargains or debt-ceiling brinksmanship. We just need Congress to abide by PAYGO.

All of which goes to a point I’ve made before: We don’t really have a deficit problem. We have a Congress problem. Congress pretends otherwise, because they don’t want to take the blame for the deficit-effects of the legislation they plan to vote for, but that’s the truth of it.

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