As Donald Marron of the Tax Policy Center observes, the world of the CBO’s new alternative baseline is actually more of a disaster than it appears to be at first glance:
Of course, no one believes that Congress will really be that disciplined. That’s why CBO offers a second vision, in which lawmakers give in to temptation. They extend the tax cuts, patch the AMT, limit bracket creep, increase payments to Medicare docs, allow discretionary spending to rise with GDP, and turn off some of the health legislation offsets after 2020.
If policymakers give in to all those temptations, the debt skyrockets, rising from about 60% of GDP today to 185% by 2035. And that’s assuming no negative effects on the economy. As my colleagues Len Burman, Jeff Rohaly, Joe Rosenberg, and Katie Lim have pointed out, out-of-control deficits would weaken the economy by crowding out investment and driving up interest rates, so the debt-to-GDP ratio would actually grow even faster.
CBO doesn’t include those economic effects in its official long-run projections. However, it does separately examine what would happen to the economy because of reduced investment. The results aren’t pretty. When CBO runs the giving-in-to-temptation world through its model, it discovers that the U.S. economy ceases to exist after 2027.
OK, maybe that’s a bit strong. What happens is that crowding out gets so severe that CBO’s model breaks down, overwhelmed by the debt explosion.
Some critics have, as we’ve noted, complained that the CBO is being unfair or unreasonable by assuming that savings will not necessarily materialize in the U.S. health system, and that there will thus be strong political pressure to “fix” Medicare provider payments above the levels envisioned in PPACA. Even if PPACA backers get their wish and the CBO suspends its critical faculties — to put it somewhat harshly — debt still reaches crisis levels.
This is part of the reason I’m so interested in seasteading.