October 16, 2019

Budget Office Warns That Deficits Will Rise Again Because Cuts Are Misdirected

Annual federal deficits will continue to fall in the short term, the budget office reported in its yearly long-term outlook, because of the recent spending cuts in military and domestic programs and rising tax collections in a recovering economy. The report projected the deficit in 2015 to be equal to 2.1 percent of the economy’s output, or just one-fifth of the peak shortfall at the height of the recession in 2009.

But starting in 2016, deficits are projected to rise again as more baby boomers begin drawing from Medicare, Medicaid and Social Security — the fast-growing entitlement programs, which Democrats and Republicans cannot agree on how to rein in.

The accumulating federal debt, which averaged 38 percent of the gross domestic product for the 40 years before the 2008 financial crisis, would rise from 73 percent of the G.D.P. now — above what most economists consider an optimum level — to at least 100 percent in 2038.

Budget experts have been warning since at least the Reagan era that in the early 21st century, aging baby boomers will drive entitlement spending — chiefly for Medicare and Medicaid, and to a lesser degree for Social Security — to levels that will crowd out all other military and domestic spending. Interest on the debt will also be a major and growing expense.

What is different now is that the Republican-controlled House and the White House have been on a two-year run of deficit reduction that has resulted, because of their inability to agree on entitlement reductions and higher tax revenues, in deepening cuts in the budget areas that are not responsible for the projections of mounting debt. Those discretionary spending programs — which include things as varied as Pentagon weapons purchases, air traffic control, science and research, education and national parks — are being squeezed even as entitlement spending grows automatically.

The budget office said that by 2023, the annual deficit would rise to an estimated 3.5 percent of the G.D.P., which is just beyond the level that many economists consider sustainable in a growing economy. By 2038, it would be 6.5 percent.

Under a nine-year plan starting in the 2011 fiscal year, discretionary spending was already being reduced annually. But the across-the-board “sequester” that took effect in March, when Republicans and Mr. Obama could not agree on alternative deficit reductions, has pared domestic and military programs further, resulting in increasing layoffs, furloughs and service cutbacks.

Republicans have supported keeping the sequestration cuts in place rather than accepting Mr. Obama’s proposal for a mix of higher taxes on wealthy people and some corporations and cuts in future entitlement spending. And he has said he will not accept their alternative for deeper reductions in Medicare and Medicaid without tax increases.

Federal spending for the major health programs and Social Security will equal 14 percent of the G.D.P. in 25 years, double the level of the last four decades, the budget office projected. While federal revenues are projected to grow — to 19.5 percent of the G.D.P. by 2038, compared with the 40-year average of 17.5 percent — that rise is not enough to offset the spending for federal benefit programs.

In contrast with entitlement spending, discretionary spending for domestic and military programs by 2023 would fall to 5.3 percent of the G.D.P., from the 7.3 percent of this year — the lowest levels in about 70 years.

“Unless substantial changes are made to the major health care programs and Social Security,” the report said, “those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

Jonathan Weisman contributed reporting.

Article source: http://www.nytimes.com/2013/09/18/us/congressional-budget-office-predicts-unsustainable-debt.html?partner=rss&emc=rss

In Granholm Book, Cautionary Economic Lessons From Michigan

After all, years before the rest of the country fell into recession, Michigan, so vested in the automobile industry, was wrestling with a single state downturn — and one that just kept going until the rest of the country unhappily caught up. And years before the rest of the states found themselves trying to patch state budget holes because of falling tax revenues, Michigan was staring at gaps to fill.

And yet, Jennifer M. Granholm, the former Democratic governor of the state, who led it through much of its rocky last decade, says she sees a key lesson from Michigan — a warning, perhaps, more than a model — for the rest of the nation as it tries to create jobs and emerge from an economic funk.

“Everything that is hitting the country hit Michigan first,” Ms. Granholm said in an interview, reflecting on eight years in office in which the state’s economic crisis overshadowed all else. Her response to the crisis, she said, was to cut spending, cut government jobs, cut taxes — the very approach now being promoted elsewhere, particularly after Republican victories in statehouses around the country in 2010.

“We tried all of those prescriptions, too,” said Ms. Granholm, whose final term ended with the start of this year. “We did everything that people would want us to do, and yet it didn’t work.”

She added: “Laissez-faire, passivity, tax cuts, hands-off does not work. And, really, that’s the lesson from this laboratory of democracy which is Michigan.”

The only approach that showed glimmers of success, she said, came when the federal government stepped in — to bail out the auto industry, for instance, and to send stimulus funds that encouraged companies like the ones in Michigan now creating lithium-ion batteries for electric vehicles.

In a state where Republicans took over the governor’s seat in the 2010 election and control both chambers of the legislature in Lansing, Ms. Granholm’s critics say they are unconvinced both by her conclusions and by her claims that she pared back taxes and spending as far as one might; had she truly cut the tax burden and big government, some Republicans said, the state’s picture might now be utterly different.

In truth, even Ms. Granholm, who, along with her husband, Dan Mulhern, has laid out her conclusions in a new book, “A Governor’s Story: The Fight for Jobs and America’s Economic Future,” expressed disappointment in her own ability to fix the state’s limping economy. When Ms. Granholm, a former state attorney general, was elected the state’s first female governor in 2002, she was seen as a rising political star.

“As the person who was in charge of the state at the time and who campaigned on trying to fix it, it was very hard for me to accept myself that I didn’t have the tools to be able to wave a magic wand and fix the loss of manufacturing jobs and the loss of market share of the auto industry and the bankruptcies,” said Ms. Granholm, who is now teaching at the University of California, Berkeley, and says she is “absolutely not interested” in some future political office. “It was hard for me as somebody who’s always been able to succeed at stuff to be able to accept that and move on.”

Ms. Granholm was unwilling to comment on the performance of Rick Snyder, her successor as governor, who this year has approved measures aimed at cutting business taxes.

“The question is for the nation: Is there something that can happen now to prevent it from happening to the whole country and having a prolonged recession in the way that Michigan did?” Ms. Granholm said. “I think there are ways to stop it but it can only happen with a partnership with the federal government, because individual states simply do not have the tools to compete against China or the globe.”

Article source: http://feeds.nytimes.com/click.phdo?i=33eb1b8a518448e17fbfee3eeda3ccf8