The story behind the CBO’s warning

The Congressional Budget Committee released its latest long-term budget outlook this morning, which, of course, sparked a new round of rhetoric about the debt. The AP’s headline reads, “CBO: Debt crisis looms absent major policy changes.”

A new report says that the national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style debt crisis unless policymakers in Washington can slam the brakes on spiraling deficits.

Putting aside the question of whether a European-style debt crisis would result if the debt reached 100% of GDP — there’s ample reason for skepticism — it’s worth emphasizing that the AP’s headline is largely backwards.

“Absent major policy changes,” deficits will shrink quite a bit. As Ezra Klein noted:

[The CBO’s long-term budget outlook] shows the same thing as always: If Congress lets the Bush tax cuts expire or offsets their extension, implements the Affordable Care Act as scheduled and makes or offset the Medicare cuts prescribed by the 1997 Balanced Budget Act — which CBO calls the “extended baseline scenario” — the national debt will be totally manageable.

If Congress passes laws extending the Bush tax cuts without offsetting the cost, repealing the Affordable Care Act and its cost controls and protecting doctors from Medicare cuts without making up the savings elsewhere — the “alternative fiscal scenario” — the national debt will be totally out of control.

I don’t doubt Republicans will seize on the CBO report and say, “See? We have to prioritize debt reduction immediately.” But party officials simply won’t consider a basic fact: if we do as Republican leaders demand, the debt they pretend to care about — the debt they largely created during the Bush era — gets much worse.

If we do nothing, on the other hand, the budget deficit shrinks a lot. As Annie Lowrey recently explained, “[D]oing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically.” David Leonhardt added, “As federal law currently stands, some significant tax increases are set to take effect in coming years.”

This isn’t popular to say, but if policymakers simply leave the status quo in place, and let nature take its course, taxes will return to Clinton-era rates, the Affordable Care Act will save us a lot of money, and the deficit will shrink considerably.

“Absent major policy changes,” the problem gets a whole lot better. The fact that the CBO helps prove this point today is worth keeping in mind.