Yesterday we had our first session of the 2013 NYU Tax Policy Colloquium, which is now in its 18th (!!) year. The paper was David Kamin's "Are We There Yet? On a Path to Closing America's Long-Run Deficit."
In a departure from our usual format, we had an extra guest commentator, Peter Orszag. (Not to be confused with Peter Ország.)
Some general throat-clearing up front: I like to use this blog to discuss the colloquium sessions, because they raise topics of general academic, intellectual, and policy interest as very broadly defined. But on the other hand the sessions are off the record, and though I don't think of myself as "press," that's effectively what I am when writing a blog post about a session. Plus, I don't want any of our speakers or other attendees to have any concern either that what they say will be repeated here, or that I am going to use this forum to pursue my side of a disagreement, and explain why I was right and they were wrong (a view that they may not share). So what I do here is ruminate (sounds exciting already, doesn't it) on my thoughts regarding the paper and the issues, along with other things that are in the record. (For example, Peter Orszag has just posted a Financial Times article on topics that were germane to yesterday's discussion.)
The main thrust of David's paper is that our fiscal situation isn't as bad as most believe. In particular, official CBO "alternative scenario" computations of the fiscal gap may be too pessimistic in a couple of respects. One is that they don't credit cost-saving measures in current law as likely to be continued by the Congress. A second is that they don't credit current commitments on both sides of the aisle to restrain indefinitely the level of discretionary spending substantially below historical levels (as a percentage of GDP). A third is that they assume income tax revenues will not be allowed to grow relative to GDP through real bracket creep.
That is, the income tax brackets are adjusted for inflation, but not for the fact that real income is growing. Thus, in theory the time may come down the road when, if the current rate brackets are retained with just inflation indexing, even low-income workers might reach the 39.6 percent bracket. This arguably is contrary to "true" current policy with regard to the rate structure. And it would lead to significant income tax revenue growth relative to GDP that also is arguably contrary to "true" current policy. Key point: none of this concerns whether real bracket creep and income tax revenue growth SHOULD be permitted. The issue is whether "current policy" for purposes of the fiscal baseline should be interpreted it as allowing it or not. CBO says no, David Kamin says maybe yes.
Perhaps the biggest issue in measuring the fiscal gap in long-term budget scenarios is how fast we should expect healthcare expenditures to grow. They have long been exhibiting an unsustainable growth rate relative to GDP. This is the main reason that the long-term scenarios look so dire. But David's article notes that the CBO forecast assumes that Congress will not permit efforts under current law to restrain excess growth to stay in effect indefinitely. On the other hand, it also assumes that at some point the growth rate of healthcare just has to somehow mysteriously slow all by itself, because otherwise the numbers would just get too crazy.
The Kamin article suggests that the CBO alternative scenario should not be so quick to assume that efforts mandated under current law will be shelved by the Congress and thus make the fiscal situation worse. It also argues that we should build into the baseline the significantly slower growth rate for healthcare that BOTH the Obama Administration projections and those under the Paul Ryan plan assert that they would produce. This ostensibly is a "lowest common denominator" area of agreement between the two - they have ostensibly agreed how much healthcare outlays should be allowed to increase, leaving only the question of how to get there methodologically (i.e., on the supplier side under traditional Medicare, or on the consumer side via Ryan's capped vouchers).
I'm not sure I find this persuasive. The two sides disagree so strongly about HOW healthcare growth should be slowed - they would use fundamentally different program designs that are hard to reconcile with each other - and they are so opposed to each other's approaches, as well as arguably retaining significant mutual veto power over each other's plans, that I draw little comfort from their having agreed on paper about the growth rate.
Peter Orszag's Financial Times article offers a different reason for thinking that healthcare growth will slow, based on recent data showing a significant slowdown that he argues (a) is not just from the recession and (b) may well reflect improvements in how Medicare operates. I don't have the expertise in healthcare to have a definite opinion on this, and even the experts would probably agree that, even if what Peter says is highly plausible, we'd need a few more years of data to get really confident about it.
A further underlying issue is the following. The Bush tax cuts, with their expiration dates that were widely expected not to stick, made such a total mockery of the "Current Law" baseline for doing fiscal gap measurements that the whole world pretty much decided to discount that baseline as, well, a mockery. But this required CBO to start exercising judgment about what "current policy" truly is for the alternative scenario that typically gets more attention. The fiscal cliff deal made "current law" less of a total farce than it had been for the last 12 years, so one could possibly advocate returning to it, on the ground that building in all the subjective judgment calls is no longer clearly worth it. But even a "current law" scenario, as it typically is done, ignores such actual features of present law as (a) the current legal effect on Social Security benefits of the Trust Fund's running out in about 20 years, (b) the current legal effect on Medicare Part A benefits of its Trust Fund running out later this decade, and (c) the debt ceiling.
Suppose one were to do a whole-hog "current law" fiscal gap estimate. Given the debt ceiling, if one interpreted current law as causing it to trump the spending rules on the books (despite arguments to the contrary, such as by Buchanan and Dorf), this would mean the fiscal gap was pretty much gone. But this arguably would be unilluminating about the true baseline that we should be considering. So even "current law" as practiced isn't really quite current law. And if we reverted to it as practiced (without the debt ceiling or trust fund limits on spending), then, even if initially it was not too terrible a baseline, would the gameplaying that made it unworkable from 2001 to 2012 just start all over again?
One topic I had in mind but that we didn't end up discussing: Being an analytical or art for art's sake type, rather than being interested just in what policy steps we should actually take, I think it is quite interesting to explore the question of what we mean by the "current path" of policy, what different purposes the baselines that we might use to make fiscal gap estimates can serve, how the measure might be adapted for each purpose, etc. I believe that it's hard to make good ad hoc judgments about measurement issues and such without taking the time to reflect a bit on what you are actually trying to do, and why. This topic of the conceptual underpinnings to fiscal gap measures and the like is one that I have written about in the past, and certainly could return to in the future. (I'm always looking for new topics when I do the colloquium, much like a shark sniffing coastal waters for blood.)
But I think I probably won't take up this topic again, even though there is some interesting territory that one could explore. My sense of things, from past forays into this area, is that very few people share my interest in these questions. For theoretical types, it's just too "applied." For people who are doing work on the fiscal gap, it's too theoretical - they want to go straight to the bottom line.