December 11, 2013
Steve Rattner is upset that Congress isn’t voting to cut Social Security and Medicare, complaining about this fact in a NYT column this morning. Much of the problem seems to stem from Rattner’s misunderstanding of budget projections and his failure to pay attention to recent developments in health care spending.
At one point Rattner gives us the distressing news that a do nothing scenario will give us a debt to GDP ratio by 2035 of 99 percent (@ 19 percentage points less than the post World War II peak) then tells us:
“That may be too rosy a picture. The Congressional Budget Office assumes robust growth over the coming decade — not a single year of recession and three annual G.D.P. increases of about 4 percent beginning in 2015. (By comparison, the G.D.P. is likely to grow by just 1.7 percent this year.) Slower growth means a higher debt-to-G.D.P. ratio.”
Actually CBO constructs long-term projections that are supposed to average out the impact of recessions and the more rapid growth that usually follows them. This explains the three years of 4 percent GDP growth. The economy is currently 6 percentage points below its potential according to CBO’s estimates. These three years of rapid growth would allow it to make up this gap. The average growth rate projected for the next 22 years is 2.36 percent, which hardly seems especially fast given the economy’s current position.
The other part of the story is that Rattner apparently missed is the sharp slowdown in the growth of health care spending we’ve seen over the past five years. This has already led CBO to substantially lower its projection for health care spending in future decades. If CBO were to fully incorporate the recent slowdown in health care spending in its projections, then the primary (non-interest) budget would be nearly balanced for decades into the future.
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