CBO Director: Defense Spending to “Decline” Long-Term
On Monday, Congressional Budget Office director Douglas Elmendorf spoke at the National Association for Business Economics (NABE). The conference’s theme was “The
CBO Director Douglas Elmendorf
New Normal? Policy Choices After the Great Recession,” so Director Elmendor had some remarks about policy based on the CBO’s January report on the budget and economic outlook and preliminary analysis of the President’s budget.
He initially focused on the near term. The CBO forecasts a sluggish economic recovery and employment levels only returning to long-term sustainable levels around 5% in 2014.
One underlying problem that, according to Director Elmendorf, will forestall economic activity is diminishing support for economic growth in fiscal policy. The CBO’s budgetary projections (following present law) show the country’s deficit dropping by 5% per annum two years from now, not due to any foreseeable economic growth but due to the “diminishing impact of last year’s stimulus legislation and the scheduled expiration of earlier tax reductions.”
On his blog, Director Elmendorf writes, “In addition, economic growth will be dampened, under current law, by the scheduled expiration of the 2001 and 2003 tax cuts and by the increasing reach of the AMT.”
He says the current policy dilemma for Washington is “whether to enact additional tax cuts or spending increases…or to allow stimulus to be withdrawn quickly…a trade-off between short-term benefits and long-term costs.”
The CBO’s January analysis of policy options notes that initiatives like extending unemployment benefits and reducing payroll taxes for employers will have reasonable returns on investment and begin having an impact by fourth-quarter ’10, but “despite the potential economic benefits in the short run, such actions would add to the already large projected deficits and, all else equal, make future incomes lower than they otherwise would be.”
If his short-term outlook is less than encouraging, Director Elmendorf’s long-term outlook is downright depressing. “CBO projects that the budget deficit and debt are on a trajectory that poses significant economic risks and ultimately becomes unsustainable. U.S. government debt in relation to GDP is quickly entering territory that is unfamiliar to us and unfamiliar to most developed countries in recent years.”
The only “choice” for long-term policy is, according to Director Elmendorf, how quickly to restrain federal spending and borrowing. Take a look at this CBO chart:
Director Elmendorf writes, “looking across the whole 40-year period, the basic story of U.S. fiscal policy is fairly simple: The country financed an increase in Social Security, Medicare, and Medicaid spending by reducing defense spending relative to the size of the economy.”
He says that the only way to finance Social Security, Medicare and Medicaid is through “a noticeable increase in the tax burden or a noticeable reduction in other domestic programs relative to the size of the economy—or we will have to take noticeable policy actions to reduce the growth of those programs.”
So our representatives have a choice: curb entitlement spending or make dramatic cuts to defense spending (relative to GDP.)
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Saying social security is being paid for from defense cuts is hilarious !!! The wars are being paid for by social security surpluses.
[...] Administration to combat swelling federal deficits, as CBO director Douglas Elmendorf has been warning for months that current deficit levels are unsustainable and that spending on national debt interest and [...]