Balanced Budgets: Kidding Ourselves


James Pethokouis has an interesting post which talks about the Ryan plan for eventually balancing the budget. The Ryan plan has some interesting ideas that rely essentially on cutting entitlement spending and replacing it with market alternatives. Ryan’s thesis is that you can get to a balanced budget without raising taxes via his plan.

Pethokouis wonders properly if markets will be patient enough to wait for the Ryan solution to work. Here is the essence of the problem with Ryan’s proposals:

How does he do it? By sharply cutting future social insurance benefits and shifting Americans into private retirement and healthcare plans. The new Obama budget plan forecasts a total debt-to-GDP ratio of 77 percent in 2020 (vs. 53 percent in 2009) with an annual budget gap of around 4 percent (vs. 10 percent in 2009). Talk about a rosy scenario. It assumes brisk economic growth, atypical following financial crises. It also assumes some budget cuts and tax increases that are politically unlikely. An alternative CBO forecast using — by its own admission — more realistic policy assumptions predicts a 2020 budget gap of 7.4 percent and a debt-to-GDP ratio of 87 percent.

The Ryan plan tops both. In 2020, it would have a budget gap of 3.7 percent and a debt-to-GDP ratio of 67 percent. But notice: even a plan created by a conservative budget hawk accepts abnormally high budget deficits a full decade from now. So beware of any politico selling quick fiscal fixes.

The Obama outline ends at 2020, but the CBO and Ryan plans take their forecast decades out. By 2040, Ryan still sees annual deficits of over 4 percent of GDP (and a debt-to-GDP ratio of 99 percent) before a long decline toward annual surpluses in the 2060s as spending eventually dips below tax revenue. Those numbers seem alarmingly high — though not vs. the stunning CBO forecast of a 223 percent debt ratio in 2040 and over 400 percent by the 2060s.

This is silliness on a par with the fantasy that the health care bill was going to result in lower federal spending over the next ten years. Ryan is being no more serious than the Democrats were in claiming that somehow a program enacted tomorrow is going to survive 30 years of unexpected events and then deliver us to the Promised Land.

It’s past time to recognize that the level of service that Americans want from government at all levels is beyond the current capacity of those entities to provide absent more revenues from society. Either we reduce what we take from government (take from each other?) or we step up to the plate and pay for that which we are demanding.

I wish it were otherwise but pretending that we can devise 10, 20, 30 year or longer plans that will solve current imbalances is self-delusion. If this is all Ryan has to offer then the Republicans are no more rational than the Democrats.

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