Don’t bump your head on the debt ceiling

December 7, 2012

We have the fiscal cliff, the debt ceiling, and the ski jump — but what’s really going on? Here’s an executive summary, with links to more if you just can’t help yourself:

  • In the near term, the issue is the cliff. Current law locks in roughly a 5% (of GDP) drop in the government deficit next year, a combination of tax increases (a lot) and spending cuts (a little). CBO estimates that this “reverse stimulus” will reduce GDP at the end of 2013 by 2.9% — plus or minus a couple percent.  (I’m referring here to Figure 1.)
  • In the long term, the issue is how to pay for the projected *huge* increase in future healthcare spending, an issue that is unlikely to be resolved next month or even next year. The delightful David Warsh puts it this way: “The fiscal cliff negotiation is no better than a skirmish in what promises to be an epic ten-year struggle to achieve a new fiscal compact.” Among the choices:  significant cuts in entitlement programs or equally significant increases in the government’s tax revenue. Along the way, we could very well see a squeeze on some popular programs: infrastructure, education, research.

There will be lots of drama in the coming weeks, but that’s what’s going on. The cliff will generate lots of drama, but probably little in the way of progress on our long-term budget problems. As Warsh says, this is a ten-year struggle.

I’m not recommending it, but if you can’t help yourself and would like to know more, here are some links I thought were informative:

  • David Altig has a nice summary (“cliff notes”).
  • CBO is the primary source here, both on the cliff and for the long-term budget outlook. The figures are great. On the former, note the uncertainty about the impact of going over the cliff; see the ranges in Figures 1 and 2. On the latter, note the “explosive path of federal debt under … what might be deemed current policies.” See esp Figure 1-1. (For arcane reasons, CBO refers to this path as the “alternative fiscal scenario.”)
  • Greg Mankiw offers tax advice (Roth IRAs).

Finally, the title comes from Stan Zin, our resident title guru.


3 Responses to “Don’t bump your head on the debt ceiling”

  1. […] that turns out, the consensus is that health care costs are far and away the biggest fiscal issue facing the country.  Unless I […]

  2. […] is to say, lots of drama, but absolutely no movement on long-term budget issues. The good news? New episodes of Psych due February […]

  3. […] little disagreement among experts that the US faces some serious budget issues over the next 20-40 years: projected spending is substantially greater than projected revenue. One […]

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