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Brad DeLong and Michael Kinsley on the Short- and the Long-Term Deficit: Seeing the Light

Seeing the Light:

In June of 2009 the Congressional Budget Office estimated America's lon-run deficit problem--the 50-year fiscal gap--at 2.6% of the GDP in its "extended baseline" scenario. In June of 2010 its estimate was 0.8%. Between June of 2009 and June of 2010 three things happened to change CBO's estimates: 1. economic conditions deteriorated more than expected; 2. Congress passed and the president signed the 2010 PPACA--health care reform; 3. Congress passed and the president signed the 2009 ARRA--the "stimulus bill." The 1.8% improvement in the fifty-year extended-baseline fiscal gap is due to:

  1. a +0.2% of GDP increase in the fiscal gap caused by worse than expected economic conditions.
  2. a -2.0% of GDP decrease in the fiscal gap caused by the PPACA.
  3. a +0.2% of GDP increase in the fiscal gap by the ARRA.

The conclusion to draw is that--according to the extended-baseline scenario--we could do ten stimulus programs the size of the ARRA before we undid all the improvement in the long-term deficit picture that was achieved by the PPACA. Peter Orszag said that the PPACA was the greatest act of long-term fiscal austerity ever enacted. He was correct.

It is important to note that the CBO does not believe that the improvements in the fiscal posture created by the PPACA will be allowed to stand. It believes that the cost savings and revenue increases will be loopholed and nibbled to death over the course of the next fifteen years--or that is what is implied by its alternative fiscal baseline. In the alternative fiscal baseline scenario, as best as I can calculate, the CBO assumes that the extra spending on providing health care in the PPACA will continue as written in the legislation indefinitely, but that only 1/3 of the cost savings and revenue increases will be realized in the long-run--the rest will be repealed or loopholed away.

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