In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Sunday, January 20, 2013

"The case for deficit optimism"

by Calculated Risk on 1/20/2013 09:56:00 AM

From Ezra Klein: The case for deficit optimism Here’s a secret:

For all the sound and fury, Washington’s actually making real progress on debt.

... Start the clock — and the deficit projections — on Jan. 1, 2011. Congress cut expected spending by $585 billion during the 2011 appropriations process. It cut another $860 billion as part of the resolution to the 2011 debt-ceiling standoff. And it added another $1 trillion in spending cuts as part of the sequester. Then it raised $600 billion in taxes in the fiscal cliff deal.

Together, that’s slightly more than $3 trillion in deficit reduction. ... In fact, that’s about enough to stabilize the nation’s debt-to-GDP ratio over the next decade.

... Obama said ... we have “a health-care problem,” not a spending problem. This is, in general, a fairly uncontroversial point on the right ...
Back in December 2011, I asked Rep. Paul Ryan, budget guru to the House Republicans, for his favorite chart of the year ... He sent me one from the Bipartisan Policy Center showing four lines. One, labeled “discretionary spending,” was drifting down. Another, “mandatory spending,” was also falling. A third, denoting Social Security expenses, was rising a bit, but not by enough to worry anyone. The fourth, health-care spending, was shooting skyward. “Government spending drives the debt, and the growth of government health-care programs drives the spending,” Ryan explained.

So here’s the good news: The growth of health-care costs has slowed in recent years. Big time. From 2009 to 2011, which is the most recent data available, health-care costs have grown by less than four percentage points. That’s compared to typical growth of six or seven percentage points through most of the Aughts. ... The $64,000 question — actually, it’s worth trillions of dollars more — is whether this slowdown is a recession-induced blip or the product, at least in part, of cost controls that will persist long after the economy has returned to health.  At the moment, there’s evidence to support both views. ...

... the truth is that deficit reduction is going better than you’d think from listening to the sniping in Washington.
A few key points:
1) the deficit as a percent of GDP has been declining and will probably continue to decline over the next several years even without further deficit reduction measures (see the third chart here),

2) the debt to GDP ratio will probably stabilize and may even decline over the next decade,

3) the key long term budget issue is health care costs.