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The Known Unknowns

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It may be hard to find humor in the news from Washington these days -- but it's not impossible. For example, pessimists and optimists alike sometimes seem determined to outdo each other -- after consulting their remarkably accurate crystal balls -- in predicting our economic future. They look at projections of future levels of federal debt and rates of economic growth and draw policy conclusions for the present based on their forecasts for one or more decades in the future. Some of this certainty is a consequence of advocacy bordering on religious faith in one economic policy or another. Whatever its roots the goal is sometimes quite laudatory: to discover whether there are reliable assumptions about the future that enable us to be more rational about what we decide to do now. The trouble is that despite their strong credentials, those reading the portents face an almost impossible task.

It's worth noting that with regard to the federal budget and taxes, it has become conventional to speak in terms of 10 years of revenues or expenditures. (On such an important matter as Social Security, analysts are expected to look 75 years into the future.) So, when we are reading about the price of something -- be it tax increase or spending change -- we should keep in mind that a headline about an $80 billion program generally means one that costs, on average, $8 billion a year. That's a rounding error in a total federal budget that is about $3.5 trillion a year. In any event, before we go charging off to fight the great battles to secure America's finances in the future, we should reflect on how accurate we have been in the past when predicting the national balance sheet.

Going back a generation, there was a period of widespread optimism. In 1972, for example, President Nixon signed into a law the federal revenue-sharing program. Some of the most respected and knowledgeable experts in Washington had sounded the alarm about impending "fiscal overhang or fiscal drag." The Feds, it seems, were going to have more money than they knew what to do with, so they would share it with state and local governments. Compounding this sunny view of the future was the belief that most state governments would have a comfortable balance between revenues and expenditures. Of course, when President Reagan dismantled what was left of the program in 1987, after $85 billion had been disbursed, there was no longer quite the same "fear" of having too much money flowing into the public coffers. Anti-tax movements were sweeping the country. Reagan's own cuts in the federal income tax turned out to be a cure that was worse than the disease. The nation slid into chronic deficits, accumulating more debt under Reagan and his successor George H. W. Bush than under all previous presidents combined. During the Reagan years, the prevailing happy view of the future was, in part, based upon a conviction that cutting taxes would actually lead to more federal revenues. That simply did not happen.

Later in the '80s, President Reagan and House Speaker Tip O'Neill struck a bargain to "save" Social Security for at least another generation by increasing the payroll tax and making other adjustments in the program. Their deal did result in the very large surplus that has been accumulated in the Social Security "check book." Today, even with no further changes, the program can pay full benefits for roughly another 20 years and then 75 percent of benefits indefinitely. As a side effect, it was projected that the Social Security surpluses, required by law to be invested only in U.S. Treasury debt, would buy up virtually all the outstanding debt of the United States. There was even concern about what would happen to markets without the familiar reference points of treasury yields and the liquidity provided by the treasury markets. But a funny thing happened on the way to paying down the outstanding debt --- actually several funny things. First Reagan and then George W. Bush kept cutting taxes AND they kept spending money. A variety of costly choices made a joke of the anticipated expectation (and concern) about putting paid to the national debt.

Cause for alarm about the imminent disappearance of the treasury markets arose again years later. In the year 2000 the Congressional Budget Office issued a report which said that the entire national debt would be paid off in just ten years, by 2010. This optimistic forecast was based on President Clinton's tax increases 1993. Opponents of the policy insisted that the tax increases would trigger a deep recession. Instead, the country enjoyed a decade of nearly unprecedented prosperity. Federal budgets were balanced budgets for the first time in a generation. We all know what happened to that forecast. The Bush II tax cuts, wars in Iraq and Afghanistan, and the crash of the housing market reversed the course set in the Clinton years and renewed the rapid accumulation of debt.

So cheer up, things could get better (and they could get worse). In the real world we have to take it one year at a time. We can't really know what next month let alone the next decade will bring. Very small changes in the projected rate of economic growth, for example, turn out to be really significant in the arithmetic of the long run. And like weather forecasting, economic growth estimates may be pretty good in the short run -- they are not so hot when you try to look out further. Maybe Yogi Berra explained it best for, when we get there, we are almost certain to find that "the future ain't what it used to be."

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