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The Same Old Story

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The Congressional Budget Office (CBO) release of its Fiscal Year 2012-2022 projections proves only three things:

  • America continues to head for a fiscal cliff;
  • Politicians remain unlikely to do anything but make it worse;
  • Last year's fiscal follies involving the debt ceiling did nothing to make things better.

CBO's decision to actually use two "baseline" forecasts to project probable deficits adds substantially to the demarcation of choices facing policymakers. The first baseline is "current law," required under terms of the Budget Act. It assumes that current law will remain unchanged. In this case, among other assumptions, that forecast contains full repeal of all "Bush Tax Cuts" of 2001 and 2003; continuing the Alternative Minimum Tax without inflation adjustments; allowing the 27 per cent cut in Medicare providers' reimbursement to take place; and allowing all tax "extenders" to expire at the end of this year. In addition, this forecast assumes that the across-the-board cuts (sequester) scheduled to occur in January, 2013, do take place without change.

The "real baseline," my words, not CBO's, incorporates likely political reality. That is, the Bush tax cuts continue in full force, the AMT is adjusted for inflation, Medicare providers escape any cuts in reimbursement, the tax extenders are extended, and the sequester never occurs.

CBO calls this its "Alternative Fiscal Scenario (AFS). We all recognize it. It's what policymakers in Washington, D.C., have chosen in the past. The new wrinkle is the sequester piece, but the consequences of such ham-handed cuts in that part of the federal budget that isn't causing our fiscal crisis will compel both parties to draw back from allowing them to occur.

Using the AFS gives us the best look at probable reality. It's ugly: federal debt ballooning to roughly 120 per cent of Gross Domestic Product by FY2022 and to more than 200 per cent of GDP by FY2035; investments in the future withering away as present consumption in the form of health and pension entitlements grows inexorably; and rapidly expanding debt payments as interest rates revert to the historic mean.

With apologies to J.K. Rowling, elected Washington, D.C, fears to discuss that which cannot be named -- Social Security and military pensions; Medicare and Medicaid; and Tri-care for Life. Other entitlements exist, but they pale in comparison to the impact of those five elements.

Toss in stark terror at angering recipients of all the tax loopholes in the code (mortgage interest deduction repeal, anyone?), and we get precisely what we see -- a Congress and an Administration frozen in time.

Reviewing old newspaper clips is instructive in this regard. Social Security and Medicare were prominent subjects in the budget battles of the early '80s. Republicans in the Senate tried to make minor changes in those programs, only to be sold out by both President Reagan and the House of Representatives.

Then in the '90s, feeble attempts at reform of entitlements flopped again. In the 2000's, other than the infamously-ineffective George W. Bush attempt to reform Social Security, the political governing class threw up its collective hands and said, "Never mind."

CBO's report today, then, tells us nothing we don't already know.

We have made promises we cannot keep. We have too little revenue from a tax code that is an embarrassment and retards economic growth. We too much fear Granny to rein in entitlements. And, right now, turmoil in other regions of the globe has kept our interest rates abnormally low, so we have not faced the bond vigilantes.

So, like the man who threw himself from the 100th floor said as he passed people on the 50th floor of the building, our policymakers shout, "So far, so good."

Worse than any of this? The absolute certainty that politicians reflect almost perfectly the wishes of a majority of the voters in their states and districts.