Federal debt still a problem, but so is poverty

Congressional Budget Office chart
This chart is from a report the Congressional Budget Office released Tuesday on the long-term fiscal implications of federal budget policies.
(Congressional Budget Office)

Two reports came out Tuesday that, just by happenstance, help illustrate why nothing gets done in Washington.

One was the Congressional Budget Office’s updated federal budget projections, which predicted that if Congress leaves current law in place -- including the much-maligned sequester -- the deficit will soon be no larger than 2% of GDP. Because that’s less than the CBO projects U.S. GDP will grow (fingers crossed!), the federal debt should start to shrink in relation to the economy. That’s not a balanced budget, but at least it’s a fiscally responsible one.

But don’t pop any champagne corks. The CBO also predicts that by the next decade, rising healthcare costs and interest payments on the federal debt will cause the deficit to again grow faster than the economy. In 25 years, that growth will be “unsustainable,” the budget office concludes.

If you’re a lawmaker focused like a laser beam on the deficit, the CBO report might make you all the more determined to keep the annual sequester cuts in place while pushing harder for changes to Medicare, Medicaid, the Affordable Care Act (a.k.a. Obamacare) and other federal healthcare entitlements. You might also be all the more determined to push for a faster path to a balanced budget and zero debt growth, for the sake of slowing the rise in interest payments on the debt.


The other report came from the Census Bureau, which looked at income, poverty and health coverage in 2012. It provided a statistical picture of what it’s meant to be stuck in a weak economy: stagnant wages, sustained high poverty rates, growing income inequality and an increasing number of Americans depending on the government for their health insurance.

Among the findings: The median income in 2012 ($51,000) was the same as in 2011, and still lower in inflation-adjusted terms than any year since the mid-1990s; the poverty rate remained at 15%; and when you adjust for family size, average incomes for all but the very highest earners remain lower than they were before the 2007-08 recession.

Policymakers across the political spectrum wince at such statistics, and they agree that faster economic growth is a key part of the solution. They disagree sharply, though, on how to achieve it. Many Democrats argue that federal budget cuts are holding back growth, and that the GOP’s efforts to reduce funding for food stamps and other entitlements will only punish the people hurt the most by the slack economy. Many Republicans counter that federal spending is impeding the vigorous economic growth that would reduce the demand for aid programs.

The policy debate is about to become more animated, and the stakes higher. The Republicans who run the House and the Democrats who control the Senate (and the White House) are about to square off over funding for federal agencies in the fiscal year that starts Oct. 1, as well as the need to raise the federal debt limit as early as mid-October to avoid stiffing some of the federal government’s employees, contractors, creditors or beneficiaries.


Expect Democrats to cite the CBO’s sunny short-term projections and the Census Bureau’s latest report as a reason to bump up federal spending in the next few years on infrastructure, manufacturing and other efforts to stimulate growth. Rather than sequester-driven cuts that reduce federal support for such pro-growth policies as basic research and transportation improvements, they would try to trim the deficit with a combination of tax hikes, defense cuts and some limited changes to entitlements.

Republicans hate the sequester’s effect on defense, but they also see the phased-in spending cuts as a bird in the hand when it comes to deficit reduction. And the CBO’s projections make it clear that Congress hasn’t done enough yet to put the nation’s fiscal house in order for the long run.  

Still, it’s also clear that the sequester is attacking the wrong problem. Tightening the screws on discretionary programs ignores the double-barreled problem posed by an aging U.S. population and ever-rising healthcare costs. Although the latter’s pace has declined since the recession, and the CBO assumes -- wrongly, perhaps -- that those costs will continue to grow faster than the economy. But even if they don’t, the CBO projects that the aging population and the new insurance subsidies in Obamacare will push federal healthcare spending higher and higher.

As is its practice, the CBO doesn’t try to tell lawmakers what to do about the budget. Instead, it lays out the trade-offs inherent in the policy choices Congress might make. And in doing so, it raises a bright red warning flag about racing to cut the deficit while the economy is still struggling:

“On the one hand, waiting to cut federal spending or raise taxes would lead to a greater accumulation of debt and would increase the size of the policy adjustments needed to put the budget on a sustainable course,” the CBO says in its report. “On the other hand, implementing spending cuts or tax increases quickly would weaken the economy’s current expansion and would give people little time to plan for and adjust to the policy changes. The negative short-term effects that deficit reduction has on output and employment would be especially large now, because output is so far below its potential level that the Federal Reserve is keeping short-term interest rates near zero and could not lower those rates further to offset the impact of changes in spending and tax policies.”


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