No Runny Eggs

(H/T – Greg Mankiw via Brian Faughnan via Charlie Sykes)

At the request of Rep. Paul Ryan, the ranking member on the House Budget Committee, the Congressional Budget Office prepared an analysis of the long-term economic effects of doing absolutely nothing to either spending or revenues (other than making the Bush tax cuts permanent and indexing the AMT), using a very-long-term plan to slow and ultimately eliminate deficit spending, and using tax increases to attempt to match the increases in spending.

Table 1, which outlines the projected changes in spending as a percentage of Gross Domestic Product (SocSecurity/Medicare/Medicaid operate under current law, “discretionary” spending essentially matches the growth in GDP, interest payments on debt increases to match the increased debt), has some scary numbers. By 2030, Medicare and Medicaid together will account for a larger percentage of GDP than Social Security. By 2050, they’ll account for a larger percentage of GDP than “discretionary” spending, interest payments will be the single largest item on the budget at 13.6% of GDP, and total government spending will account for 41.8% of GDP. By 2082, more than 75 cents of every dollar produced by the economy would go to the federal government, with 40 cents of that going to pay interest, and Medicare/Medicaid spending outstripping the rest of the budget.

Bear in mind, that is with no “universal health care”, no adjustments in the Social Security/Medicare/Medicaid formulae, and no adjustment other than the change in GDP in the remainder of government spending.

As for the debt, by (approximately) 2030, it would be more than 100% of GDP, a situation only experienced in and immediately after World War II. Shortly afterward, it will zoom past the all-time high of 110% of GDP, blowing past 290% of GDP by 2050 and 400% of GDP by 2060.

A textbook analysis of the effect of the exploding deficits on the real Gross National Product per person is similarily ugly. The CBO acknowledges that the textbook analysis is too rosy, but by the late 2040s, the GNP/person will begin to drop due to the effects of the deficits. By 2060, and a drop of 17% from the peak, the debt will be so large, the future effects are incalculable.

Regarding the thought that increased taxes would save us, the focus on the blogs I linked to was on the 88% top tax rate and 25% bottom tax rate required to support a non-interest spending rate of 35% of GDP (and the associated 40% of GDP spent on interest). The CBO notes the following regarding that more-than-doubling of the tax rate: “Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. Revenues would probably fall significantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.”

The CBO also ran some numbers on the assumption that non-interest government spending would somehow be held at 28% of GDP (the projections for 2050). Even that would necessitate a higher-than-90% increase in taxes; the lowest rate would go up from 10% to 19%, the current 25% rate would go up to 47%, and the top 35% rate (both individual and corporate) would go up to 66%. That tax increase is estimated to reduce real GNP per person by between 5% and 20% from what it would be if the 2007 levels of spending and taxation would be maintained.