New CBO Estimates and the Death of Deficit Reduction

The Congressional Budget Office released new data that cover its forecasts for the economy in the short term and also for the next decade. The report is voluminous, but its one outstanding feature is the expectation that unemployment will be 8.5% at the end of next year and will stay above 8% into 2014. The CBO predicts that the economy will grow very slowly for the next several years. But, it forecasts the annual federal deficits will shrink from their current level of about $1.3 trillion to $2o5 billion in 2015. The analysis undermines most of the current plans for deficit reduction. An ongoing poor economy means lower-than-forecast tax revenues.

The congressional deal with the White House to cut the deficit by $2.5 trillion is no longer a viable way to begin the process of slowing increases in the U.S. debt, if the CBO numbers are right. A long-term slow-growth economy means that cuts will have to be larger than anticipated to bring the deficit down by any reasonable amount.

Buried in the document is a forecast that new home construction will not increase for several years. The agency is not sure about the timing, but it does make it clear that housing will be an important factor that will slow the recovery.

“The CBO Budget and Economic Outlook: An Update” is a document that contains some hope that the economy will begin to right itself next year. The other side of its forecasts is that growth of any substance is years away.

The projections about how deficits can be reduced are currently too optimistic. Cuts in entitlements will probably not be addressed this year. That means, as most analysts have pointed out, that any real control of government spending is unrealistic. The CBO projections mean that the lowering of Social Security and Medicare payments will have to be much greater than anticipated under current assumptions about the economy and assumptions about government debt.

It is a shame that the CBO would not be more precise on home prices and the prospects for home sales. The trend in these things will be a tremendous swing factor in the health of the economy. Economists like Robert Shiller believe that the home market will fall as much as another 15%. If the CBO used that figure, its forecasts would be much more pessimistic. Again, that would force budget cut plans to be more aggressive, or at least make it clear that they are hardly realistic at all, according to current projections.

Congress and the White House did not have any comment on what home prices and intransigent unemployment would mean to future deficits. What could they say? That all of their plans to cut government spending are deeply flawed? They are.

Douglas A. McIntyre