So what about the Fiscal Cliff?

As I watched the Congress try to reconcile the Fiscal Cliff Discussions (from my perspective the President did little negotiation) a couple of things were clear.

First,  let's reconcile some numbers.  In January 2001, CBO produced a forecast that projected $5.6 trillion in surplus.  So what happened.  Well first of all the economy did worse (by $3.3 trillion) than the CBO projected - that was caused by two recessions (one mild, one terrible).   Then we adopted $2.8 trillion of tax cuts (the Bush Tax bill)- that is about half of what the CBO originally projected as surplus.  Then Congress appropriated a total of $4.3 trillion more than they had (or almost 50% more than the costs of the Bush tax) to things like Homeland Security, a couple of wars and the prescription drug benefit.   Finally, as a result of all that profligacy we paid $1.4 trillion in additional debt.  So that left us with $6.2 trillion of additional debt.  (Less than a third was the Bush tax cuts.)

Now to the deal.   The chattering class has said it was a disaster for the GOP but I would think that it is a mixed deal for both parties.   Perhaps 82% of the Bush tax cuts were retained as "permanent" including a generous death tax exclusion (albeit with a slightly higher rate which is still below the rate before the Bush changes).   Both sides will still have to deal with entitlement reform.  As the chart to the right suggests what the deal did not do was actually reduce the deficit by any meaningful numbers (some have suggested that the pork in the bill actually spent more than will be collected if the revenue assumptions are actually real.

What is also troubling is that without substantial entitlement reform we will continue on the trend of increasing the ratio of our total debt to GDP.   Even the Center on Budget and Policy Priorities (which is not exactly a conservative organization) argues that the curve needs to be brought down by another $1.4 trillion over the next 10 years if we are to stabilize the long term prospects of government.

There are a couple of conclusions.  First, if we want decent economic growth it is unlikely that we would stabilize tax revenue at a level which is a significantly larger share of GDP than the numbers we had for the last couple of decades (18-20%).   Second, when even the CPPB begins to talk about significant entitlement reforms as a way to stabilize, it should be a wake up call.   Will Washington figure this one out?