Presentation to the NBER’s Conference on Tax Policy and the Economy

October 7, 2011

Yesterday afternoon, I was delighted to speak at the National Bureau of Economic Research’s annual Conference on Tax Policy and the Economy. I first attended this conference in 1988 and in the 20 years since then, I have learned from many of the papers presented and enjoyed listening to many luncheon speakers.

My remarks, not surprisingly, focused on the federal budget landscape. Currently, a special committee of the Congress is trying to reach agreement on policies to reduce future federal budget deficits. The challenges and choices it faces are basically the same challenges and choices faced by all of our elected leaders and, ultimately, by us as citizens: With our aging population and rising costs for health care, the combination of budget policies that has worked in the past cannot be maintained in the future.

As I illustrated in my blog post last month, under current law, spending for Social Security and the major health care programs will represent about 12 percent of GDP in 2021, 5 percentage points more than it did on average during the past 40 years. (To illustrate the magnitude of that change, consider than 5 percentage points of GDP today amounts to about $750 billion.) An increase of that size will put enormous pressure on the rest of the budget.

CBO’s current-law projections provide some sense of what it would take to bring deficits down to as little as 1 percent of GDP by 2021 under those circumstances. That outcome would be accomplished under current law by a substantial increase relative to our historical experience in the share of GDP that people pay in taxes (because significant tax reductions currently in effect will expire by the end of next year) AND a noticeable reduction relative to our historical experience in the share of GDP devoted to federal programs and activities other than Social Security and the major health care programs (including defense, transportation, health research, veterans’ health benefits, education and training, housing and nutrition assistance, international affairs, and the administration of justice).

Although those developments would occur under current law, they would represent a sharp change from the tax and spending policies people are accustomed to, and many analysts and policymakers have expressed concern about that combination of policies.  Of course, many other combinations are possible, but none will produce a sustainable budget outcome unless at least one major aspect of budget policy changes significantly from what we have been used to: Federal revenues will have to be greater, the types of benefits the government provides to older Americans will have to be changed, or the rest of government will have to shrink.

To illustrate this point most clearly, I discussed the historical experience and CBO’s projections for three broad categories of the budget. Below I’ve included links to last week’s blog posts in which I discussed those components:

My remarks concluded by making the same point that I often do: Policymakers and citizens face difficult choices. If we are going to avoid a continuing escalation of the federal debt, citizens will either have to pay more for their government, accept less in government services and benefits, or both.