Tea Leaves

Yesterday, the CBO issued a report on the federal deficit, Long-Term Economic Effects of Chronically Large Federal Deficits. The report begins its analysis with the core problem facing this country:

Since fiscal year 1960, the federal government has recorded budget deficits averaging 2.1 percent of gross domestic product (GDP), and those deficits have been especially large in each of the past three years. Depending on the course of policy and the economy, deficits may moderate as a share of GDP over the next decade. But looking farther ahead, the demand for federal budgetary resources is expected to rise steadily under current law as the baby boomers retire and become eligible for Social Security and Medicare.

The CBO report concludes:

Federal deficits reduce future living standards by slowing the accumulation of national wealth as they lower national saving. Deficits reduce national saving by shifting resources into public and private consumption through increases in federal spending and cuts in federal taxes. Those impacts on national saving can occur even if financial market prices, such as interest rates, are not significantly affected. Deficits also can lower labor productivity by reducing domestic investment, although capital inflows from abroad tend to mitigate that effect.

Of course, this is what many of us have been saying since the Bush Administration began its orgy of deficit spending. However, the report has special resonance as we await the issuance of the report of the President's Advisory Panel on Federal Tax Reform. Preliminary comments on leaks (trial balloons?) from that Panel have focused on whether the recommendations will find sufficient political support to be enacted. I think that, once the report is actually issued, the focus of analysis should be on the equity of the Panel's recommendations. For the Panel's report to pass even a cursory analysis, it must, either explicitly or implicitly, acknowledge that the Bush Administration's tax cuts disproportionately benefited the extraordinarily wealthy while simultaneously undermining the nation's economy. My guess: That's not in the cards.