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Congressional Budget Office Is Pessimistic About the Economy

The Congressional Budget Office (CBO) came out with its new projections for the budget today. There are not many surprises. It projects somewhat slower health care cost growth in recognition of the recent trend in the sector. It also projects continued high unemployment, with the unemployment rate not projected to fall below 6.0 percent until late in the year 2016.

One interesting item is the sharp projected increase in interest costs. In the baseline projections, outlays are projected to rise by 0.1 percentage points of GDP from 22.8 percent in 2012 to 22.9 percent in 2023. However interest costs are projected to rise by 1.9 percentage points, meaning that non-interest spending is projected to fall sharply over this period. (The baseline includes several assumptions that are unrealistic, so it is probably not the best set of projections.)

It is also worth noting that CBO has become very pessimistic about the economy's growth potential and the lower limit on the unemployment rate. It puts potential growth over the decade at just 2.2 percent annually. Part of the explanation is that it expects capital deepening (the increase in the ratio of capital to labor) to make less of a contribution to growth than in prior decades. This is a bit hard to understand since CBO projects that the cost of capital will be low compared to the 1980s and 1990s when capital made a considerably larger contribution to GDP growth.

 

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                        Source: CBO, Federal Reserve Board, and Bureau of Economic Analysis.

The graph shows CBO's projection for the contribution of capital to growth. At 1.0 percentage point annually, the projected contribution of capital growth in the next decade is lower than in the 1970s, 1980s, and 1990s.

CEPR / February 06, 2013

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Honduras

Latin America and the Caribbean

World

AP Investigation: U.S. Spends $20 Billion Over 10 Years on Increasingly Bloody Drug “War” in Latin America; Rejects Drug Policy Reform
It started in Colombia in 2000, moved on to Mexico in 2008 and now rages in Central America.  Since the beginning of the century, the U.S.-backed “war on drugs” has progressively spread throughout the northern part of Latin America, leaving tens of thousa

Alexander Main / February 05, 2013

Article Artículo

The Impact of the Upward Redistribution of Wage Income on Social Security Solvency

The impact of the aging of the U.S. population on the finances of Social Security has been widely touted by the media and Washington pundits. While these demographics do raise costs for the program, this is hardly an unbearable burden and it certainly is not a surprise. We have known about the baby boom for more than 50 years.

What is newer and was less widely anticipated is the upward redistribution of income that we have seen over the last three decades.  This affects the program in two ways. First it has a direct effect in that a larger share of wage income has gone over the taxable maximum (currently just over $113,000). In 1983, the Greenspan commission set the cap at a level where 90 percent of wage income would be subject to the tax, meaning that 10 percent would escape taxations.

Since that date, the upward redistribution of wages has increased the portion of wage income over the cap to 16.8 percent, with just 83.2 percent of wage income subject to the cap. The share going over the wage cap is projected to rise further, reaching 17.5 percent of wage income in a decade. In this way, the upward redistribution of income directly worsens the finances of the program.

However there is also an indirect effect. If wages had kept pace with productivity growth over the last three decades, the typical workers would be paid around 25 percent more than they are now getting. In an environment of growing wages the prospect of increased Social Security taxes may not seem as bleak as in the environment of stagnating wages that we now see. While it is difficult to know how the political situation would differ if wages had kept pace with inflation, it is worth noting that even now workers would prefer higher payroll taxes to cuts in benefits according to a recent poll by the National Academy for Social Insurance.

CEPR / February 03, 2013

Article Artículo

Ezra Klein Strikes Out Big on Immigration and Demographics (link fixed)

Ezra Klein usually can be counted on for good insights on politics and the economy, however today's piece on immigration is the sort of thing that could have been on a press release from Fix the Debt. The basic point is to tout the virtues of immigration. While there are benefits of immigration that Klein rightly highlights, much of the piece veers off into the sort of pablum readers expect from the non-Klein portions of the Post.

This is especially the case where Klein dives off into demographics.

"The economic case for immigration is best made by way of analogy. Everyone agrees that aging economies with low birth rates are in trouble; this, for example, is a thoroughly conventional view of Japan. It’s even conventional wisdom about the U.S. The retirement of the baby boomers is correctly understood as an economic challenge. The ratio of working Americans to retirees will fall from 5 to 1 today to  3 to 1 in 2050. Fewer workers and more retirees is tough on any economy."

Klein then adds, "there’s nothing controversial about that analysis."

Actually everything about that analysis is controversial, including the basic facts. (Actually, these are just wrong.) The current ratio of workers to retirees is 2.8 to 1, it hasn't been 5 to 1 since the early 1960s. It is projected to fall to 2.0 to 1 by the mid 2030s.

Dean Baker / February 02, 2013