Published for www.johntaylorsblog.blogspot.com, March 29, 2012
In a recently released report the Congressional Budget Office calculated how debt reduction with the House Budget Resolution (which just passed the House today), would affect GNP in the United States. The CBO took the spending and tax parameters from the House Budget Committee staff and computed the resulting deficit and debt. They then compared the debt path under the House budget with the debt path under their “extended alternative fiscal scenario, which is their description of current law and its most likely extensions. They then estimated the effect of the different debt levels on economic output. This is a “little” dynamic scoring in the sense that other positive effects of lower marginal tax rates and other incentives in the House budget plan are ignored.
Nevertheless, CBO reports that the reduced level of debt has large positive economic effects. I created the following “fan charts” to illustrate this.
The fan charts represent the range of uncertainty as reported by CBO. If you take the midpoint of the fan charts, you will find that GNP is 19 percent greater in 2040 under the House plan and the gap continued to grow after that. That is about $5.6 trillion per year and growing. The difference is three times the maximum annual loss of output under the Great Recession, but it continues year after year.
The difference in the federal debt as a fraction of the economy under the two scenarios is shown in the next chart. While CBO projections go through 2050 under the House plan, the CBO does not report numbers greater than 200 percent of GDP in the alternative fiscal scenario. In the chart, I estimated the actual percent by extrapolating the 2011 Long Term Scenario and showing the little star. But no matter how you look at it, the effect on the debt and thus the economy is huge.