Quantifying the Cost of Waiting

The Congressional Budget Office made an unusual jump into the fiscal fray back in the summer, spelling out the specific harm that excessive long-term debt does to our economy. Today, they released a report that attempted to quantify the effects of waiting to act to stabilize the debt.

In its long-term outlook, CBO provided an alternate path for debt assuming that crowding out effects hurt growth significantly. But, this time, the analysts specifically quantified how much the economy would be impacted by a huge debt burden.

CBO calculates these effects by examining the effect on the 2050 economy if we waited until 2025 to stabilize our debt, as opposed to taking action in 2015. Then, CBO examined three different scenarios for stabilizing the debt: reducing government-funded benefits for all adults, reducing benefits for adults except those over the age of 60 at the time of implementation, and raising taxes. As you might expect, the damage to the economy increases as you go down the line of options. 

Effect of Waiting on Economic Variables in 2050
  Capital Stock Labor Supply Output Consumption
Reducing Benefits -7% -0.5% -2.5% -1.5%
Reducing Benefits, Exempting Those Over 60 -7% -1% -3% -2%
Raising Taxes -18% -2% -7% -5.5%

The report also raises concerns about intergenerational equity if the current generation of lawmakers fails to act. According to CBO, while delaying changes will make the current adults and elderly better off (relative to acting in 2015), it severely damages economic performance down the road for our children and especially for children soon to be born. They estimate that children born after 2015 could have as much as a three percent reduction in their lifetime consumption.

Of course, intergenerational equity is just one of the many concerns of delaying timely action. Among the others that we mention frequently: crowding out of private investment, increased risk of a fiscal crisis, loss of the ability to prioritize in budgeting, and loss of flexibility in responding to emergencies or recessions.

CBO's report only underscores the importance in acting sooner rather than later to remedy our long-run fiscal problems.