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c-span powered by cable. >> next a look at federal debt and fiscal policy current and former government officials and economists at a conference hosted in part by the american enterprise institute. institute. in this session congressional budget office director gives a presentation about future death of policy projections fell by a group of economists focus on wall street perspective and a panel discussion on social security spending. quick susan, thank you so much methinks to ai and brookings into kent and susan for arranging this. i am really grateful and thank you everyone for coming. it said looking around the room and think we should turnur this into a fiscal summit and solve the problem right within the group the room.

alright, i have a couple of slides. i can see them there. these are on the studio website. i'm going to go through the slides pretty quickly just to hit someig of the highlights and talk broadly at the end about some thoughts on civic reduction. i think we hope to leave lots of time for discussion and questions. okay. there's aa sense the usual slide from cbo. this one shows the deficit the y axis as usual is percentage of gdp. there are some things are known and familiar. and that's the depths is a wide the next slide will be debt that will also be familiar. going to take out some highlights here.

the deficit is wide in the economy is doing reasonably well for that is what is unusual for repass the pandemic the physical response of the pandemic is mostly behind us there's at s least going out of course. the emergency 2020 physical response is largely behind us. this is a case before the pandemic as well. you can see on the chart just before the pandemic spike and the deficit in 2002 had a structural deficit. the economy was strong people thought incomee distribution wee seen rising income. we have a structural deficit. that's both familiar yet different. it's different than the large deficit we've had in the t past. the other thing you can see in the chart as a rising share of net interest outlays in the deficit.

undress has come up a bit on the future could go back down. we all know know about the argument. the challenges are minus g will help some of that was the prime primary deficit. the primary deficit is no longer moderate is not set to be moderate out into the future. we are working now pretty sure of the late spring. there will be new numbers. we'll talk about the fiscal numbers and things that are already public. i'm not going into the analysis. the bottom line is the next update is going to show a wider

deficit. the - things we know already tht make the situation or senate looks. this p is already pretty diffict but it's probably worth -- it's worth it. showing the debt to gdp ratio. i promise it doesn't get better if you go past 30 years. we have what we call the two and 50% problem which is some point debt to gdp ratio can actually high enough value you have to look at it and say it really is that meaningful at that point? we decided to truncate our white axis. this assent habit. some have a few negative shocks

than you can get a debt to gdp ratio as a shock to the numerator and denominator that being worse being lower for the nominator being worse as well. then you really phase 250% problem. there is more debt and high interest rates and update to the rules workbook at the spreadsheet on our e website use that essay help make changes to the baseline. generate to the economics. i do that you can show 50 basis points of higher interest rate. the yield on that 10 year treasury is 50 points higher than what had in our last

forecast period from december of last year. comes up to an increase in the deficit of more than $1.6 trillion of the next 10 years. it just gives you the indication the sensitivity we have and the risk of a worse fiscal outcome. i should say i'm going to talk a lot about dollars. $1.6 trillion which make sense policyns makers think a nominal dollars. we try to speak both languages. alll right, let me briefly divet into good news and it's not always a people get these days. this is a chart that shows the change in tenure deficit outlook

from the prior baseline from 2023 baseline throughput out in february of 2024. the deficit that went down. there's a variety of changes in there. the biggest improvement came about because the fiscal responsibility act that was enacted by congress. he was signed by the president last year. that is reduce discretionary spending subsequently legislation with certain adjustments. by statute's projects for discretionary spending. we make no assumption when future congress would do by statue mechanical rule projecting discretionary funding forward. using that mechanical rule that gives you the legislative changes.

2.6 trillion. it was 2.5 of it. there are other changes were technical changes. a large part of that is re- estimated cost of the green tax provision in the 2022 bill. that work was done by taxation the rate estimates were also done by the joint committee on those costs that were done as originally estimated. but from baseline to baseline there is an, improvement. what is not in here? there's a whole list of things that are not on projections you can see one already. we recently enacted a security supplement about $95 billion to ukraine, taiwan and israel. that was enacted after

february 24 numbers were locked down. added to the 24th deficit. that will be projected forward into the future. that rise with inflation. mechanically we know the next baseline update that we publish in june will show eight wider deficit productive future congresses to decide whether to turn that into it. >> good. this is the good news slide. we can come back to good news. this is also some fiscal good news. this shows the labor force again comparing may 23 baseline to february 24 baseline. there were demographic projections and economic projections are at the foundation of the budget baseline. this shows it important change

we made in the projections. there is a sense in which the change of the past due on the update toward the end of last year we realize there is a disconnect the numbers from dhs the department of homelandom securityty on the number of immigrants released into the interior. those d numbers seem to be disconnected from that the population statistics we get with census. this is not a criticism at all of census. demographic update ofn the surge of immigration has a huge impact on the economic projections and therefore on the fiscal

projections. this is just one view of it. look at the change in weight workforce since there were additional workers in the labor force or the budget horizon the 10 year budget window. i should say in our projections if surge of immigration going from 2022, when it started, through 2026. we actually do not know when it is going to end. what is the basis thank 2026 was a little bit of we are not sure. there are many factors behind the surge conditions here, conditions and the source countries. regulatory decisions, social media, lots of things. it is something we are going to have to keep watching and keep our eye on and see how long immigration surge goes. now there are many impacted tgraduation. but we have in our budget baseline is a relatively narrow

view of immigration is the cbo view. our job is the federal budget. there o is of course enormous impacts of state and local government from the surge of innovation. that is notra in here for that s not in this chart is not in our budgetary statistic. we're certainly aware is a politically is important if you live inrt denver, local governmt or local civic groups in denver for example is very important to you. i would to servicing is not in here. did he think not in your meeting in the slides and show how the impact on discretionary spending. things like the border patrol for example is funded by discretionary spending. cboo has a beautiful view about

what a future congress will do as far as providing resources to agencies funded by discretionary spending.. again thus not in the budget baseline immigration surge results in more discretionary spending in the future trade that will be additional costs congress enacts it. so let me tell you what we do have in here. of course is the macro. the gdp impact and the surge of immigrations means it larger labor force that is what shown in the chart. that contributes to gdp. our initial talent for it we did for the february baseline 7 trillion-dollar impact is that nominal gdp over the budget window. that translating according to our models inch of out of trillion dollars of additional revenue again over the budget window. some of the outlay impacts are

already in the budget baseline. i think that the tax code is a delay in most immigrants and eligibility for many of the federal benefits. everything to the tax code is ag immigrant coming through. that someone coming through humanitarian parole. they generally have work authorization. many get at six months and many others soon thereafter. someone who gets eight federal benefits of the tax code with a separate tax benefit from insurance or a tax credit. that's in the baseline already. that is what we have got. other things we are working on now. have a multiyear period for before they are eligible for certain benefits. for example medicated there is generally a five year waiting period for many immigrants come

to this sort before they're able for most benefits there are certain emergency ones you have a reimbursement sooner but for the most part there's a five year delay. that varies by the type of immigrant meaning which program they come in and then which should benefit. that's the work we are doing now i am hopeful we will have in the baseline and put out lots of material with that is what the outlay implication? i'm sorry the surge in surgeon immigration for the outlay impacts of the surge of immigration. just to say a littlee about the process, if you think about it what is the cost? is that the cost of medicaid to an emigrant seven years from now? or immigrant who arrived in 20226 years after in 2028. we have to know what is the

income of that immigrant because medicaid is a means tested. you also have to know which state they are in because the eligibility varies by expansion and non- expansion states in the affordable care act. that's the work we are doing is making projections going forward from 2022 goingrw forward. over the income impacts the distributional impacts of the search of immigration but working on the productivity and the immigrants will start companies but they will learn. we are looking at that part would look at the impacts on gdp and on inflation. and immigration affects supply and demand. affects labor supplies i discussed it also affects demand. absolutely type labor market but contributed to demand.

we aren't looking at the balance between those two. >> a few last remarks. this is a long-term budget outlook. the changes in the composition of outlays over the next 30 years from 2024 to 2054. can the top chart is a mirror of the first chart i showed on deficits. that showed the rising importance of net interest outlays. this shows you the same thing but over 30 years. it's a 30 year horizon increasing share over federal outlays. it's projected to be net interest outlays. again i said before more debt, higher interest rates is more net outlays in our calculations' the increase. not just your big dollar

increase over the 10 year budget window is about two thirds from higher eight and one third from more debt. >> good. that's thehe top familiar with y first chart but knew is that rising share of interest outlayn after a long period in which interest rates were low and policymakers did not worry about as much about the float cost of the debt. in the bottom of the chart shows again i think this is familiar. but it is still worthwhile to see. you can see at the very bottom major healthcare programs a lot is medicare, medicaid, subsidies for the affordable care act and other things in there. both the population in strong cost growth and health care.

and then social security. socialseur security is the bulkf the increase of gdp is in the next 10 years. and then at moderate that's what increase their over a 30 year horizon is smaller. >> okay. i have a couple other charts. i'm going to say it one on this chart s and skip back to my firt chart and make some general remarks and turn over too alan. this look that population growth this is again for the demographic outlook. the point i want to make is that orange spike you can see the immigration surge through 2026. from 2040 on the net population growth in the u.s. has projected entirely fromfr immigrants given the fertility rates we projected 1.6 and now we projected to go up somewhat silt to remain at

much lower than it was. okay i'm going to skip over my last chart is on the website about gdp. let me close with a few broad points. my budget situation is daunting. there is a sense in which it is yet more difficult than we show under budgetary projection. i'll tick through some of his horeasons quickly. of next year. jct has estimated that extending just the individual income tax revisions, the ones that expire, 3.8 trillion dollars over the next 10 years including the interest costs on the provisions and the key line, that's in the budget window that goes through 2034.

of course, if legislation is enacted next year, well, then the budget window will go to 2035 and that 10-year cost will be more. it will be one more year with the full cost and the year at the beginning that doesn't have the full cost. so, you know, we're already at 3.8 trillion dollars to extend the personal provisions of the 2017 act. and it's more than that. and of those dollars, more than half of them are for households with incomes below $400,000. even if they want to extend part, it's still very >> i mentioned beforech that our projections by law showed discretionary spending increasing with inflation but that means that discretionary spending in that they find declines as a share of gdp. cbo, cbo makes no normative

judgments. what the policy is how much spending on the bored patrol, homeland security, on education on housing, national parks, all ofpa these things. if future congress decides that discretionary spending should keep pace with nominal gdp rather than declining that would decrease deficit by more than $3 trillion over the next 3 years. monthly budget review, monthly budget review for april, cbo noted that the administration has announced that it will record credit reestimates in 2024 of more than $100 billion, that's $74 billion for student loans and $33 billion for loans from the small business

administration, 100 billion from the deficits. we don't know what future credit reestimates will come. those could be from policies tthat were previously nuanced bt nott fully modeled. there could be changes for haeconomic conditions, cost of future policies. petroleum reserve, those have not been recorded. we expect those to be recorded over the next few days. we are not sure when. we will put them in our projections when they show up. the monthly budget review subject that health spending is running above what we had in our february budgetary outlook. so medicate from october to april, the first part of the fiscal year, are down by that 1% compared to same period of last year. health spending at least for asmedicaid is running above

previous projections because we expect to decline much more substantially thann that as people left medicaid following tend last march of the pandemic-era continuous coverage requirement. and we are also going to publish a comprehensive update on health insurance coverage and that will have -- the high-watermark of insurance coverage between subsidies for policies on the aca exchange and medicaid continuous coverage. not much further ahead we have the social security trust fund exhausted in 2023 within the budget window, there's multiple hundreds of billions of dollars so gap between resources available in the system andva te benefits that have been promised, medicare is not much further behind since the fiscal

is daunting, i left the debt to gdp chart on the screen for a variety of reasons i've gone through is that the numbers are yet more challenging than what are reflected in our most recent projections. we'll have new projections coming out in june. >> all right. so i'll skip ahead. okay. perhaps this is gilding the lily, given the tenor of phil's comments, but this is mine. i'm starting from the, you know, the base of information you get from what cbo produces

and what phil said and phil has covered a little of what i was going to say. as he said at the end, things are-- daunting is probably an optimistic way of describing the situation. i'm going to highlight things of my comments in terms of thinking about that. when we look at-- we hear everything that phil said, but when we look at the picture that he had up at the end of the debt rising smoothly, we sort of forget that projections always are smooth and myth is never smooth and should tell us something about the future. so, the first thing is to highlight what phil mentioned about tax cuts and jobs act. and so this is from a recent-- from last week, the document they updated estimates that cbo produced of the cost of extending the provisions of the tax cuts and jobs act.

if you add it all up, not just the individual provisions, if you add it all up, it's about four and a half trillion dollars and if you look the at national debt projected in the cbo baseline through 2034. this would represent close to a 10% increase in the national debt relative to the baseline. so, this is not a small difference. and we need to keep in mind, as phil pointed out, that the difference of opinion in washingtons in terms of what to do about the tax and jobs act, isn't should we have a tax increase or extended tax cuts, it's what fraction of the tax cut is going to be extended, more than half or all? and you know, in recent histories, when there are differences of opinion in washington, everybody can agree on a tax cut.

and so i think regardless of the configuration of government after the election, i think you need to expect-- we should expect a substantial tax cut, at least measured relative to the baseline. and so that's already going to put you well above the cbo baseline holding everything else. the second thing i wanted to focus on is immigration. and i borrowed two of the slides that phil showed you here. the only difference between the version he showed you and the version i'm showing you is that i've highlighted some of the text. and having to do with immigration. the fact that this -- there was a big surge, unexpectled, in a couple of years ago, a big surge in immigration, that's been happening and it's really, you know, we were wondering for a while, you know, as we were thinking, well, the economy is

at full employment and we're hitting 200,000 jobs a month, where are all of these people are coming from, now we have some idea. we've had a big surge in immigration. it's basically allowed the economy to continue growing much more quick than we were anticipating a years or two ago and even being at full employment we've had much more rapid growth than one would normally expect under those conditions. and the other aspect of this is, you know, again, all of this going forward, all of this projected to the extent that the population is relatively stable, all the growth we're going to get in the population is coming in immigration. given the low rate of per filth -- fertility and negative population.

and i've highlighted here in the green box the period just before the pandemic to remind you that the circumstances regarding immigration were quite different at the end of the teens under the previous-- under the trump administration and it's pretty obvious that whatever a second biden administration would do regarding immigration, which is hard to predict, a second trump administration would have much lower immigration. i mean, that's not a secret. and so if we imagine immigration not simply getting over the surge as is being forecast here in the cbo baseline projection, but going back to where we were in 2018, 2019 in terms of the rate of immigration, i mean, i think that's what you could predict, and who knows, perhaps even in a second biden administration given that there have been

cross-currents even in the current administration about immigration policy and i think that that is-- would have very big effects on the economy. you know, we're clearly not going to have the kind of growth that's being projected if we have a sharp clamp down on immigration, and the fiscal implications are more complicated because you know, there's costs and benefits to this in terms of additional immigrants, but i think largely, in terms of economic activity, largely negative to the extent that we have a big decline in immigration. obviously depends on what happens to the composition of immigration as well. interest rates. phil alluded to the fact that interest rates are going up. these next -- these next two pictures come from the paper i did with bill gail recently.

the national nominal government interest rate is just based on looking at cbo's projected interest divided by the projected debt. not the rate of any given one, but prediction the average would be on the debt the next 30 years and then you have the growth rate of gdp and as phil mentioned, the i think we have been focusing on a lot in recent years is the difference between the interest rate and the growth rate. and under the -- this most recent baseline projection, cbo has us going for many years more with the interest rate below the growth rate which all other things being equal is a positive saying in terms of the rate at way debt accumulates. high primary deficit will

overcome this in terms of the debt, but worse if the interest rate exceeded the growth rate. in terms of where we're going, phil talked about the spring of 2023 and spring of '24 largely due to reductions in projected spending. this was the bad news in the change which was the increase in the interest rate being projected going forward. this year, relative to last year, which is higher. but the other thing to keep in mind, and what, you know, to look for in the next version of the cbo baseline is this, which is this is the market year on 10-year treasuries since the beginning of 2024 until last week. and it's really gone up substantially. now, of course, 10-year yields are only one component of the

interest of the debt service because of the shortage structure of the national debt, but this is obviously not going to be good news in terms of what the next cbo forecast tells us about debt service. it's going to be a lot higher. taking-- of course, taking into account, also, the fact that government spending is going to be higher because the cbo baseline is just generally very optimistic about what is happening to discretionary spending and as phil mentioned in recent weeks, we've had two major shocks upward in the defense bill and in the-- and in student debt relief. and one has to assume that more of the same is coming in both of those areas, if not in other areas as well. and that's going to make discretionary spending, the discretionary spending over the

next several years much higher than it's projected in the recent cbo baseline. the other-- the final point i wanted to make has to do with shocks and that smooth projection which you see here. so, here is historical debt to gdp and the projections, it's a different color, but it's basically the graph that phil was showing you in the debt to gdp ratio and i wanted to make an observation, which is, if you were to describe sort of what shocks to the economic situation caused the debt to move significantly, it's -- you know, you would describe the path here as one where in good times, at least since the -- you know, the early 2000's so you look at the last 22, 23 years, you know, since the end of the dot-com bust recession, and in good times, the debt to

gdp ratio doesn't start to move very much. you might have hoped that it would go down with good growth and no negative shocks and that would have been true in the 1950's, but since there's so much underlying push upward through entitlement programs, for example, that keeps you from gaining any ground and so, the debt to gdp ratio, in good times in full employment just sort of stays constant. and when you have a recession, things really go badly and you know, our last two recessions admittedly were not garden variety recessions,neither of them, we've had sharp increases in the debt to gdp ratio, after each one, debt to gdp ratio just stays constant after that and then you have a shock and then stays constant. so you might think that things can be worse than projected, things can be better than

projected. and given that those things would sort of balance, that the trajectory that the baseline is showing of the debt to gdp ratio is going up is a good guess. i think that's wrong. i think the way you think about it is if things go well, remember, cbo doesn't project-- they don't predict recession. so that rising debt to gdp ratio that's good times, that's not average times. that's good times. if that happens we're not even going to be staying constant the way we have after recent recessions. the debt to cbo is going up. it going up or going up a lot and those are the two possibilities and given that, still may need to rethink that ceiling of 250% for his graph

because otherwise he's going to have to a footnote explaining why the end of the series is cropped from the picture. >> thank you both. right now we'd like to take questions from the audience for the next nine minutes and then we have a hard stop at 9:50. >> your graph, going back to the '90s surplus, showing the surplus under zero and interest. >> yes. >> beside taking that surplus all wrong, political and trying to find a way he could find a trillion dollars. where does all of this interest come from in the '90s while the surplus is there? i have a lot of political stuff on that. >> oh, sure, sure. >> so you know, since it's

budget arithmetic, even as the debt to gdp was going down in the second half of the '90s, there's still debt, there's still, you know, interest rates and we still had net interest outlays, so it was still there just much smaller, the share of gdp. but maybe this is-- i'm sorry, that's the-- the more substantive response is had that scenario been played forward, you know, had you know, the deficit essentially gone to zero or negative, then the net interest outlays, of course, would have gone smaller. at any point there may have been some federal debt or outlays, but-- >> (inaudible) >> it's an important point that i think it goes with what alan said, also, just the difference in outlook from the

2000's. and those are the charts that you started in 2000 and you skip the really good years of -- the fiscal years of just before that. thank you. good question. >> i see rich. >> can you talk more about the 250% problem? what makes you latch onto that number and not something smaller and i mean, is there any sort of research that suggests that that's the sort of tipping point? i mean, people -- like japan, i think they're above 250 and say, well, 250 may not be a problem, but anyway, just expand on that a little bit? >> maybe i'll say a little. >> at the very end when alan-- when he finished with that, i think in my head, well, you

know, whatever the footnote that he suggested, we could put that in japanese or you know, it's not belgian, it's flemish or french. you're right, there's no hard and fast point at which the debt becomes impossible at which market will look at it and say, that's it, that was the straw or the piece of legislation that made me give up and the u.s. is in an enviable position, certainly compared to the rest of the world. so the 250% is not -- you know, it's not a normative statement as with all things cbo. it's just a, now, the idea is that at some point, we have to think about what our models are telling us, as you know, the debt rises and the carrying costs of the debt rises and we haven't gotten there yet. we haven't thought it through. we will and you know, something we're thinking about, but

that's all it is, it's just a-- at some point we know we need to think about things differently, yeah, actually i was going to say-- one last word and now on the y axis that sometimes when people don't start the y axis at zero, that's how to mislead with your charts, and sometimes, cbo we do it and we always put these like checks, i think the word on the axis to indicate a break, but i think that's something we might be thinking about in the future. >> i want to add two quick things. first of all, from japan especially, you need to be careful between the difference of the growth and the net debt. japan has-- all the numbers that phil showed you are a net, net, that's publicly held debt and i think in japan a larger share is held internally within the government. so, it's still much higher than it is in the u.s., but i don't think it's quite as high as

sometimes suggested. the other thing i wanted to say about all of this, in terms of where it ends, i usually think of the, quote by rudy dornbush the named economist, crisis take longer than you expected and then they happen faster than you expected and that's not very helpful in terms of talking how far we can go, but i don't think one can be sanguine about things being calm, that it will take a while for them to unravel bec unravelling, they can unravel pretty quickly. >> and i'd like to add one more sentence and the next question. we could be in the other direction, just have some good news. if there's something that gives markets more confidence, i suppose we could have the opposite of rates going down, if markets are just in a sea of some sort of deficit. >> i guess i would take a little bit-- i think one of the things causing the interest rates to

go up, in fed terminology, the fact that our star was higher than a couple of years ago, the national rate of interest where the fed is going to be setting the federal funds rate to keep it, and have a noninflationary position and we were thinking a few years ago, we were thinking about secular stagnation and the big decline in the national rate of interest what the fed calls our star, i have a sense that there's a general consensus in the profession na we probably overdid it in terms of thinking that it declined and so, certainly true that confidence and fiscal responsibility would help keep interest rates down. but i don't think we're going to get as much of a bonus from low interest rates as we got a few years ago. >> and two, here and then in the back. >> a question. you showed a chart on 2017 and

large deficit as a result and talking about whether 50% of that -- i know the republicans argued that the tax act generated revenues. is this the dynamic or constant chart that shows those additional revenues. can you explain that? >> i'm glad you asked that. so, in 2018. april of 2018, cbo published analysis of the 2017 tax act that included that dynamic analysis. and it-- that analysis showed that about 20% of the -- you know, the cost of the tax reductions was offset by the dynamic, you know, the positive dynamic

feedback, so the improved incentives present stronger gdp growth that flowed back into revenues. so, you know, in cbo's analysis, the tax act didn't pay for itself, but there was positive feedback and the initial impact on the economy seemed to match what was in the cbo analysis, business investment, accelerated early in 2018, you know, the challenge had been, you know, there was a series of trade policy actions that had the opposite affect on business investment and so of course, the pandemic and then, you know, the period of very high inflation starting in 2021, and since we tax nominal income basis, high inflation, number of nominal dollars of revenue will be high and reflects inflation and not the tax act. and so, is that the challenge, we know there's a lot of interest in dynamic analysis and we're working at cbo to be

ready to analyze that and of course, we'd follow the house rules, but we will do, you know, we will do much of more of this dynamic analysis as there's, you know, legislative proposals to, you know, regarding the 2017 act. >> and 20% of the tax cuts came back-- that's right, i'll repeat the question. what he said was our analysis showed that about 20% of the cost of the tax cut was offset by the stronger revenue generated at the time. that's right. >> and making assessment to what the effect on the economy was overall with respect to the tax cuts. >> that was based on our projection at the time of the tax cuts. you know, we haven't gone back and-- we've de