How the Fiscal Cliff Deal Cured Washington’s Fuzzy Math Epidemic

As public policy, the fiscal cliff deal has few merits to recommend it. But it does have one positive political consequence that has mostly gone overlooked: It substantially narrows the gap between the policy commitments we have made and the way the budget process officially presents them. Americans can finally have a cleaner—if not necessarily more productive—debate over what to do.

Understanding why is somewhat complicated, but worth the effort. The Congressional Budget Office is required to prepare “baseline projections” that reflect the provisions in current law, some of which are permanent, others which are time-limited. This procedure works reasonably well as long as the temporary portions of current law can reasonably be expected to expire on schedule. In recent years, however, that condition has been violated: Congress has treated many tax and spending provisions as temporary while fully intending to extend them before they lapse, generating a yawning chasm between the baseline budget and political reality. This increasingly pervasive strategy has enabled all sides to conceal the long-term costs of their commitments, enabling them to postpone tough choices.

In response, CBO has taken to preparing what it delicately calls an “alternative fiscal scenario,” based on the assumption that many allegedly temporary policies will continue indefinitely. Take, as an example, the CBO’s most recent budget and economic outlook for the coming decade. In addition to considering the consequences of current law, it lists existing policies that are scheduled to be phased out, but whose continuation would most affect the budget and the economy: the ensemble of laws, including the Bush tax cuts, that were temporarily renewed after the 2010 mid-term elections; the sharp reductions in Medicare payment rates for physicians (the annual fiscal remedy for which is known as the “doc fix”); emergency extended unemployment benefits; and the 2 percent Social Security payroll tax holiday. It also took into account the automatic cuts (i.e., “sequestration”) created by the Budget Control Act enacted in response to the 2011 confrontation over the debt ceiling;

The baseline projections and alternative fiscal scenario generated sharply contrasting estimates for the next decade. Under the baseline projection, which assumes a return to Clinton-era tax rates for everyone and the implementation of sequestration, the budget deficit declines sharply from $1.1 trillion in 2012 to $213 billion by 2015, the cumulative deficit between 2012 and 2022 is only $2.3 trillion, and the ratio of debt held by the public to GDP falls during that decade from 72.8 percent to 58.5 percent. Under the alternative fiscal scenario, by contrast, the budget deficit would dip only slightly by 2015 before resuming an inexorable rise; the cumulative deficit would amount to $10 trillion; and the debt to GDP ratio would soar to about 90 percent.

The bottom line is this: the features of the tax code that the fiscal cliff deal makes permanent closely mirror the assumptions at the heart of the alternative scenario. That means that in the future, the baseline projections will be much closer to political reality, and every new proposal will be judged against a single standard that will be much harder to challenge. The accounting gamesmanship that made so much of the recent budget discussion impenetrable to the public will subside. Congressional hearings will spend less time jousting over dueling baselines. Participants may be no readier than ever to agree about whether we should increase or cut spending and taxes, but it will be clearer whether a proposal represents an increase or a cut. Politicians will be forced to spend more time debating substance rather than shadows. (The dispute that broke out between the White House and CBO as to whether the fiscal cliff agreement increases or decreases the budget deficit is a timely example of the obfuscation dueling baselines can create.)

The agreement averting the fiscal cliff renders the basic reality of our situation clear enough for busy non-experts to understand. Without substantial tax increases and spending cuts, the annual budget deficit will average $1 trillion during the next decade, and our debt burden will move into what many (but certainly not all) economists regard as the danger-zone. Congress and the people will have to weigh these consequences against the sacrifices required to avert them.

One thing is clear: this debate is just beginning, and it won’t end anytime soon. The fiscal cliff agreement does nothing about the debt ceiling, delays sequestration for only two months, and leaves the impasse over appropriations where it was. Republicans who found themselves on the defensive after November see an opportunity to regain the advantage in February. They will insist on deep spending cuts in return for an increase in the debt ceiling, while President Obama has sworn never again to negotiate under the threat of default. But if our leaders in Washington now fail to make progress, it will be harder to blame the failure on fuzzy math.