Graphic by CBO
Doug Elmendorf has a lot on his mind these days. As director of the Congressional Budget Office, Elmendorf is responsible for reviewing and analyzing all the budgets and legislation making their way through the 112th Congress while at the same time keeping an eye on the health of the nation’s long-term fiscal situation. As Congress has become increasingly divided, Elmendorf sees the challenges of his office escalating and concern begins to creep in.
“What I worry about most is that our political system needs to come to grips with this fundamental choice of whether we are going to let taxes rise relative to what we are used to in the past or cut spending on the big, popular entitlement programs or some combination,” Elmendorf said at a gathering of reporters organized by the Christian Science Monitor.
The most recent CBO projection shows a drastic shift in long-term projection based on the ability of Congress to successfully navigate its way around the edges of a fiscal cliff. Under the best-case scenario, the government’s debt level would gradually decline over the next 25 years, eventually reaching a level just over 50 percent of GDP. The alternative scenario shows the nation’s debt level rising to almost 200 percent of GDP.
Elmendorf readily admits, however, the fulfillment of debt projections depends on factors outside of congressional control, such as the Federal Reserve and the world bond markets.
“We don’t know what level of debt the country can sustain,” Elmendorf said. “There probably isn’t a particular number because it depends on people’s expectations of what would happen and their sense of the will and ability of the political process to control fiscal policy.”
Further complicating the CBO’s projection is the uncertainty facing households and small businesses. The Federal Reserve issued a report showing the median net worth for American families has declined since 2007 and an analysis by Peter Coy of BusinessWeek shows family net worth to be at the lowest level since 1992 (these numbers are adjusted for inflation).
Graphic by Reuters
“The most important source of uncertainty for individual households and businesses right now is about their income or demand for their products, it’s an underlying economic uncertainty,” Elmendorf said. “But we think uncertainty about the course of public policy is an additional source of uncertainty that matters.”
Whether Congress can overcome an all-time high of polarization and partisanship and pass legislation to achieve a resolution to what many warn could be impending fiscal doom remains to be seen, but Elmendorf says he is optimistic about the shape of the American economy.
“We do see the underlying economy gaining strength,” he said. “So apart from the changes in fiscal policy, we would expect strengthening of the underlying economy.”