Class Four -- Thursday, January 7th, 2016

In today's class, we will first turn our attention to the economics of federal deficits and debt, as well as their measurement. For an introduction to the subject, read pages 141-155 of Fiscal Challenges: Chapter Five: Michael J. Boskin, Economic Perspectives on Federal Deficits and Debt, which describes different ways that policymakers project future deficits and debt. We will then turn to a recent paper by David Kamin that discusses different normative approaches in setting a budget "baseline"; please read the highlighted sections that discuss the purposes of budget baselines, and the different types of budget baselines. (For additional background on issue of dynamic scoring versus static scoring, see the D’Amico Briefing Paper on the topic included as background readings for today’s class.) Individual Assignment: For Today’s class, please write a short memorandum (2-3 pages) assessing the merits of Professor Kamin’s proposal with respect to budgetary baselines. Would you endorse his recommendation? For a practical application of baseline projections, please review Part 1 of the CBO's 2015 Long-Term Budget Outlook. What does the CBO believe the budget will look like in 50 years, and what types of assumptions must it make to reach these projections? As background readings – in addition to the briefing paper on dynamic versus static scoring mentioned above -- we have included several documents highlighting the complexities of longer-term budget projections. Scan the CBO's 10-year budget projection in 1998, which predicted surpluses through the 2000s. How did intervening geopolitical, legislative, and economic developments undermine the CBO's predictions for future surpluses? Part 7 of the CBO's 2015 Long-Term Budget Outlook discusses the assumptions that the Office must make today in order to project spending and revenue out to 2040. (Part 7 can be accessed through the link to Part I of the report, assigned above as part of today's core readings.)