This article first appeared at The McAlvany Intelligence Advisor on Wednesday, February 4, 2015:
When the Congressional Budget Office issued its Budget and Economic Outlook 2015 to 2025 in January, few could be bothered to do a serious review of it as it seemed to contradict the present meme of the Goldilocks economy: job growth accelerating, interest rates low, consumer confidence improving, deficits shrinking, and so forth. Even those taking the time to look at it, scoffed at its conclusions. Said the CBO:
The federal budget deficit, which has fallen sharply during the past few years, is projected to hold steady relative to the size of the economy through 2018.
Beyond that point, however, the gap between spending and revenues is expected to grow, further increasing federal debt … which is already historically high.
The CBO explained why:
Spending will grow faster than the economy for Social Security, the major health care programs, including Medicare, Medicaid, and [federal] subsidies offered through insurance exchanges, and net interest costs….
By 2025 the national debt is predicted to rise from $18 trillion currently to more than $26 trillion, and the annual deficits to exceed $1 trillion as far as the eye can see, according to the CBO.
Matthew Klein, writing for the Financial Times, however, called the CBO authors “boffins” (teddibly English pejorative for fuss-budgets) and rewrote their analysis, concluding that, from his view, things in the colonies were going just swimmingly and that the US economy would soon be showing a surplus! He concluded his riff of the CBO report with this:
It isn’t hard to imagine a scenario where the federal government ends with a budget surplus (emphasis added) thanks to a combination of a stronger economy, higher remittances from the Fed, and a shrinking primary deficit.
Klein is so far off the mark as to be laughable. Interest costs to service the $18 trillion debt as it increases to $26 trillion will quadruple from its current level of $200 billion to nearly $800 billion. In just five years, says the CBO, those interest charges will exceed what the government plans to spend on defense, as well as non-defense (discretionary) items, in less than six years, and be frighteningly higher than those two categories in less than ten.
In addition, the mandatory programs – Social Security, Medicare, Medicaid, ObamaCare, etc. – will double from their current level of $2 trillion to $4 trillion by 2025. But, according to Klein, there’s nothing to worry about. Remittances from the Fed’s holding its $4 trillion of manufactured paper will magically make those deficits disappear.
Two other commentators who write for The Wall Street Journal, Nick Timiraos and Josh Zumbrun, were only slightly more realistic. Zumbrun, a former Federal Reserve reporter for Bloomberg and a Washington correspondent for Forbes, said the budgetary pinch is just around the corner:
Defense and nondefense discretionary spending will be squeezed. Anyone who doesn’t want to see that happen in the next decade needs some combination of higher revenue, much faster economic growth, or cuts to entitlement programs.
Unfortunately none of these three solutions are in the offing. The American taxpayer has had his way ever since 1981, demanding that the federal government take no more than 18 percent of the country’s economic pie to run itself. The only exception to that rule was in 2000 when the government absorbed 20 percent, but pressure from taxpayers resulted in tax cuts that brought that percentage down to a near-record low of 14 percent within five years. It’s safe to surmise that US taxpayers remain resistant to strains of higher taxes, if based on nothing more than the scorn heaped on the president’s latest bid to do precisely that.
As far as growing the economy goes, the Fed has been “goosing” the economy for years now, with precious little to show for it except bubbles in the stock and bond markets.
And for cutting those “mandatory” programs, they have resumed their place as “the third rails of politics” by politicians: touch them and you die.
How long can this go on? After all, at some point interest rates will have to return to “normal” with budget-busting implications, won’t they? As recently as 2000, lenders were charging the US government more than 6 percent interest. With debt more than tripling (from $5.6 trillion in 2000 to $18 trillion today), shouldn’t interest rates already be climbing to reflect the increased risk of default?
No. Instead, interest rates have dropped to just 2.42 percent last year, making the funding of government deficits not only possible but manageable and, to spendthrifts like the president and his supporters, an irresistible temptation.
Isn’t the US turning itself into Greece? This suggestion was floated years ago and has been ignored as Greece has continued to shrink (it’s GDP has declined by a quarter during its seven-year recession) while unemployment has continued to soar, now in excess of 25 percent. Happily, compared to Greece, the US is vastly better off.
Can’t the US economy be compared to a family that has habitually overspent, using home equity loans and credit cards? Not according to Zumbrun and Timiraos:
A lot of people want to make this analogy between individuals and the government. Economists think this is a really bad analogy. The U.S. government is 238 years old and isn’t planning to retire one day.
If you were going to live forever, and bring in revenue forever, and issue bonds in money that you print [in your basement], then you’d have a much more similar situation.
But you don’t, and so the logic of personal finance [compared to government finance] doesn’t apply.
The two also pretend that governments can run deficits forever, defying the laws of logic, history, and simple mathematics. Wrote Zumbrun:
I don’t think … that governments ever need to pay off their debt…. The goal is for the government to [remain] a going concern. With that in mind, the only thing the government needs to do is hold its debt at a sustainable level. If your interest payments are stable at [say] 3% or less of the economy … there’s no reason you couldn’t carry this debt forever.
Even Standard & Poor’s has drunk from the same Kool-Aid can. Back in 2011 it downgraded US treasuries and put them a “negative” watch, explaining at the time:
The fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
Yet scarcely two years later S&P removed its downgrade, noting:
We are revising the rating outlook to stable [from negative] to indicate our current view that the likelihood of a near-term downgrade of the rating is [now] less than one in three.
So, concerns by the CBO that the US government is painting itself into an irreversible fiscal corner seems to be falling on deaf ears – ears that are much more inclined to celebrate the US’s escape from the Great Recession than to see the trouble just ahead.
Thomas Jefferson was right: “The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” That scale is now so large that most are willing to ignore it altogether, hoping it will go away all by itself, or by conjuring myths to explain why it will.
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Sources:
The Wall Street Journal: The Legacy of Debt: Interest Costs Poised to Surpass Defense and Nondefense Discretionary Spending
Economic Collapse Blog: Barack Obama Says That What America Really Needs Is Lots More Debt
The Wall Street Journal: Q&A: What the $18 Trillion National Debt Means for the U.S. Economy
Standard & Poor’s: United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative
Standard & Poor’s: United States of America ‘AA+/A-1+’ Ratings Affirmed; Outlook Revised To Stable On Receding Fiscal Risks
Financial Times: Will the US soon have a budget surplus?
Dave Manuel: A History of Surpluses and Deficits in the United States
The Congressional Budget Office: The Budget and Economic Outlook 2015 to 2025
Pejorative connotations of the word Boffin
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