This article was published by The McAlvany Intelligence Advisor on Wednesday, April 11, 2018:
All one needs to do is view the first page of the CBO’s 166-page report on its 10-year outlook for the U.S. economy and government spending that was released on Monday to see why: it features a graph that shows better than words just where we’re headed. Two lines diverge: one, showing government revenues; the other, government outlays. The gap, instead of narrowing, widens dramatically into the future. Unfortunately, the graph cuts off in 2028, leaving one wondering: what happens next?
The CBO report reflected the new law, happily called the Tax Cuts and Jobs Act, that was passed in December. Its previous projection, made by the CBO last June, showed a deficit of $563 billion for 2018, rising to $689 billion next year. Now, with the Tax Cuts and Jobs Act behind them, the CBO now projects this year’s deficit to be $804 billion and next year’s to be just a touch below a trillion dollars, at $981 billion.
The CBO, considered by many to be less partisan than projections coming from the White House’s Office of Management and Budget (OMB), covered itself with this disclaimer:
CBO’s projections, especially its economic projections, are even more uncertain this year, because they incorporate estimates of the economic effects of the recent changes in fiscal policy [the tax reform bill] – and those estimates are themselves uncertain.
Translation: we’re essentially clueless as to the impact Trump’s tax reform law will have in the future, and so “we formulate projections that fill in the middle … of possible outcomes.”
One outcome is certain: government spending is running away from government revenues, with no relief in sight. Consider: the federal government is slated to spend $4.1 trillion this year, with $2.5 trillion (61 percent) on entitlements (i.e., Social Security, Medicare and other “transfer” payments). In 10 years, according to the CBO, the government will be spending $7 trillion a year, with $4.5 trillion of that on entitlements. Put another way: entitlements will grow from $2.5 trillion today to $4.5 trillion in 10 years. That’s a jump of 80 percent.
The CBO didn’t use the words “unsustainable” or “apocalyptic.” It didn’t need to.
Every assumption it makes is of course questionable: the economy could grow faster than projected, or slower. Government spending could continue at its present pace, or it could accelerate. Trump advisor Larry Kudlow complained that the CBO’s estimate of economic growth was too low. In the out years, the CBO thinks GDP will average 1.8 percent a year. Kudlow would like that number to be revised upward to, say, three percent, or perhaps even four percent.
It really doesn’t matter. The “elephant in the living room” is entitlement spending, about which nothing is being said or proposed, this being an election year and all. Don’t want to frighten the sheeple. Boston University professor Laurence Kotlikoff isn’t afraid of frightening anyone: his words of warning have fallen on deaf years for years.
Kotlikoff’s creds are impressive. Apart from being an economics professor at Boston University, he is also a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, a former Senior Economist, and was formerly on President Ronald Reagan’s Council of Economic Advisers.
For years Kotlikoff has been telling anyone within earshot that the governmental accounting for its unfunded liabilities is borderline fraudulent. The trustees (love that word) caring for the Social Security welfare program have suggested that the Ponzi scheme is underfunded by $32 trillion (with a T). Kotlikoff, using what he calls intergenerational accounting, says it’s more than $200 trillion (with a T).
The graph missing from the CBO’s report is one showing how interest rates are shortly to take over second place (ahead of military spending) as the government’s largest expenditure behind entitlements. The CBO has projected Fed Chairman Powell’s plan to raise interest rates (the Fed Funds rate is currently 1.75%) to 4 percent by 2020. Dig deep enough into the CBO report and one finds that interest paid by the Treasury on its debt will quadruple by 2028, if not sooner.
As the CBO so eloquently concluded in its summary: “Federal debt is projected to be on a steadily rising trajectory throughout the coming decade … [while] after 2019 economic growth is projected to slow.”
One doesn’t need a graph to see what lies beyond 2028.
The Wall Street Journal: CBO: Fiscal Stimulus Will Widen Budget Deficits, Boost Growth in Coming Years
CBO.gov: The CBO’s complete 166-page report
St. Louis Fed: The Fed’s current balance sheet