According to Congressional Budget Office (CBO) Report on Thursday, President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020. US debt would top 101% of GDP by 2021, more than the value of everything produced in this country over the course of a year. By 2035, the publicly held debt, CBO says, could top an almost unfathomable 190% of GDP.
And that was the good news.
White House Office of Management and Budget (OMB) released this Feb. 1 projected a 10-year deficit total of $8.53 trillion. However, after CBO’s final analysis, released this Thursday, the Obama Administration’s budget would generate a combined $9.75 trillion in deficits over the next decade.
In a nutshell, the US federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it’s headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO’s deficit estimates. That is an additional $1.2 trillion dumped on generations – a $10,000 per household above and beyond the federal debt they are already carrying. This equals 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America’s debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year.
As scary at it is for the future of several unborn American generations, the report is exaggeratedly over-optimistic, for it doesn’t account for the effect of rising debt levels on interest rates and the economy:
CBO’s projections in most of this report understate the severity of the long-term budget problem because they do not incorporate the negative effects that additional federal debt would have on the economy, nor do they include the impact of higher tax rates on people’s incentives to work and save. In particular, large budget deficits and growing debt would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States. Taking those effects into account, CBO estimates that under the extended-baseline scenario, real (inflation-adjusted) gross national product (GNP) would be reduced slightly by 2025 and by as much as 2 percent by 2035, compared with what it would be under the stable economic environment that underlies most of the projections in this report. Under the alternative fiscal scenario, real GNP would be 2 percent to 6 percent lower in 2025, and 7 percent to 18 percent lower in 2035, than under a stable economic environment.
Rising levels of debt also would have other negative consequences that are not incorporated in those estimated effects on output:
- Higher levels of debt imply higher interest payments on that debt, which would eventually require either higher taxes or a reduction in government benefits and services.
- Rising debt would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, the effects of such developments on the economy and people’s well-being could be worse.
- Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices. To restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.
CBO gives us this conclusion:
To keep deficits and debt from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that medium- and long-term changes to tax and spending policies are agreed on, and the sooner they are carried out once the economy recovers, the smaller will be the damage to the economy from growing federal debt. Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations.
The report examines two different forecasts (both are significantly grim). The “extended baseline scenario” assumes, among other things, that the Bush tax rates will expire in 2013 and that the cuts to Medicare envisioned under Obamacare will actually materialize. The “alternative fiscal scenario” (i.e., the far more likely one) assumes that the Bush rates will be extended and that most Medicare spending will remain in place.
Under this second scenario, the CBO predicts “a positive effect on saving and investment from the lower marginal tax rates on capital [that] tends to increase the capital stock, output, and pretax wages compared with what they would be without the effect.
Michael D. Tanner , a senior fellow at the Cato Institute explains, “The US government has three different types of debt. Debt held by the public, which generated the headlines in the CBO report, is the type of government bonds that you — or the Chinese government — might own. Economists worry a lot about this type of debt because the government has to borrow the money from private credit markets. The government borrowing competes with investment in the nongovernmental sector, leaving less money available for private investment in such things as factories and equipment, research and development, housing, and so on. Growing levels of publicly held debt can drive up interest rates in the long-run, and may already be choking off interbank lending. But that’s not the only type of government debt. For example, there is “intragovernmental” debt, which is essentially debt that the federal government owes to itself, such as debt it owes to the so-called Social Security Trust Fund. If publicly held debt is like the money you borrowed from a bank, intragovernmental debt is like the money you swiped from your kid’s piggy bank. It may not be on your credit report, but you still have to pay it back. Today, intragovernmental debt exceeds $4.6 trillion. The good news here is that intragovernmental debt is not projected to grow much in the future. The bad news is that that is because both Social Security and Medicare are already running deficits — there’s nothing left to steal.
As if that’s not enough, there is also a third category of government debt: “implicit debt.” This represents the unfunded obligations of programs such as Social Security and Medicare — the amount that those programs owe in benefits in excess of the amount of taxes that they expect to take in. Think of it as bills you know are going to come in next month but haven’t been delivered yet. According to the annual report of the Social Security system’s trustees, that program’s unfunded liabilities now exceed $18 trillion. Medicare is in even worse shape. The most recent estimate of its finances, also released this week, warns that Medicare owes $36.8 trillion more in benefits that it is expected to be able to pay for. And that is the optimistic outlook: It assumes that all the projected savings from President Obama’s health care reform actually happen as promised, something that even Medicare’s own actuaries are deeply skeptical of. If those savings don’t materialize, Medicare’s debt could actually top $90 trillion!
Add it all up, and total US debt actually exceeds 900% of GDP. That’s somewhere in excess of $120 trillion. We are beginning to talk real money here.” Tanner hammers.
When Democrats talk about revenues needing to be part of the solution, for them to really be part of the solution, taxes as a proportion of the economy would have to exceed record levels. Their idea of revenue is raise taxes.
The US problem is on the spending side. As a result of the Bush/Obama spending boom, federal outlays soared from 18.2 under President Clinton to 24.1 percent this year. With no reforms to entitlement programs, outlays will be 33.9 percent of GDP by 2035, which is 86 percent higher than the Clinton level.
In President Clinton’s last year of 2001, revenues were abnormally high at 19.5 percent of GDP as a result of the booming economy. Over the last four decades, federal revenues as share of GDP have fluctuated around about 18 percent of GDP. The tech boom a decade ago helped generate large capital gains realizations. CBO data show that capital gains tax revenues were $100 billion in 2001, or 1 percent of GDP (see page 85). By contrast, the CBO expects capital gains taxes to be $48 billion in 2011, or just 0.3 percent of GDP (see page 93).
In 2011, revenues are way down because of the poor economy. Some people complain that the Bush tax cuts drained the Treasury, but note that revenues were 18.2 percent of GDP in 2006 and 18.5 percent in 2007, when the economy was growing and the Bush cuts were in place.
So how will Washington fix this? Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China. Most of the U.S. national debt is made up of publicly marketable securities sold by the Treasury Department and I.O.U.s called “intragovernmental” bonds that the Treasury has given to so-called government trust funds—such as the Social Security trust funds—when it has spent the trust funds’ money on other government expenses. Recently, China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.
“Republicans should not fall into the trap of reflexively defending every special-interest loophole in the tax code. But neither should they be seduced by the argument that we need a “balanced” approach to deficit reduction that includes tax increases. Government is too big, too intrusive, and too expensive. It doesn’t take more taxes to fix that, ” Tanner points out.
Looking at the USA these days is like watching a movie called The Fall of the Roman Empire. We suggest to have your caramel popcorn handy as you watch this US National Debt Clock with the rest of the world.
One wonders how the American people feel and what they will do about this “good” news. Sounds like a deep house cleaning is in order.
AUTHOR: Lady Michelle Jennifer Santos, Founder & Publisher
The views expressed in this article are the author’s own and do not necessarily represent The Santos Republic’s editorial policy.