Under the Obama no-recovery, they will continue to deepen, and if it’s lucky the economy might even sputter. But who’s to say its luck can hold out?
Last week, the Congressional Budget Office (CBO) issued its long-term projections regarding President Obama’s new budget proposal this year. Those projections show even higher Federal spending, deficits, and debt than Obama’s budget confessed to just last month.
The CBO projects that President Obama’s deficits would be $1.2 trillion higher over the next 10 years than estimated in Obama’s budget released on February 1. Federal deficits over those 10 years would be almost $10 trillion ($9.761). National debt held by the public would double in just 4 years, from $5.8 trillion at the end of 2008 to $11.6 trillion at the end of 2012. It would almost quadruple to $20.3 trillion by 2020, $1.7 trillion more than Obama projected just last month.
That national debt in 2020, CBO further projects, will be 90% of GDP, which means the federal government will owe almost as much by then as our entire economy produces in a year. But it gets even worse. Total Gross Federal Debt, which includes such items as the debt held in the Social Security trust funds (real debt that will have to be paid in the future), would be over $27.5 trillion. That would be 122% of GDP.
That is well into the level at which national debt begins to sharply reduce economic growth for advanced, developed economies, according to a new economic study from Harvard University and the National Bureau of Economic Research, by Kenneth Rogoff and Carmen Reinhart. That study was ”based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances.”
The study concludes that developed economies with debt to GDP over 90 percent suffer median economic growth roughly 1 percentage point lower, and average economic growth almost 4 percentage points lower. And they are talking here about total gross debt. With long run U.S. economic growth at 3% to 4%, this means long term economic stagnation for America. Indeed, the Rogoff-Reinhart study shows that from 1790 to 2009, when U.S. federal debt is over 90% of GDP, U.S. economic growth averages negative 2%, 5 to 6 percentage points less than otherwise.
Long Term Growth: For the Deficit
The annual deficit by 2020 would still be well over $1 trillion ($1.253) and rising, according to the new CBO figures. It is going to be very difficult by then, 10 years from now, to blame that deficit on George Bush. But Barack Obama and the Democrats will still be trying, for sure. It will be even more difficult, however, because President Obama’s budgets will run up more debt over eight years than all other Presidents in American history — from George Washington to George Bush — combined, as Brian Riedl of the Heritage Foundation has shown.
Just for the record, the deficit for President Bush’s last year in office, 2008, was $459 billion. The deficit for the last budget adopted by a Republican-controlled Congress, for fiscal 2007, was $161 billion. The deficit this year according to Obama’s budget is $1.6 trillion. The question for President Obama, who was glad to take the office but not the responsibility, is not what he inherited, but what he did with what he inherited. And what he and Congressional Democrats did was turn a fiscal deficit into a fiscal and economic catastrophe for America.
By 2020, CBO projects that Obama’s budget would have increased federal spending relative to the economy by almost one-fourth, shattering a settled, stable pattern since soon after World War II. Federal spending will have almost doubled by 2020 since Bush’s last year, in nominal terms. CBO reports that President Obama’s budget adds nearly $2 trillion to already out of control entitlement spending over the next 10 years, one-third of that due to his health care takeover scheme. Despite the assumed end to the wars in Iraq and Afghanistan, and a resulting $300 billion reduction in defense spending, and President Obama’s much ballyhooed, supposed, discretionary spending freeze, his budget would increase federal discretionary spending by $500 billion over the next 10 years.
Moreover, CBO reports, net interest spending under Obama’s budget would more than quadruple over the next 10 years, to $916 billion for 2020 alone. That is 27% more than we spend today for national defense, and 34% more than the defense spending Obama proposes for 2015. It is almost the same as what the Obama budget would spend on Medicare in 2020. That effectively adds another entitlement program the size of Medicare.
Because of all this runaway Obama spending, America will suffer the above deficits and debt even with $2 trillion in tax increases Obama proposes for the next 10 years, including $750 billion for his health care takeover.
The Rosy Scenario
But all of this should be considered a rosy scenario, compared to the harsh reality that is far more likely to result. Under President Obama’s tax and budget policies, federal deficits and debt are certain to be higher than CBO projects.
The first reason for that is that CBO makes no allowance for the counterproductive economic effects of the comprehensive tax rate increases President Obama proposes for every major federal tax. President Obama would increase the top income tax rate by 13% to start. He would also phase out the personal exemption and limit maximum allowable itemized deductions for couples earning over $250,000 and singles earning over $200,000. He would also allow itemized deductions to be deducted only against the 28% rate for those paying higher rates. This would increase the effective top income tax rate by another 3 percentage points, to 42.6%, for a total top income tax rate increase of 22%. The President’s budget would also increase the second highest income tax rate by 18% counting all of these increases.
The President’s health proposal would also increase the HI payroll tax rate by 0.9 percentage points on upper income earners. Together with the above changes, that would effectively raise the top tax rate by 24.3%, and the second rate by 21%.
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Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
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It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
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