Americans don’t need to go to the movies to see a horror picture
show. The Congressional Budget Office’s latest report on the
federal budget should scare everyone. Not that Washington seems to
have noticed.
For the fourth year in a row the federal government is running a
deficit in excess of $1 trillion. Yet President Barack Obama is
lecturing European governments on how to solve the Eurozone crisis.
He should be telling them what not to do: stop running up wild and
irresponsible debts.
That’s what the CBO opined in its latest budget report “The 2012
Long-Term Budget Outlook.” The document is a bit dry, but the
looming catastrophe it describes could not be more
frightening.
Explained CBO: “In the past few years, the federal government
has been recording the largest budget deficits since 1945, both in
dollar terms and as a share of the economy. Consequently, the
amount of federal debt held by the public has surged.”
Uncle Sam’s 40-year average debt to GDP ratio is 38 percent. At
the end of 2008 Washington was up to 40 percent. By the end of 2012
that number will be 73 percent, “the highest percentage since
shortly after World War II,” said CBO. The recession is responsible
for part of this rise but, explained CBO, “the growing debt also
reflects an imbalance between spending and revenues that predated
the recession.”
These numbers disguise worse news, however. CBO does not count
intra-government borrowing as part of the national debt. So when
the Treasury Department “borrows” money from Social Security, CBO
doesn’t count it, even though cash will have to be procured —
through more borrowing — to pay promised benefits to retirees. The
full national debt already is 100 percent of GDP, compared to about
84 percent for Europe.
But use CBO’s analysis. The long-term still looks truly ugly.
There’s the so-called “baseline scenario,” under which everything
goes “right” in the agency’s view. Then debt as a percentage of GDP
would fall to 61 percent in 2022 and 53 percent in 2037. That would
still be about 30 percent above the 40-year average.
Unfortunately, everything doesn’t often go right in Washington.
Of course, what is “right” for the CBO is not necessarily “right”
for the American people. Under this analysis the CBO figures that
taxes would go up dramatically — as a result of “Taxmageddon,”
with the expiration of the Bush tax cuts — which would push the
country toward a renewed recession. Even with the tax reductions
Americans would be paying a larger share of the GDP to the
government than the average over the last four decades. The
“baseline scenario” would have Americans turning over a much larger
share.
At the same time outlays would fall. A lot. As CBO explained:
“under this scenario, government spending on everything other than
the major health care programs, Social Security, and interest —
activities such as national defense and a wide variety of domestic
programs — would decline to the lowest percentage of GDP since
before World War II.”
Essentially CBO said: If only the tooth fairy would pay off the
national debt, the Easter Bunny would fund Social Security, Santa
Claus would take care of Medicare, and the Great Pumpkin would pay
for everything else, life would be fine. Unfortunately, all of
these are more likely than Washington politicians controlling their
appetite for legal plunder.
Yet that’s what would be necessary to save America’s taxpayers.
CBO observed: “Whether that debt will continue to grow in coming
decades will be affected not only by long-term demographic and
economic trends, but also by policymakers’ decisions about taxes
and spending.” Social Security, Medicare, Medicaid, and health care
expenditures all are expected “to continue rising faster than
spending per person on other goods and services for many years.” If
that happens, “those factors will boost federal outlays relative to
GDP well above their average of the past several decades — a
conclusion that holds under any plausible assumptions about future
trends in demographics, economic conditions, and health care
costs.” What a future.
CBO analysts really aren’t stupid or deluded, so they offer an
“extended alternative fiscal scenario,” which from a fiscal
perspective is essentially all bad news. Taxes wouldn’t rise
dramatically, but still stay above the historical average. Social
Security and Medicare expenditures wouldn’t be controlled. Health
insurance subsidies wouldn’t be restrained. Other outlays would
remain at historic levels, rather than falling dramatically. The
result would be not just unpleasant, but truly horrendous.
Explained CBO: “Under those policies, federal debt would grow
rapidly from its already high level, exceeding 90 percent of GDP in
2022. After that, the growing imbalance between revenues and
spending, combined with spiraling interest payments, would swiftly
push debt to higher and higher levels. Debt as a share of GDP would
exceed its historical peak of 109 percent by 2026, and would
approach 200 percent in 2037.” That’s using the agency’s discounted
debt levels. In comparison, Greece peaked at about 163 percent debt
to GDP.
Optimists might dream of living under the baseline scenario, but
the agency noted that “many budget analysts” believed the extended
alternative was much more realistic. Certainly that is what history
tells us to expect.
Unfortunately, rising outlays and debt threaten to create an
economic death spiral. Obviously, more borrowing means higher
interest payments, that is, more government spending. At the same
time, more debt is likely to increase interest rates, since lenders
will become ever more worried about Uncle Sam’s ability to pay back
the loans. Last year Standard & Poors downgraded Washington’s
credit rating and in early June threatened to do so again if
Congress fails to control spending. The result would be even higher
interest payments.
Moreover, warned CBO, rising red ink “would reduce national
saving, leading to higher interest rates, more borrowing from
abroad, and less domestic investment — which in turn would lower
the growth of incomes in the United States.” That is, because of
excessive government outlays Americans will earn less even as they
have to pay the government more. And there’s no logical stopping
point. As expenditures rise, the cycle will accelerate.
Which leads to an even more frightening prospect: financial
panic. Explained the agency: “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.” In 2008 Uncle Sam wildly bailed out virtually
everyone and everything — except taxpayers, of course. But if the
federal government faced a budget crisis, who would bail it out?
And if the American government tottered, what would happen to
weaker European states, highly indebted Japan, and other
nations?
In short, Americans are not just watching but living in
a potential financial horror show. Unfortunately, President Barack
Obama is one of the directors of the program. The CBO’s recent
separate analysis of the president’s budget reported that he would
nearly double the cumulative deficit between 2013 and 2022, taking
the “baseline” estimate of $3.5 trillion to $6.4 trillion. The
annual deficit would fall to “only” $488 billion in 2017, before
steadily rising to $728 billion in 2022. Total federal, non-Social
Security debt would rise to 76 percent of GDP.
Unfortunately, Republicans share the blame for the looming
fiscal disaster. President George W. Bush and the GOP Congress were
unashamed big spenders. Putative Republican presidential nominee
Mitt Romney promises to be tough on federal spending, but nothing
in his past behavior suggests that he takes this promise any more
seriously than he has treated the many positions he has cheerfully
tossed aside when he thought doing so was to his political
advantage. Believing that Republicans, if victorious come November,
will rein in Uncle Sam, is, like a second marriage, the triumph of
hope over experience.
There is little time left to avoid Washington’s looming budget
apocalypse. The American people must take control away from
politicians, irrespective of the letter after their name. Asked
Ronald Reagan in 1980: If not us, who? If not now, when? We must
answer these questions today.
