We are doomed or ‘The new normal’

Matthew Hoy
By Matthew Hoy on January 30, 2011

The Congressional Budget Office released its 10-year budget outlook last week.

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021.

To summarize that for the mathematically challenged: We are hosed.  The current national debt is $14 trillion and counting. Fiscal year 2011 adds $1.5 trillion onto that and the we continue adding to it, but at a lower rate, for the rest of the decade. By 2020, at the current rate, the national debt will be 76 percent of GDP. In 2008, it was just 40 percent.

And it gets better, from the Committee for a Responsible Federal Budget (an organization forever to be tilting at windmills):

Also of note, this current law baseline comes with the standard disclaimer: even these bad deficits are extremely optimistic. CBO must assume no changes in current law, so it assumes that all provisions of the tax cut act expire in 2011 or 2012 accordingly, that Medicare physician payments will face a 28 percent cut in 2012, the AMT will go unpatched and spending on the Wars in Iraq and Afghanistan will continue as they are currently, even with a withdrawel [sic] scheduled. Since all of these will most likely not happen, CBO thankfully provides the cost of these policies that would affect the baseline. We used these estimates to construct our CRFB Realistic Baseline. Under this baseline, deficits over ten years total $10.5 trillion and debt as a percent of GDP reaches 92 percent by 2021.

And then there’s entitlements. The CBO reported that Social Security is now officially a net cost to the federal budget, not a net surplus as it has been since its inception (the Social Security Trust Fund is a myth).

Previously, both the Social Security Trustees and CBO projected that there would be a few short years of surplus early on this decade, but that deficits would begin by mid-decade and continuously grow as the Baby Boomer generation enters into retirement. The Trustees projected total deficits between 2012-2021 would total $380 billion this past August. These projections exclude the interest earned on the existing balances in the trust funds--offering a better view at the program's yearly finances and its sustainability.

As you can see below, the balance projections just keep getting worse. In 2008, we thought Social Security would run sizable surpluses this coming decade. Boy, were we wrong. Social Security is never expected to get out of the red now.

You’d have to be Sen. Harry Reid channeling Kevin Bacon in “Animal House” to believe that “Social Security is fine.” Of course, President Obama isn’t any better. Obama explicitly rejected his own deficit panel’s suggestion that the retirement age be raised and he certainly isn’t going to cut benefits. Which leaves only the third leg of the Social Security tripod—raising taxes.

And you don’t even want to get started on Medicare/Medicaid—the calculations involved in bringing those programs into some sort of sustainability is multi-variable calculus compared to Social Security’s arithmetic.

All of this makes President Obama’s call in the State of the Union to last week to freeze domestic discretionary spending for five years at current levels woefully inadequate. Over ten years, Obama says this will reduce the deficit by $400 billion. According to the CBO, over those same ten years without the “freeze,” we will be tacking on an additional $6.97 trillion to the national debt. Obama thinks that number should be $6.57 trillion.

Feel better now?

Dealing with this problem is going to hurt. The government is going to have to get smaller. It appears Republicans are willing to deal with the problem.

We’ll soon see if the American people are ready to deal with the problem like adults—Democrats appear to be betting that they aren’t.

A note on CBO numbers

One of the CBO rules that has been proven wrong time after time is so-called “static scoring.” Basically what this means when it comes to calculation tax revenues is that if you lower tax rates, the government gets less money and the CBO numbers reflect that. If you raise taxes, the government gets more money and CBO numbers reflect that too.

Unfortunately, this doesn’t jive with what we know happens with tax rates.

TaxRevenues_CBO_vs_Actual_CapitalGains

Similarly, if the CBO was told that the new tax rates would be 90 percent, they’d turn out a number that would put the government in the black for as far as the eye could see. Anyone with an ounce of common sense would realize that many people would do anything they could do legally (and some illegally) to avoid paying rates that high. There’s no way that the CBO’s initial estimates would be in the same universe as the real numbers.

One comment on “We are doomed or ‘The new normal’”

  1. The most politically active demographic from my own straw poll is the retired community. Baby boomers and their predecessors are VERY likely to vote with dollars, call their congress person/senator, and donate to strong lobby groups like the AARP. The least politically active group I know is people who are too young to vote or young adults. Is it any wonder that education suffers and social security/retirement age does not?

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