Every year about this time the Congressional Budget Office releases its budget and economic outlook for the next ten years. This year’s CBO report for the years 2012 through 2022 was issued a few days ago. So how do things look for the next ten years, according to the CBO? Really bad. It’s not pretty. There’s nothing in this 147-page report to celebrate. Anyone who spends just 30 minutes with the document will quickly conclude that we’re in a world of hurt and things are only going to get worse if we do not radically alter course.
First, a little background. Our public (the sum total of our annual deficits from the beginning) totaled $5.8 trillion at the end of fiscal 2008. Annual deficits for the ten year period ending in 2008 averaged $262 billion, with an unprecedented annual deficit of $458 billion in 2008. Then things nosedived fast with an unimaginable $1.4 trillion deficit in 2009 – a 300 % increase over anything we’d ever seen in the past. Fiscal years 2010 and 2011 brought more of the same, with each year racking up a shortfall of $1.3 trillion and making it a three-peat of trillion dollar plus annual deficits. These monster deficits ballooned the federal public debt to $10.1 trillion by the end of fiscal 2011 (up 74% from the 2008 level), and the total federal debt (inclusive of the amounts owed to Social Security and other trust funds) had surpassed $14.4 trillion.
To appreciate the significance of an additional trillion dollars of debt every ten to twelve months, remember that a single trillion dollars would fund the cost of a full-ride, four-year college scholarship for all 20 million Americans between the ages of 15 and 19 or would fund a 20 % down payment on a $200,000 home for all 25 million Americans between the ages of 28 and 35.
With this background, here’s my take on the top ten highlights of what the CBO now says about the next ten years.
1. Under the “alternative fiscal scenario” (the most (only?) plausible scenario), the deficit in 2012 will exceed $1.1 trillion, keeping the annual trillion-dollar plus deficit string alive. And, worst yet, the string will continue. The projected cumulative annual deficits during the period 2013 through 2022 total $10.981 trillion (an average of roughly $1.1 trillion a year), with the lowest year being 2017 ($960 billion) and the highest year being 2022 ($1.5 trillion).
2. According to the CBO, these deficits will push the total public debt to an unthinkable $23.3 trillion by 2022 (a whopping 400 % increase over the 2008 level).
3. On top of this, by 2022 the debt owed by the federal government to the trust funds, including Social Security, will top $5.6 trillion. So the total federal debt, inclusive of the trust fund debt, could total more than $28.8 trillion by 2022. This debt number would exceed 117 % of our annual gross domestic product (GDP) in 2022.
4. With this debt load, the CBO projects that the net annual interest cost on the federal debt would skyrocket to 3.8% of GDP by 2022 (up from 1.4% in 2012) or roughly $935 billion. And that assumes that rates on a three-month Treasury Bill will be in the 4% range in 2022. In assessing the impact of such an annual interest tab, consider that total individual income taxes collected in 2022 are projected to equal $2.8 trillion. Thus, under this scenario, one out of every three dollars in income taxes paid by individuals in 2022 would be used to fund the annual interest hit on the federal debt. And, of course, with an ever-burgeoning debt load, the interest burden will continue to escalate in all future years.
5. The real GDP annual growth rate in 2011 was a pitiful 1.7%. The CBO now projects it will be only 2.0 % in 2012 and 1.1% in 2013. What’s most discouraging is that the average projected annual growth in GDP from 2012 to 2022 is estimated to be only 2.3%, a far cry from the historic annual average of 3.3% since 1950. The CBO credits the ongoing sluggishness in the annual growth rate to a “continuing decline” in the potential labor force and slower growth in capital services and productivity. It’s a sad contrast to the higher projected average annual growth rates of our trading partner countries and the continuing robust 6.7% to 7.2% annual growth rate in Asia.
6. The CBO states that the “slow growth in output will hold down the growth of employment.” The unemployment rate is expected to remain above 8% for the next two years, with the 2012 average rate pegged at 8.8% and the 2013 rate at 9.1%. The unemployment rate is projected to still be at a high 7.0% by 2015 and to have dropped to 5.25% by 2022. And, of course, these rates exclude from the calculations all those (now tens of thousands a month) who give up looking for a job and check out of the workforce.
7. The percent of the total population over the age of 65 will grow by a full third between 2012 and 2022. As a result, the CBO projects that Social Security and healthcare program costs for this aging group will grow at an annual rate of over 7%, which will, in the words of the CBO, “outstrip growth in nominal GDP.” The combined costs of these programs, expressed as a percent of total non-interest federal outlays, will escalate from 45% in 2012 to over 60% in 2022.
8. Compared to normal averages, there are now an additional 2.1 million vacant homes. The CBO projects that this huge backlog of vacancies will keep housing prices below pre-recession levels until 2018.
9. The CBO projects that the value of the dollar will continue its constant decline over the next 10 years, noting that the dollar’s “value fell for most of the past decade as investors became less willing to add to their increasingly large holdings of U.S. dollar assets.” As for the recent bump in value triggered by Europe’s banking and fiscal crisis, the CBO forecasts that the dollar will “return to its downward trend when the European problems fade in the next few years.”
10. How about after 2022? In this report, the CBO states, “Beyond the coming decade, the fiscal outlook is even more worrisome.” Referencing its June 2011 Long-Term Budget Outlook, the CBO explains that, under present policies, the debt held by the public would “balloon” to nearly 190% of GDP by 2035 and “the amounts the federal government would be required to borrow would be unsustainable.” Noting that such “burgeoning” debt would reduce national savings, suppress output and income, discourage work, and “boost the likelihood of a sudden fiscal crisis,” the CBO emphasizes that the “explosive path” of escalating federal debt “underscores the need for policy changes that would put the nation on a more sustainable course.”
So does all this mean that our future is cooked? Not necessarily. It means that existing policies (the core basis of the CBO’s forecasts) don’t work. No family, business or country can prosper with an unsustainable, out-of-control debt that forever spirals upward and digs an ever-expanding hole that makes real progress impossible. Consider that just 24 months ago, in this same annual report for 2010, the CBO projected that, for the period 2012 through 2014, the real GDP growth rate would be a healthy 4.4% and the average unemployment rate would be down to 6.5%, and that the unemployment rate would continue its descent to 5% by 2016. So the CBO, like nearly everyone else in the country, has grown increasingly pessimistic about the future as we’ve all witnessed the powerful impacts of the present drags on our economy.
We’ve known for some time what it will take to smartly alter course. We just haven’t done it. Higher tax rates (on the rich or anyone else) are not the answer, nor are knee-jerk, draconian freezes in future government borrowing. In a nutshell, we need a smart long-term plan that:
• Reforms our massive senior entitlement programs to restore long-term solvency, to protect the status quo for those who are at or near retirement, and to provide a fair deal for all American workers, both the young and not-so-young.
• Revises the tax code to wipe out fat-cat tax breaks, to promote certainty and fuel growth with permanent pro-growth tax incentives and lower rates, and to grow government revenues by creating more taxpayers and higher incomes.
• Aggressively promotes the development of our natural resources to fast-track real energy independence that becomes a driving force for immediate job creation and improved global competitiveness.
• Eliminates or seriously mitigates the fear and uncertainty of the pain that healthcare reform now promises in the years ahead.
• Promotes a pro-business regulatory environment that provides smart oversight, opens up new global markets for American businesses, and scraps the ever-growing regulatory obstacles to growth and job creation.
• Establishes, monitors, and maintains smart spending caps that work for the long term, preserve essential safety nets, and mandate real fiscal discipline.
February 3, 2012