“We know the basic conditions in which strong economic growth occurs. Chief among them is a government that does not do too much—unlike the way the U.S. government has been overreaching since at least 2008 (arguably since 1990 or 1965 or 1933)…

…Restoring market incentives should be the first priority of the next U.S. government. Taxes and regulation are excessive and too complex, and there are too many loopholes creating inequality. Retirement and medical programs are too generous to those who could provide for themselves. Legalizing 11 million immigrants already here and welcoming still more productive workers would also help. A nation that can’t balance its checkbook is not likely to shift from consumption to investment. In the long run, it will die…….the national debt (today/2015) should be reported as $18 trillion, or about 100% of GDP.”, Thomas G. Dolan, Barrons, June 21, 2015

Editorial Commentary

Doing the Numbers: Past, Present, and Future Prospects for the U.S. Experiment

Past, present, and future prospects for the U.S. experiment.

By Thomas G. Donlan

Don’t worry about a thing, folks. As John Maynard Keynes said, in the long run we are all dead. Those who think about the long run are wasting their short time on Earth.

But the long run is getting shorter. The Congressional Budget Office published its annual long-run projections of deficits and debts last week. It was no surprise and no concern to most Americans. What need is there to worry, when the so-called Great Recession is behind us and we’ve seen our deficits cut by two-thirds?

We are only borrowing about $450 billion this year—about 2.7% of our gross domestic product—and we only owe about $13 trillion, according to the most common way of figuring. That’s only 74% of our GDP.

Only? A mere 15 years ago, the U.S. was running a small budget surplus and our national debt was $5.6 trillion, which was 34% of a smaller GDP.

The current year’s deficit does look small in comparison with the deficits incurred between 2008 and 2014, and especially compared with the peak year, 2009, when the deficit was $1.4 trillion and 9.8% of GDP.

Payback Is a Myth

The $13 trillion debt is only part of what we owe. It’s the direct borrowing from U.S. and foreign investors, including foreign governments. We haven’t included $5 trillion that has been borrowed from the oxymoronic government trust funds. Social Security is the largest of about 100 such funds.

The $5 trillion is often considered unimportant because the Treasury owes it to other government entities. In reality, those other entities are holding Treasury bills, notes, and bonds on behalf of beneficiaries. Eventually, the Treasury must redeem those securities, giving the trust funds cash raised by issuing regular Treasury debt.

Thus, the national debt should be reported as $18 trillion, or about 100% of GDP.

Anyway, that’s not the biggest part of U.S. liabilities. Many Americans believe that their prospective benefits flowing from existing social programs are guaranteed by the government. That’s not so in a contractual sense, but future benefits from Social Security, Medicare, Medicaid, government and military pensions, and many other programs with dedicated trust funds are guaranteed by the promises of politicians. Any politician who is serious about keeping those promises has to deal with the consequences for taxes, spending, and borrowing.

In budget lingo, they are “mandatory” programs, which means that their spending was put on automatic pilot by acts of Congress years ago.

According to the CBO, mandatory programs are consuming 12.7% of GDP this year. So-called discretionary programs, the ones that Congress fights over every year with grand drama and occasional government shutdowns, get 6.5% of GDP, and interest on the $18 trillion of federal debt gets 1.3% of GDP. Total spending is 20.5% of GDP. And total revenue is 17.7% of GDP.

That’s the present. The future is likely to be worse.

Looking Forward

Based on current law, the CBO projects that the economy will grow a little faster in the next few years than our national appetite for health care, Social Security benefits, and debt. By 2020, however, our social needs and political demands will once again exceed our ability to produce and willingness to tax—even if we do not cut taxes or enact big new programs in the next few years.

Revenues may grow a little faster than the CBO’s expected economic growth of about 2.2% per year for the next decade. The CBO estimates that in 2025, taxes will take 18.3% of a $27.5 trillion GDP. On the other side of the ledger, there’s a lot of growth built into spending, since so much of it goes to the large, aging baby-boom generation.

Mandatory programs are expected to grow to 14.1% of GDP by 2025. In the CBO’s baseline scenario, discretionary programs would shrink to 5.1% of GDP (thanks to the much-abhorred spending limits called the sequester), while interest on the debt would more than double, to 3% of GDP. The result would be a 2025 deficit of 3.8% of GDP.

Making further extrapolations all the way to 2040 is more worrisome. The CBO projects revenues of 19.4% of GDP, expenditures on mandatory programs of 16% of GDP, discretionary expenditures holding steady at 5.1% of GDP, and interest on the debt reaching 4.3% of GDP. Total expenditures: 25.3% of GDP; deficit: 5.9% of GDP; debt held by the public: 103% of GDP.

The CBO helpfully points out that the cost of holding the national debt steady as a percentage of GDP is not all that big. Any combination of taxes and spending cuts totaling $210 billion in 2016 and held through 2040 could be enough so that the debt would not become a bigger burden on GDP. But only if we do it now and stick to our resolve for 25 years. Delay makes it harder.

The Hard Way

People who take these numbers seriously know that most Americans, and especially their political leaders, do not want to face the inevitable consequences. That’s why Republican presidential candidate Jeb Bush offered a third way in his opening speech last week: not tax policy, not spending policy, but real economic growth of 4% per year after inflation for 10 years.

Unfortunately for Bush and the nation, this is not the easy way back to fiscal responsibility and prosperity. It would take a lifetime of political change.

We know the basic conditions in which strong economic growth occurs. Chief among them is a government that does not do too much—unlike the way the U.S. government has been overreaching since at least 2008 (arguably since 1990 or 1965 or 1933).

Restoring market incentives should be the first priority of the next U.S. government. Taxes and regulation are excessive and too complex, and there are too many loopholes creating inequality. Retirement and medical programs are too generous to those who could provide for themselves. Legalizing 11 million immigrants already here and welcoming still more productive workers would also help.

A nation that can’t balance its checkbook is not likely to shift from consumption to investment. In the long run, it will die.

Posted on July 1, 2015, in Postings. Bookmark the permalink. Leave a comment.

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