Does This Describe Our Economy?

Forget the stock market, forget Europe, forget Bernanke… the most important economic news last week is something you likely did not hear about. It is a document directly affecting every American’s near term future.

It was released by the Congressional Budget Office(CBO) and has this dry sounding title:
The Budget and Economic Outlook: An Update” – Douglas Elmendorf, CBO, 8/24/2011

That one document alone will be ground zero in the upcoming Congressional battles driving this nation’s economic recovery. It will be at the heart of President Obama’s jobs plan that he announces next month. It will be the bedrock upon which the “super committee” will build their recommendations for getting this nation’s vast debt under control.

It will be the blood soaked battleground over the 2012 budget which has not yet been passed but which goes into effect October 1st of this year.

How those battles play out will define the difference between prosperity for Americans and an economic holocaust over the next decade.

Why Is This Document So Important?

CBO's Baseline Budget - Source: Congressional Budget Office

Every spending bill passed by Congress requires a 10-year impact study of its budgetary effect. Those impact studies are produced by the CBO. Most important of all is their effect on budget deficits.

In September when the President attempts to resurrect his “grand plan”, the $4 trillion in spending cuts will be estimated by the CBO. The spending cuts recommended by the super committee or the automatic cuts that come into play if the super committee fails are also estimated by the CBO.

The CBO calculations are based on what is called the CBO’s baseline budget outlook. It is a 10-year forecast of revenues vs outlays for the federal government. The spending cuts we hear thrown about so freely by politicians in heated discussions are projected savings compared to the CBO’s baseline budget.

The latest incarnation of the baseline was released last Wednesday.

Its rosy outlook is the anchor that could drag our economy into an economic abyss.

Whats Wrong With The CBO Baseline?

Plenty! We have to take a closer look at the CBO baseline budget forecast to understand how unrealistic this critically important table has become.

Some of its major defects are:

  • It estimates a projected budget deficit, not a projected real deficit
  • It lacks an accounting of interest payments on the national debt
  • It assumes that all the 2001 and 2003 tax cuts will expire
  • It presents an unrealistic projection of economic growth

What is a “real deficit”?

A budget deficit, simply called a “deficit”, is defined as the difference between the federal government’s outlays and its revenues when spending outpaces revenues. The last time there wasn’t a budget deficit was in the year 2000.

Wherever you read the word “deficit” it always means a budget deficit.

What gets grossly overlooked in a federal government “deficit” are interest payments on the national debt.

The “real deficit” is defined as the difference between the sum of federal government outlays PLUS interest paid on the national debt and its revenues. The last time there wasn’t a real deficit was in 1957 – over half a century ago!

The real deficit is what grows the national debt. That means our national debt has grown bigger every year for 54 years in a row. In 2000 the interest payment on the national debt was so big that the real deficit grew the national debt.

Years ago when the national debt was small compared to federal budgets the interest payments had little noticeable effect. Over time they have grown substantially. Last year the interest on the national debt was $413 billion! That is more than half of non-war defense spending in 2010. It is 4 times MORE than 2010 war spending. It cost 4 times MORE than the so-called ‘Bush tax cuts for the rich’!

Interest payments on the national debt ate up 19% of the government’s total revenue in 2010!!!

That can’t be ignored, yet the CBO does!

The Bush Tax Cut Effect

Everyone, rich and poor, got tax cuts back in 2001 and 2003. After a huge argument in Congress last December those tax cuts, as is, were extended another two years; conveniently until AFTER the 2012 elections.

The CBO’s baseline budget outlook, however, assumes the Bush tax cuts will expire in 2013 as currently scheduled.

That ain’t gonna happen. Nobody, but nobody wants the ‘Bush tax cuts for the poor’ to end. Those will be continued and made permanent. What happens to the cuts fir the wealthy remains to be seen. You can be certain that small businesses potentially affected by tax changes will be holding onto and not spending their money until their tax burden is finally set. That won’t do the economy any good.

The bottom line is that the CBO has a built-in factor in their budget baseline that will never come to pass that artificially reduces the deficit to an incredibly unrealistic $205 billion in 2015 – just 4 years from now. Outside a couple years around the turn of the millennium we haven’t had deficits that low since the early 1980s with a economy far stronger than what we are likely to have in the next 10 years!

Unrealistic Revenue Projections

According to the table above federal revenues are supposed to increase by about 6.5% this year ($151 billion) over 2010 revenues. GDP growth was only .4% in Q1 and only 1% in Q2 so far this year. Our economy is flat. It is unlikely that revenues will make the 2011 CBO projection.

Revenues are projected to be even greater after that… averaging $370 billion in growth each year through 2014. Who, besides government paid economists, predict revenue growth as strong as that, even with all of the Bush tax cuts ending?

The CBO has a long history overestimating revenues and underestimating costs. That is especially true for big new programs. The CBO projected Medicare at 8.8 times LESS than it actually cost in its 1st 10 years of existence back in the 60s and early 70s. Obamacare goes into full effect in 2014. It most certainly will cost far more than projections, just like Medicare did.

Percentage of debt-to-GDP

A country’s debt-to-GDP percentage is a fundamental measure of the overall economic health of a nation.

The CBO’s debt-to-GDP projections above includes only “debt held by the public”. Its maximum percentage of 72.8% in 2013, though on the high side, really isn’t bad at all. If that were the whole story then there would be no problem. It isn’t.

Unfortunately, the CBO doesn’t include “intragovernmental holdings” as debt. That, too, is very real debt. As of today that debt is $4.7 trillion! That is debt owed by the government to itself and we, the public, are responsible for it.

In fact, “intragovernmental holdings” debt is the reason that both Social Security and Medicare are in trouble right now rather than years in the future as we are told by politicians. That is because both funds have been borrowed down to nothing to pay for other government programs. The federal government is like a broke child bilking the life’s savings from its elderly parents.

When we include “intragovernemntal holdings” the country’s debt-to-GDP ratio will be OVER 100% by the end of this year. Most economists agree that anything over 85% of GDP is in the danger zone and slows a nation’s economy in the same way we see it now.

Conclusions

This week’s CBO baseline budget outlook woefully underestimates expenses and overestimates revenues.

Its forecast of a federal deficit reduction down to only $205 billion in just 4 years calls the CBO’s credibility into question. Nobody but government economists forecast anything less than $1 trillion real deficits for many years to come.

Yet this document will be the basis for evaluating the economic impact of 2012’s budget on our future debt, the economic impact of President Obama’s “grand plan” on massive debt reduction and the basis for the super committee’s decisions for making its recommendations.

The CBO baseline already includes a built-in tax increase far bigger than ANYTHING likely to be considered or passed by Congress this year.

It excludes important data, like national debt interest payments and “intragovernmental holdings”, that both have a dramatic impact on our future debts and deficits. It assumes higher revenue then is likely to occur, 2.3% for this year when it is growing at less than 1% so far. It’s exaggerated revenues will likely exceed reality for the next 4 years at least.

It presents the deceptive impression that our debt-to-GDP percentage is a lot better than it really is.

On all counts, our economy is worse off than the CBO baseline budget forecast.

There is an old adage in computer programming that says, “garbage in, garbage out”.

The problem we face today is that this particular “garbage in” just might help strangle our recovery and send the U.S. economy into a deep tailspin.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Aug 27, 2011, in 2012 Elections, Bush-era Tax Cuts, Debt, Deficit, Economy, GDP, Gross Domestic Product, National Debt, Politics, Super Committee, Tax cuts for the rich and tagged . Bookmark the permalink. 2 Comments.

  1. Tell me this is a joke. 6.5% GDP growth??? Surely people like Paul Ryan won’t let this stand. The CBO should be tasked to produce a best case and worst case baseline and both should include debt service costs. I f this stands, we are doomed.

  2. The 6.5% figure isn’t for GDP… it is a calculated government REVENUE increase for this year. It is calculated from the actual revenue collections of $2.163 trillion in 2010 and the $2.314 trillion (+$151 billion) projected revenue forecast for 2011 from the CBO table above.

    The CBO forecasts GDP growth for this year and next at 2.3% and 2.7% respectively. Since we are half way through the year with yearly growth less than 1% (.4%-Q1, 1.0%-Q2) we won’t even get close to 2.3% growth.

    There are more factors than just GDP determining federal revenues… tax increases, for example.

    However, given how poorly the economy is performing so far this year it seems unlikely that the government will realize a 6.5% increase in revenues over last year.

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