The report plainly states that the federal government should forget about patting itself on the back over the short-term effects of sequestration — those automatic budget cuts that are hitting discretionary spending across the board, including the military.
Sure, things will look better for a while, even into the next administration. Then things go very, very wrong. The enormity of the problem means that we will feel its impact far sooner than most think is possible — perhaps just a few years from now. The tide rushing out is a tsunami approaching, just over the horizon.
The CBO report predicts that federal spending by 2038 will hit 100 percent of GDP, driven largely by entitlement programs. Unless action is taken very soon, the CBO said,
“The risk of a fiscal crisis — in which investors demanded very high interest rates to finance the government’s borrowing needs — would increase.”Let’s dig into the numbers a bit. The CBO sees the annual deficit falling to 2 percent by fiscal 2015. That’s just one-fifth of the number we hit as the 2009 recession was doing its worst.
Not surprising, really. The economy went into reverse. Tax receipts cratered. Spending rode along with the typical momentum of a government. We were conducting wars on multiple fronts. It’s a lot of money, which we largely borrowed.
Remember, we’re not talking about the debt but the deficit, the amount we overspend every single year. That deficit spending piles up and becomes the debt, which is a much larger number. CBO calls this number at 73 percent of GDP, but the Treasury takes a broader view, putting the real total debt at 101.6 percent.
A big difference I know, but for now let’s accept the idea that however you count things, it’s more money than we can raise with taxes alone and difficult to raise even with cuts and tax increases combined.
That’s now. In just a few years, about the time Obama’s successor — whomever it may be — takes office, things get worse. CBO projects that the number of recipients in the entitlement programs — Social Security, Medicare, Medicaid, and others — will mushroom out of control.
By 2023, the deficit is 3.5 percent of GDP, a red line for economists, the point of no return on sustainable spending for a healthy economy. Fifteen years, later we’re at 6.5 percent. CBO estimates that Congress needs to cut spending or raise taxes by $4 trillion now to make things go “back to normal.” That’s about a quarter of our entire economy, erased. Unlikely.
“But this is all years from now,” you might argue. Perhaps, but as the CBO points out, the effects of overspending will be felt much, much earlier. It will be a drag on the economy that will hurt tax receipts sooner than anyone expects.
Thus my estimate of 10 years till the showdown comes — not the 25 years at which the CBO hints — is likely to be less than five years.
Even the CBO doesn’t believe we have much time left to act. From the report: “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”
When Europe went up in flames over the past few years, the weaker countries turned to their relatively rich partners for help. The big political problem was justifying robbing German savings account holders to finance Greek public-employee retirements.
A problem for sure. But when the United States hits that wall, to whom will we turn to for help? China? Japan? Europe?
No, we have only the Federal Reserve, and they have only a printing press. Yesterday, Fed Chief Ben Bernanke suddenly backed off the whole “tapering” argument, sending stocks higher. Wall Street loves free money. But it’s not free.
There will come a point when the market will fear money printing, not cheer it. The medicine will turn to poison and very quickly we’re on the road to high inflation. We won’t balance the budget because of a “grand bargain” or some other political compromise. We’ll be forced into it by panic and public outcry.