A stunner from the Congressional Budget Office in its new long-term budget forecast. When the government budget scorekeepers took into account the worst-case scenario impact of debt on the U.S. economy, its economic forecasting model, well, broke:
Under the assumptions leading to the most negative effect on GNP, debt would reach 250 percent of GDP by 2035. CBO’s model cannot reliably estimate GNP after debt reaches that amount, in the agency’s judgment: The assumptions about private saving and capital inflows incorporated in CBO’s model are based on historical experience, and if interest rates and the debt-to-GDP ratio rose to levels well outside of that experience, those assumptions might no longer be valid. In 2035, GNP would be 21 percent below the benchmark under the assumptions leading to the most negative effect on GNP; beyond 2035, the negative effect on GNP would grow under those assumptions as debt continued to increase relative to the size of the economy.
The above chart shows the U.S. economy in a long recession starting in the early 2020s and then just … stopping. There be dragons!
Debt is so high, a massive 250% of GDP, that the CBO can no longer calculate its harmful impact on the economy, though one can assume the direction is down.
Neither of the CBO’s scenarios allow for the policy proposed by most economists who support stimulus: a short-term boost in spending (and/or continued cut in payroll taxes) followed by fiscal consolidation.
You might of course argue that the government will not be politically capable of cutting spending in the long run, but this is an argument based in politics, not economics. The economic case for short-term investment is still strong.
I think most of those who support a short-term stimulus would also favour increasing the retirement age, and restructuring the federal healthcare system further, to slow or reverse the long-term increase in these large portions of the government budget.
How can you assert that the economic case for short-term investment is strong, when everybody with a brain knows to a certainty that “temporary” spending sprees or tax hikes will be anything but? You may argue that there’s a difference between political and economic arguments, but the people and companies driving the economy know damn well what sort of political class they have to deal with.
But please, do carry on with “But I’m sure they’ll spend the NEXT five trillion dollars much more wisely!” arguments. They’re really quite convincing.
What a ridiculous analysis. The Bush tax cuts lapse in less than a year and the spending reduction deal that Congress approved to lift the debt cap go into place in less than a year. That’s your budget problem solved.
Social Security is fixable with minor changes. Medicare is the only real fly in the ointment. Rather than creating horror scenarios, the CBO should focus on that.
As for more stimulus? You can’t stimulate an economy when so much of your spending simply moves immediately out of the country. You’re trying to fill up a bucket that’s full of holes. Stop the unfair trade practices and give American companies a competitive shot, and we’ll be humming along in no time.
We’ve been spending to stimulate the economy for three years now, on shovel-ready projects. Spending is up almost a trillion over the last couple years, all spent to ‘stimulate the economy’. It isn’t working, because the Keynesian economic theories on which they are based are utter crap.
The CBO also didn’t consider the scenario where conservative policies are implemented, government is slashed drastically in size and spending, taxes are cut, productivity is unleashed, human freedom is embraced, property is protected, and life is celebrated. We’ve tried liberal-lite and progressivism- maybe it’s time to give conservative policies a chance.
Perhaps it is time to rethink our entire economy. Automation and computerization is rendering human labor obsolete. This increasing unemployment and further misery.
A National Bank performing all banking services to businesses and individuals would halt the profiteering of Commercial banking.
Nationalizing energy (petroleum, green, and electrical) would eliminate exorbinate profits and allow cost containment so the end user only pays production and delivery expenses.
Reign in the profitteering in the Health industry! All medical services should be delivered on a cost only basis.
Since, labor is becoming obsolete, enforce a zero population growth policy. Any extra labor required in the nation could be obtained through an immigration policy that is enforced properly.
Consolidate Government. Computerization has eliminated the population’s need to ride a pony 20 miles to the County seat to do business. County governments should be abolished and regional governments should be put in place; eliminating redundant representatives and their staffs.
Suburban sprawl with its wasteful costs should be halted immediately!! Large, densely populated cities should be encouraged!
Regional high speed rail should be the norm in transportation, supplanted with local transportation systems. This eliminating costly and redundant highway systems and their maintainence.
These are just a few thoughts for openers!
@Ronald — ha … man that was funny! Good one Ron