Economics, Pethokoukis

Another day, another government agency, another scary US debt chart

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The General Accounting Office takes a shot at forecasting future federal debt levels, and the results are unfortunately and unsurprisingly scary, as the above chart shows. The Alternative baseline — the non-magic unicorn baseline — is the one you should pay attention to. The real difference between Baseline Extended and Alternative is that the latter assumes an unreformed entitlement system.

And the longer we wait to deal with the entitlement debt problem, the bigger the problem becomes and the more dramatic action will be needed to wrangle it.

For example, to keep debt held by the public as a share of GDP in 2086 from exceeding its level at the beginning of 2012 (roughly 68% of GDP) in our Alternative simulation, the fiscal gap is 8.3% of GDP. This means that revenue would have to increase by 46% or noninterest spending would have to be reduced by about 32% (or some combination of the two) on average over the 75-year period. Even more significant changes would be needed to reduce debt to lower levels. …

However, the longer action is delayed the greater the risk that the eventual changes will be disruptive and destabilizing. Under our Alternative simulation, waiting 10 years would increase the fiscal gap to nearly 10% of GDP— meaning a revenue increase of more than 54% or a noninterest spending cut of about 37% or some combination of the two would be required to bring debt held by the public back to its level in 2012 by 2086.

Actually, even the Alternative baseline numbers are overly optimistic because they assume — despite the massive increase in debt — that GDP growth, inflation, and interest rate levels stay constant at 2.1%, 2.0%, and 5.2%. They assume the massive increase in debt has no economic impact.

Of course, that is unlikely. Indeed, those impacts would surely make the debt situation even worse even faster, adding an additional 50 percentage points to debt/GDP levels by the 2030s, as this CBO analysis shows:

Also note that these charts assume historical levels of federal tax revenue. The problem is spending.

27 thoughts on “Another day, another government agency, another scary US debt chart

  1. These stratospheric debt charts always assume that someone will keep buying our debt. They might, but not at interest rates we will be able to afford.

      • Max,

        Do you really think we can continue “to be our best customer” throughout the next two or three decades? Without adverse consequences? What do think happens when we aren’t or can’t be? And if the rest of the world takes note of our debt levels, what do you really think their reaction will be? If the Chinese export economy slows, what do you think will happen to their rate of accumulation of US debt?

        • If the Chinese export economy slows, what do you think will happen to their rate of accumulation of US debt?

          China has not been accumulating U.S. Treasury debt for 3 years. It has reduced its holdings in the last year.

          Treasury TIC data

          • Not by any significant amounts – yet. Granted, their rate of accumulation has slowed to a halt, at least for the time being.

            Longer term, the question still remains: who, given the debt situation in both CBO’s and now GAO projections, will continue to buy our debt? What rates will be necessary to clear those auctions?

          • Thank you for noticing that the Japanese have just about caught up with the Chinese, but few people on sites like these pay attention to details.

            Better to quote Von Mises to impress the unwashed, than to notice what’s actually going on.

        • I’m not saying we should be. But the policy is working.

          Exxon’s paper is now trading higher than equivalent treasuries. Corporate America’s balance sheet is going to be rock solid as we come out of this. The hardest part, though, has been for the American consumer. But they don’t have the options a corporation has.

  2. Guess we’ll have to raise those taxes on John Bearsford Timpton after all, Jimmy.

    Thanks for the chart. It’s been looking like that for awhile, but amazingly the Republic still stands.

    Another day begins for James Pethokoukis.

    • The wealthy have extreme flexibility in how their income is received which is why even in the face of high tax rates the federal government has collected a fairly constant percentage of GDP since the end of WWII. The only way the welfare states in Europe survived is through regressive consumption taxes. We have avoided that but the money is where the consumption is, the middle class. The middle class is where the bulk of the Bush tax cuts helped the most. If it weren’t for the tax distortions related to benefit payments cash wage growth would have been higher. Transfer payments have grown almost 50% faster than the growth rate for cash wages and for that matter for propreitor income and for all other asset income. The only choice the government has is to take more from production and transfer it to the retired, the poor and the disabled. That transfer means lower cash wage growth for the middle class which also means at the margin a greater dependence on government entitlements as the middle class falls further behind. The entitlement state has been consuming the middle class from tax preferential treatment of forced savings and employer provided health isurance to payroll taxes that are transferred to the old, poor and disabled, for over 50 years.

          • Is Thomas Sowell more credible or maxie boy?

            Max is. Why do you ask? Individual income tax receipts declined from 2000 to 2005. It is quite unusual for individual income tax receipts to decline year over year or for consecutive years in the historical record, but Bush did it for either 4 or 5 consecutive years dependent upon the base year.

            Tax Policy Center

          • I like the Heritage Foundation’s confession here: http://blog.heritage.org/2010/07/29/the-washington-post%E2%80%99s-weak-case-for-ending-the-20012003-tax-cuts/

            Specifically this paragraph:

            ” The budget situation has certainly deteriorated. “The $5.6 trillion surplus that had been originally projected for the 2002–2011 period has been replaced with an actual $6.1 trillion deficit. Yet Congressional Budget Office (CBO) data shows that the tax cuts caused just 14 percent of that swing. The vast majority of the fiscal decline was caused by surging spending (by both Presidents Bush and Obama) as well as the economic factors described above.

            See the part about the missing 14 percent, or $1 trillion? Of course, revenues went up, as did spending. But the proper comparison is what revenues would have been (i.e. 14 percent higher.)

          • I like the Heritage Foundation’s confession here“…

            Which part todd?

            This part maybe? In yesterday’s Washington Post, Ruth Marcus uses “quack medicine” to describe conservatives’ support for extending the 2001 and 2003 tax cuts. Yet she commits her own economic malpractice

            Or is it this part? ‘The budget situation has certainly deteriorated. The $5.6 trillion surplus that had been originally projected for the 2002–2011 period has been replaced with an actual $6.1 trillion deficit. Yet Congressional Budget Office (CBO) data shows that the tax cuts caused just 14 percent of that swing. The vast majority of the fiscal decline was caused by surging spending (by both Presidents Bush and Obama) as well as the economic factors described above‘…

          • See the part about the missing 14 percent, or $1 trillion?

            Well, I think the Bush tax cuts are closer to $1.7 trillion or 10 percentage points of GDP.

            The CBO study referenced indicates that of the $11.8 trillion swing from projected surplus to actual deficit, $6.2 trillion are revenue reductions and $5.6 trillion are outlay increases.

            It’s just another data point to show that Jimmy P is misinformed that it is just a spending issue. It is equally a revenue and a spending issue.

          • marmico says: “Well, I think the Bush tax cuts are closer to $1.7 trillion or 10 percentage points of GDP“…

            Yeah but that’s merely your guesstimate, it could be something else entirely, right?

            The CBO study referenced indicates that of the $11.8 trillion swing from projected surplus to actual deficit, $6.2 trillion are revenue reductions and $5.6 trillion are outlay increases“…

            CBO studies seem to be biased in the favor of the person/party asking for the numbers – merely my own possibly flawed observation…

            BTW when was that chart generated, do you have any idea?

            Thanks for the link…

        • Then why at their (middle class tax cuts) repeal do they comprise 80% of the tax increase? The Bush tax cuts cut the poorest total tax burden, including payroll taxes from 8% to 4% and the middle class total federal tax burden including payroll taxes fell from 18.6% to 14.3%. Max, so sure in his knowledge is wrong, yet again and seems to think it would be no problem to let the Bush tax cuts expire across the board since the burden on the poor and the middle class was so light under Clinton. The facts can’t be wrong, http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456 from that table the bottom 4 quintiles fell in percentage terms greater than the fall for the highest quintile and by definition the bottom 4 quintiles benefited the most and will suffer the most with the repeal of the Bush tax cuts.

          • The top quintile will suffer the least but will deliver the least of tax revenues. 2012 is shaping up to be a huge tax revenue year with all kinds of income loading from capital gains to special dividends. And 2013 will be a revenue bust year with taxes from capital gains plummeting by over 50% and dividend taxes collapsing. From 2013 onwards we will see a continuing collapse in dividend payouts until taxes are lowered yet again in 2017.

          • Don’t assume I’m in favor of tax cuts expiring “across the board.” Given the choice between what the AEI kleptocracy wants and going over the cliff, I’ll take the cliff.

            At least the deficit these people scream about when they’re not screaming about A 4.9% tax increase will cease.

  3. If USG debt and future costs of entitlements are so ‘scary’ why are interest rates on that USG debt near all-time lows?? Even lower than in the depths of the Great Depression.

    Why are CDS swaps on USG debt lower than those of any other significant country? That is correct, even lower than the so-called “AAA” countries: Germany, Sweden, Netherlands, Singapore, Switzerland, Hong Kong etc., etc.

    So who doesn’t understand the macroeconomics of USG finances: Mr. Petholulis or the financial markets??

    • You forget several things, QE, the dollar is the world’s reserve currency, our trade deficit and our budget deficit, they are all related. When we run a trade deficit our trading partners accept dollars which are exchanged at the exporter’s CB for local currency and the exporter’s CB uses those dollars to purchase US assets. This drives the demand for US assets up and their value rises and their yield falls. At the same time the FED uses QE buy US treasury debt which further restricts supply of treasuries on the market and drives price higher and yields lower. So there are two forces that drive debt prices higher and yields lower, foreign CB that hold dollars and need to receive a safe return and our FED buying those same assets. If financial markets were allowed to function our trade and budget deficits would be subject to appropriate hedging absent CB puts. That is when you would see the true effects of unsustainable obligations but right now the CBs of the world are papering over that problem. After all how can CDS’s for Greek 5 year paper fall from over $15m to $5m per $10m face value when the Greek economy has weakened without CB paper being the explanation?

    • Folks like Mr. P are just parroting the most recent sound bite … coming from the echo chamber…

      contradictions like why the T-note rate is so low just further confounds them…

    • Bond rates are near all-time lows because the Fed is buying 77% of all new federal bonds. The Fed is also buying $40 billion in mortgage bonds. They’re floating the banks by providing well over a trillion in excess reserves. They are propping up the stock market by depressing the return on bonds. This economy is completely manipulated and phony.

  4. James,

    I think the analysis is off. You said:

    “The real difference between Baseline Extended and Alternative is that the latter assumes an unreformed entitlement system.”

    But the report clearly states:

    “. The Patient Protection and Affordable Care Act (PPACA) slows the growth of health care spending and federal debt under the Baseline Extended simulation, in which cost-containment mechanisms are assumed to be fully implemented and effective. However, some have
    questioned whether these mechanisms can be sustained over the long term; this is reflected in GAO’s Alternative simulation. ”

    Basically the GAO is saying the alternative baseline is the result if Obamacare reforms failing to control costs as planned. This chart does not seem to address “other entitlement” reforms at all.

    I don’t for a minute believe that Obamacare will do all the cost savings they claimed, but then the delta between the baselines is convoluted with what Obama care actually does achieve and what is left undone.

    -D

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