Economics, Pethokoukis

The chart that shows why JPMorgan calls the fiscal cliff ‘nothing but theatrics’


Economist Michael Feroli of JPMorgan makes a great point in a new report about the fiscal cliff. Almost whatever the outcome, he points out, it will do little to nothing to change the nation’s lethal long-term budget trajectory. Focusing, as the current negotiations do, on a completely arbitrary ten-year budget window is a complete distraction. The national debt will still be rocketing higher:

In the chart [above], the green line indicates the CBO’s projections for publicly-held debt as a percent of GDP assuming a continuation of current tax and spending policies. In this scenario debt-to-GDP is projected to reach 247% in 30 years time.

The President is currently pushing for $1.2 trillion of revenue over 10 years, or about 0.6% of GDP over that same horizon. Assuming that increase in revenue as a share of GDP persists after 2022, and taking account of the saving from reduced federal debt service payments, publicly-held debt (the yellow line) will still amount to 226% of GDP in 30 years.

If instead, a trillion dollars in higher revenue is coupled with a trillion dollar reduction in discretionary spending, and that revenue increase and spending reduction as a share of GDP is projected forward (again taking account of interest saving), debt-to-GDP (the dashed line) at the end of the thirty-year horizon is still 213%.

The point isn’t to argue the merit of either of these options, but rather to demonstrate the misleading nature of looking at ten-year budget horizons.

Policies that have important effects over the ten-year horizon may have comparatively small effects when things worsen in the 2020′s and 2030′s. Going in the other direction, policies that can bend down the debt hockey stick in the ten- to thirty-year horizon, such as gradual changes to entitlement programs, often generate relatively minuscule savings on a ten-year horizon.

Thus, the ten-year horizon may bias policymakers toward policy options that do little to address the projected explosion in debt coming in fifteen years. We’ll continue to closely track the fiscal cliff theatrics, more because of how the outcome could affect near-term growth rather than the implications for long-run sustainability; the focus on the ten-year window almost guarantees that longer-run sustainability will not be attained in the current budget battle.

We are missing a huge opportunity to do something right now about entitlements, particularly Medicare and Medicaid.

11 thoughts on “The chart that shows why JPMorgan calls the fiscal cliff ‘nothing but theatrics’

  1. Husband: Honey, I just got our credit card statement. We owe $200,000, and we only make $60,000 per year. We’ve GOT to do something to address this or we’ll be bankrupt eventually.
    Wife: You’re absolutely right. I’m going to buy one less latte at Starbucks every week.
    Husband: Honey, that’s not good enough. We need you to do more!
    Wife: Okay, we’ll compromise on this. I’ll buy TWO fewer lattes each week.
    Husband: Alright, that’s the spirit! Now let’s go out and get that big screen TV we talked about.

  2. We are missing a huge opportunity to do something right now about entitlements, particularly Medicare and Medicaid.

    Hit the nail right on the head with that one. We have the ability to address our problems right here, right now. Why wait until we have a Greek scenario before we decide to make the tough calls?

  3. what was JP Morgan’s forecast for 2012 for the deficit & GDP in 1982?

    before i believe their projections, i’d like to see what their track record is on 30 year forecasts..

    • The data is from the CBO actually, and, as the poster explained earlier, their track record is terrible, they also predicted 10 years ago that public debt would be a mere 7.4% of GDP today, instead, it’s ten times that. So, yes, the forecast is absurdly unreliable.

  4. Wife: I’m back from work and here you are watching television again.
    Husband: Hey, I’d like to find a job, but we have to live within our means and my car is out of gas.
    Wife: But you have a First Bank of China credit card in your pocket that charges zero interest.
    Husband: Silly, you shouldn’t worry yourself about economics. Any day now a job creator is going to knock on our door. Now I hope you haven’t spent any money today….

  5. The socialist vote-buying machine can be stopped, but only by a constitutional amendment to limit the federal government to some huge number, like 18% of GDP. There is zero chance of that happening. We are rapidly becoming like Europe – socialist, bankrupt, and degenerate.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>