Friday, July 15, 2011

Even if Deficit Deal is Reached, Long Term Projections For U.S. Look Stark

Even if Congress and the White House reach a deal to raise the debt-ceiling and make large budget cuts, the long-term projections for the U.S. economy simply aren't good.

Unfortunately, whether you look at economic growth, tax revenues or unemployment, the future doesn't look bright.

The Congressional Budget Office (CBO) Website notes the following:

Federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession. However, the growing debt also reflects an imbalance between spending and revenues that predated the recession.

Federal spending has increased not due to pork-barrel projects, but from supporting Americans who have been hit particularly hard by the Great Recession. The spending was for long-term unemployment benefits, food stamps (the SNAP program) and increased applications for disability insurance.

It's hardly a surprise; one-in-seven Americans were living below the poverty line in 2009. Consequently, one-in-seven Americans now receive food stamps.

While recession-related expenditures went up, tax revenues collapsed as unemployment soared. Even before the Great Recession, the government's balance sheet was already in tatters as a result of two rounds of tax cuts (2001 & 2003), two concurrent, unfunded wars and the unfunded Medicare prescription drug law.

It all added up to a very bad recipe.

According to the CBO, the national debt will be 70 percent of GDP by the end of this year and will reach 77 percent of GDP by 2021. In total, the CBO projects $7 trillion in deficits over the next 10 years.

Yes, despite the best intentions of some in Congress, deficits will continue for the next decade.

"To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of the those two approaches,” CBO Director Douglas Elmendorf announced in January.

Simply put, the only meaningful, substantive solution includes cutting spending and raising taxes. There are no other choices. We are now way past that.

Even the most aggressive budget cutting plans still leave the nation with massive deficits over the next decade.

The House-GOP-passed budget would generate deficits for more than a decade into the future, according to the CBO, and add about $9 trillion to the current debt in 10 years.

Yet, that plan was viewed as too draconian by many in Congress (including some Republicans) and by most voters who were polled on the topic. Consider that for a moment; the most far-reaching plan would still result in massive additions to the deficit.

It's important to remember that the U.S. economy is now totally reliant on federal spending and reducing that spending, though vital, will inevitably shrink the economy.

The deficit plans now being discussed in Washington include raising the debt ceiling by $2.4 trillion. That would push the national debt to $16.7 trillion by next year. And, according to CBO projections, that ceiling will have to be continually raised over the next decade.

One of the primary challenges for the government is that high unemployment results in lower tax revenues. And unemployment will remain at high levels for years to come. Millions of jobs have been outsourced and are never coming back. And in a stagnant economy, businesses won't hire.

Economic growth of 2% isn't enough to even keep unemployment constant, much less reduce it. In other words, unemployment will go even higher if growth remains at 2%. As Fed Chairman Ben Bernanke told 60 Minutes, " It takes about two and a half percent growth just to keep unemployment stable. And that's about what we're getting."

However, GDP expanded at just 1.9% in the first quarter. Projections for second quarter growth range from 1.6% (Macroeconomic Advisers) to 2% (Goldman Sachs).

When the economy grows, tax revenues also grow. But when the economy contracts during a recession, tax revenues also contract. And when the economy is stagnant, revenues remain stagnant. However, in the latter two cases, government expenditures typically increase because more people need government assistance of one form or another.

The primary problem for the U.S. has been, and remains, slow economic growth.

The U.S. economy has been slowing for several decades. Economic growth averaged 3.2 percent from 1965 through 2008. However, over the past 20 years, growth averaged just 2.5%.

That decline really isn't surprising.

Over the 20th Century, the U.S. went from a growth era in which it was a post-emerging market with a dominant manufacturing sector, to a mature post-industrial economy. The rate of growth would normally be expected to slow even without a crippling recession.

This pattern is expected to continue well into the future.

According to a recent McKinsey Global Institute study, the economy is likely to remain slow for decades to come.

McKinsey argues that the economy is likely to slow because as labor force participation drops—as more and more baby boomers retire and the number of new women entering the workforce slows—Americans who do work will have to support the increasingly large proportion of Americans who don’t.

Unless the unemployment problem improves, government revenues won't improve. And if government revenues don't improve, annual deficits will continue adding to the nation's already massive debt.

Here's a rather simple formula: No jobs = no spending = no growth = lower tax revenue = higher deficits = higher debt = higher tax rates & interest rates = no growth.

It's a vicious cycle, and the U.S. is caught squarely in the middle of it.

Where it stops, nobody knows.

1 comment:

  1. Anonymous7:33 PM

    I think it was Lennin who said, "The capitalist will sell you the rope with which you intend to hang him". America has done just that. We ship our jobs/manufacturing overseas, we spend money we don't have to buy shit we don't need that was made from slave labour a world away. The oligarchy sends the poor to fight in wars so that they can stuff there already filled pockets with more money that will soon be worthless. We have a financially illiterate population begging to be exploited by an amoral corporate, political and media ruling class. America is unsustainable. It is terminal. No one seems to have the balls to put a gun to its head and pull the trigger, so we can all start over, and hopefully build something worthwhile on it's smoldering ruins.