So I’ve recently written about the GAO’s overview of the US Economy. The CBO has just released its own report projecting economic activity and the budget for the next ten years. It is, again, a bracing report. Despite the President’s inauguration address indicating the contrary, most actors in Washington recognize that action must be taken and must be taken now.
Even though it has had to triple the deficit projections it made just last August, or maybe because so, the CBO leaves no doubt concerning the unsustainability of our current borrowing path:
Such high and rising debt would have serious negative consequences: When interest rates rise to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.
The information on interest payments is especially alarming, both for its effect on the economy as a whole and on households. Interest payments are non-deferrable and non-negotiable, so any future budget must include them in its payment structure. Furthermore, federal interest payments have been kept artificially low as a result of the Fed’s depressing of rates, a policy that can’t continue forever, at least not without serious inflationary consequences.
The amount of interest paid currently stands at 1.4% of GDP. By 2023, the CBO projects, it will be 3.3 percent of an increased GDP. What does that mean in real dollars? The FY2012 budget earmarked roughly $223 billion in interest payments. By 2023 that amount would be roughly $850 billion. There are currently 114,000,000 households in the US. Assuming some immigration patterns, but also birth patterns, let’s project the 2023 number to be 120,000,000. That would mean that average federal tax burden for each household, for interest payments alone, would be $7000 annually.
Then too there are the implications in other sectors of the economy. The CBO estimates that in the next decade one of the effects of the ACA will be to move 7 million Americans off employer-based insurance. Because of the fines the employers will pay this will mean a net revenue increase for the Federal Treasury. But it will also mean that the ACA hasn’t accomplished one of its central purposes – expanding coverage – especially if states refuse to put together the exchanges the government insisted on. The CBO has also changed its estimates of the costs of the Affordable Care Act, indicating they are 29% higher than previous estimates. I’m guessing the upward adjustments aren’t done.
As if the federal tax burden is not bad enough, consider what is happening at the state level. Illinois, for example, is facing catastrophic budgetary problems as a result of it woefully underfunded pension programs. According to a recent report “Illinois’ pension systems are in the worst financial shape of any state at 39 percent funded when no less than 80 percent is considered healthy. State pensions are in the hole by the staggering amount of nearly $97 billion, or $20,000 per Illinois household and nearly four times the annual state revenue.” A fascinating story in The City Journal investigates the systemic problems in California’s pension system – mismanagement, lack of foresight, corruption, political jockeying – that have resulted in drastic underfunding. “Right now, the pension bill that Californians owe because of CalPERS is enormous. In a December 2011 study, former Democratic assemblyman Joe Nation, a public finance expert at Stanford University, estimated that CalPERS’s long-term pension debt is a sizable $170 billion if CalPERS achieves an average annual investment return of 6.2 percent in years to come. If the return is just 4.5 percent annually—a rate close to what more conservative private pensions often shoot for—the fund’s long-term liability rises to a forbidding $290 billion. By contrast, CalPERS itself estimated its long-term unfunded liability at merely $80 billion, using a lofty projected annual investment return of 7.75 percent. (The fund has recently cut that estimate to 7.5 percent.)”
I’ve been harping lately on budgetary issues because I believe them to be issues of great public and moral significance, and we have governments crippled in their capacity to respond. Part of the measure of any person is taken by what he or she hands on to his or her children: financially, culturally, politically, and environmentally. We are failing on every measure. Our biggest public spectacle, the Super Bowl, featured 20 minutes of high-class and high-paid stripping as its centerpiece. We are living large and lasciviously and passing the bills to our progeny.
America has faced financial crises before. Indeed, the Constitution itself may be thought of as a response to a debt crisis. Many of the Constitution’s critics were concerned about the use of paper money with its inflationary complications, or other financial schemes, to get America out of its predicament. But they saw that the cunning and ambitious could use this as an opportunity to create a more powerful and potentially despotic government. Centinel noted that the evils of depreciated money “upon the patriotic and virtuous part of the community.” Federal Farmer:
Our governments have been new and unsettled; and several legislatures, by making tender, suspension, and paper money laws, have given just cause of uneasiness to creditors. By these and other causes, several orders of men in the community have been prepared, by degrees, for a change of government; and this very abuse of power in the legislatures, which, in some cases, has been charged upon the democratic part of the community, has furnished aristocratical men with those very weapons, and those very means, with which, in great measure, they are rapidly affecting their favorite object.
Perhaps the most prominent and relevant sentiment of the time was expressed by Patrick Henry:
“Will the adoption of this new plan pay our debts? This, Sir, is a plain question. It is inferred, that our grievances are to be redressed, and the evils of the existing system to be removed by the new Constitution. Let me inform the Honorable Gentleman, that no nation ever paid its debts by a change of Government, without the aid of industry. You never will pay your debts but by a radical change of domestic economy…The evils that attend us, lie in extravagance and want of industry and can only be removed by assiduity and economy.”
Whatever the lessons of the 1780’s, it seems worth recalling that one. America’s budgetary woes are colossal bordering on catastrophic. These are not the result of gridlock, safe districts, ideology, or bad faith. Ultimately, they have their roots in a public that wants a broad panoply of public services without having to pay for them. Politicians lack the political will to fix the problem not because they don’t think it’s a problem but because they know they can’t get elected if they earnestly try.
We the people are trying to maintain an extravagant lifestyle without having to work and save for it. We think we can insure that every person in America can have Cadillac-quality health care. We think we can insure that every person in America can enjoy a long, healthy, and leisure-filled retirement. We think, as the President said, that government can “protect its people from life’s worst hazards and misfortunes” and continue to pursue possibilities that are “limitless.” We think we can maintain a worldwide empire that will “extend our capacity to manage crisis abroad.”
This refusal to live within limits is butting up against reality more violently daily, and the longer we persist the more reality will extract its cost. Americans can embrace the message or learn it the hard way: we’ve created a massive mess for ourselves and our posterity, and the only way out is hard work, saving, learning to do with less, a lowering of expectations and material advantages, and to stop being so extravagant with other people’s money. Sadly, the politician who says any of these things has no chance of being elected, and so we will continue to stumble toward the precipice until we fall off. At that point we get to look our grandchildren in the eye and figure out how to respond to their question: “What were you doing when we were busy getting screwed?” I hope we can give a better answer than “Well, I was golfing in Florida during the winter.”