Renaissance or collapse? The choice is ours
The Congressional Budget Office recently released its annual economic outlook and, as one might expect, it is not at all rosy. The CBO projects that in 10 years the federal debt will be $26 trillion, or five times the projected $5 trillion federal tax revenue. But it turns out that the budget office isn't very good at forecasting.
Since at least 1997, the CBO has been an ongoing exercise in positive thinking. It routinely overstates future revenues, understates future spending and significantly understates future debt — all this from a nonpartisan office. With analyses like this, who needs partisanship?
In the 121 forecasts it has generated since 1997, the CBO has overestimated future revenues 70 percent of the time, underestimated future spending 85 percent of the time and underestimated the federal debt 80 percent of the time. In short, when there's a choice between rosy and dismal outlooks, the CBO consistently errs on the rosy side.
So just how bad are its forecasts? On average, the budget office overestimated 10-year forward tax revenues by 20 percent, underestimated government spending by 30 percent and underestimated federal debt by a whopping 80 percent.
In its defense, the agency is required to use whatever assumptions it is given — no matter how outlandish. If politicians assume, for example, that the economy will grow at a dot-com era pace for a full decade (as they assumed in 2010), the CBO must build its forecasts around that assumption. While we can't trust the CBO's predictions, we can adjust them given what we know about their past errors.
If the CBO's current forecasts are off by as much as its past forecasts, that $26 trillion debt predicted for 2023 will actually be $48 trillion. And how much tax revenue will be collected to service that massive debt? The CBO estimates $5 trillion. But based on past errors, we can actually expect $4 trillion. That is bad news without question.
But it gets so much worse.
Today, the federal government pays 2.6 percent interest on its debt. This is uncommonly low because of the Federal Reserve's manipulation of interest rates. Yes, Washington tells us that low rates are good for businesses and home owners, but the biggest beneficiary is the federal government itself. Over the past 50 years, the interest rate on the federal debt has averaged 6 percent. At today's 2.6 percent, the government saves more than $500 billion in interest annually.
Ten years from now, if rates have returned to their historic average, 70 cents out of every tax dollar will go to pay for interest on the debt. In addition to a $48 trillion debt, we will be running $5 trillion deficits.
This means one of three things will happen in the next decade. The Fed will hold interest rates down (meaning near zero returns for savers and, eventually, severe inflation), the Fed will raise interest rates but not all the way to 6 percent — forcing Washington to cut noninterest spending by 50 percent or more (most likely by gutting Social Security and Medicare) — or the government will default.
Since the third option is extremely unlikely, that leaves us with a choice between sustained and significant inflation or gutting social programs. We shouldn't have to make this choice. And we might yet avoid it if politicians put us on a sustainable fiscal path, not over 10 years but over two or three.
Politicians have a year, maybe two, to decide whether history will remember the upcoming decade as the Great Economic Renaissance or the Great Economic Collapse.
Antony Davies is associate professor of economics at Duquesne University and an affiliated senior scholar at the Mercatus Center. James R. Harrigan is a fellow of the Institute of Political Economy at Utah State University.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Bubble players get last chance to impress Steelers
- Steelers accomplish mission to get younger, faster on defense
- Locke struggles again early, Pirates lose again in Milwaukee
- Asking price for Penguins franchise said to be at a record $750M
- Roundup: U.S. bank earnings up 7.3% in 2nd quarter; IMF warns China slowdown threatens global economy; more
- Adrian man sentenced to 10 years in prison for sex crimes
- American to halt 2 direct routes from Pittsburgh International
- Pa. business interests decry EPA ozone proposal as economic albatross
- Family affair for Charleroi HOF inductions
- U.S. stocks bounce back from precipitous drop
- TJ to clash with Ringgold in tough season opener