Should You Worry About the Budget Deficit?

Want to increase your stress level? Just view the Congressional Budget Office's federal budget deficit forecast for the next decade. Between 2009 and 2019, the CBO estimates we'll rack up a cumulative $9 trillion deficit.

No single year's deficit is any particular danger -- but their accumulation quickly becomes lethal. Piling up endless sums of debt works until it doesn't, at which time a vengeful flock of chickens comes home to roost. Those needing proof can ask Dubai, or simply refer to the recent performance of the U.S. dollar.  

But if you're looking for a glimmer of hope, it's this: The recent record of long-term budget forecasting isn't just bad, and it isn't just flawed ... it's invariably bogus.

Your Magic 8-Ball's broken
This is the third time in 20 years the CBO has issued a long-term budget forecast that made pupils swell. The first was in the early 1990s. The second was around 2000.

How did the first two forecasts turn out? In 1993, the CBO estimated that by 2000, the federal budget deficit would hit $455 billion. Turns out it was a surplus of $230 billion. Whoops. In 2000, the CBO estimated that by 2009, the surplus would be $579 billion. In reality, it's a deficit of $1.4 trillion. Double whoops. In 2001, even then-Federal Reserve chairman Alan Greenspan acknowledged that by 2010, we'd have "an on-budget surplus of almost $500 billion." So close!

There's been a trend over many decades: When the CBO releases a budget forecast that inspires shock and awe, take the polar opposite, and that's probably what will happen.

See, macroeconomic forecasting is a science that isn't. In the early '90s, few could predict that a technology revolution would keep unemployment absurdly low and push companies like Microsoft (Nasdaq: MSFT  ) , Dell (Nasdaq: DELL  ) , and Cisco (Nasdaq: CSCO  ) to staggering heights. In 2000, no one could have predicted that a terrorist attack one year later would not only spawn costly wars, but influence rock-bottom interest rates that fed a speculative bubble, culminating into an ungodly recession and bailouts of companies like Citigroup (NYSE: C  ) and Goldman Sachs (NYSE: GS  ) . The events that matter most -- the ones that shape long-term budgets -- often aren't foreseeable.

Optimists, therefore, might look at this and not worry about today's budget. I've heard several commentators use CBO's track record as reason to disregard the current grim forecasts.

It's different this time
That could be a big mistake. As chancy as the CBO's forecast usually is, there are reasons aplenty to say "it's different this time" regarding the current budget deficit.

The forces feeding today's deficit forecasts are far more predictable than those that derailed the CBO's previous predictions. All you have to read is one short sentence from the CBO's recent outlook: "Almost all of the projected growth in federal spending other than interest payments on the debt comes from growth in spending on the three largest entitlement programs -- Medicare, Medicaid, and Social Security."

Ah, good ol' entitlements. Become old enough, and the checks start flowing. Their outlays aren't discretionary, no matter the state of the economy. That gives reason to believe that if the CBO has ever issued a long-term budget forecast that's likely to become accurate, it's the current one.

Why? Because entitlement spending growth by and large isn't a factor of hard-to-predict economic growth or political swings, but simply demographics. Step one: Grandma gets old. Step two: She's entitled to benefits. No prophetic forecasting needed here.

True, part of the growth lies in exploding health-care costs, and those estimates could be wildly off. But that portion of the calculation is actually still a minority. As the CBO puts it, "Between now and 2035, an aging population -- driven by both the retirement of the baby-boom generation and increases in life expectancy -- explains 64 percent of spending growth in Medicare, Medicaid, and Social Security." Thank you, baby boomers.

Moreover, it's possible that economic growth could end up far stronger than forecast, just like what happened in the '90s. Who knows what could lead to this -- the explosion of the next Google (Nasdaq: GOOG  ) ? Perhaps a green energy company that rivals ExxonMobil (NYSE: XOM  ) in size? Your guess is as good as mine.

But entitlements' deficiency is so severe that even fairy-tale growth wouldn't do the trick. As the Government Accountability Office notes: "Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double-digit range every year for the next 75 years." That just isn't going to happen.

Another option is raising taxes. But here, too, the deficiency is so large that only absurd assumptions make a dent. Last summer, Columbia Business School dean Glenn Hubbard noted that in order to right the deficit in Social Security and Medicare, "all federal taxes on average would have to be raised by more than 50% to make up the shortfall." If you think health-care reform was a testy debate, wait until that happens.

"Where the money is"
At a congressional hearing last week, Federal Reserve Chairman Ben Bernanke said, "Willie Sutton robbed banks because that's where the money is, as he put it. The money in this case is in entitlements."

Bernanke further offered a solution: "It's only mandatory until Congress says it's not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation."

He couldn't be more right. And that's what this really comes down to: Unless we rethink the word "entitlement," yes, you should worry about the budget deficit.

What are your thoughts on the deficit? Let me know in the comments section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Google is a Motley Fool Rule Breakers recommendation. Dell and Microsoft are Motley Fool Inside Value recommendations.  Motley Fool Options has recommended a diagonal call on Microsoft. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2009, at 1:49 PM, PhulishMortal wrote:

    This is why I have no confidence that Social Security will be around in any form by the time I reach what is these days termed "retirement age."

  • Report this Comment On December 08, 2009, at 4:25 PM, NoMoeMoney wrote:

    No worry, Obamacare has an answer, its called euthinasia.

    Stay close to your god and guns, you will need them!

  • Report this Comment On December 08, 2009, at 4:26 PM, NoMoeMoney wrote:

    No worry, Obamacare has an answer, its called euthinasia.

    Stay close to your god and guns, you will need them!

  • Report this Comment On December 08, 2009, at 5:05 PM, Pushkinator wrote:

    I know this is not the main point of the article, but this statement is false:

    "In 1993, the CBO estimated that by 2000, the federal budget deficit would hit $455 billion. Turns out it was a surplus of $230 billion."

    If there was a surplus in 2000, how did our national debt increase in 2000? Government accounting tricks showed a budget surplus; GAAP would not have shown a surplus.

    The myth continues because democrats want to take credit for a surplus and republicans improperly used the alleged surplus as a reason to lower taxes.

  • Report this Comment On December 08, 2009, at 5:48 PM, ontheemmis wrote:

    A National sales tax or VAT are probably the only way out of this mess. I am not in favor of either one but if I were forced to make a decision I would go for the Sales tax and eliminate most of the IRS.

  • Report this Comment On December 08, 2009, at 6:10 PM, Keal7 wrote:

    Great, the answer to our structurally driven deficit that Obama is trying to tackle is oppose him so that it fails then hold on to your guns since you will need it because we did not solve the problem.

  • Report this Comment On December 08, 2009, at 6:15 PM, Gorm wrote:

    Whether the word is "entitlement" or "expectation" there are many realities:

    1) People are living longer. Congress looks foolish approving Part D drug bill which exacerbates our problems, ie increasing expense across Medicare, Medicaid and SSA. Can't see a gutless Congress reversing themselves.

    2) SSA, which originally was designed to be supplement income is increasingly "all" the retirement many will have. BUT where the ratio of worker to retiree was recently 32:1 it is nearing 2:1. 3) Where life expectancy was 63 and retirement age was 65 we now have retirement as young as 62 and life expectancy up to age 78. Congress is right on the ball adjusting to change. Yep, they've done nothing - productive.

    4) Like any good program, why not let Congress bastardize it. So, they did. They added COLA and disability.

    5) And, Congress, playing games, chose to issue IOUs for FICA receipts to give the illusion deficits weren't all that large. So, there is no money tucked away. 100% comes from FICA receipts until 2041, when payments exceed receipts.

    So, even though Congress has destroyed what was once a well funded, well designed retirement supplement on which retirees predicated their retirement income, it will probably be wealthy Americans and those who planned ahead that will fore go "entitlement" and "expectations" so those who lived on everything they earned can, at least squeak by on their SSA check.

  • Report this Comment On December 08, 2009, at 11:22 PM, TheBadger1969 wrote:

    What we need are a balanced budget amendment and a term limits amendment to force Congress to address the deficit. Congress will never pass these amendments on its own though.

    Article V of the Constitution lets the states circumvent Congress to get amendments passed. All we need are 2/3 of the state legislatures to request a constitutional convention to propose amendments. I found a website called FixitTogether.org that is trying to get the state legislatures to do this. I don't think there's any other way.

  • Report this Comment On December 08, 2009, at 11:24 PM, dbooner wrote:

    I agree with Gorms comments, but 2041 could be moved to a date much sooner than anyone expects.

    With the unemployment rate at current levels and collection of taxes 20% lower, plus the expectations of a sluggish economy for the next 5-10 years will compound the expenditures.

    Congress will have to act whether they want to or not. Both parties fall short of having the fortitude to properly address the problems. Where have the Statesmen Gone?

  • Report this Comment On December 08, 2009, at 11:56 PM, dividendgrowth wrote:

    When national debt exceeds 250% of the GDP, systemic collapse is likely.

    Weimar Germany started with debt in excess of 400% of GDP in 1919.

  • Report this Comment On December 09, 2009, at 1:30 AM, needdividends wrote:

    Not only where have the statesmen gone, but where has good,not even excellent journalism, gone? We need honest reporters who do not dote on the sensational, but do decent and honest investigation.

    Does anyone have good ideas on what we really need

    to get this country working together as we did in

    WWII? I think we are in real trouble unless we face real facts, not invented untruths.

  • Report this Comment On December 09, 2009, at 1:49 AM, withoutlimits wrote:

    Screw the "deficits" and "surplus" it's the freaking DEBT!!! You have a surplus you pay off your debt, Duh! Our currency is backed only by confidence, and that confidence is getting pretty darn weak.

    I personally have a better job than I did 25 years ago but my spending power is even lower. So I don't have much confince in the dollar.

  • Report this Comment On December 09, 2009, at 6:19 AM, ezturin wrote:

    The more people watching Cavuto and Beck, the more awakening we have

  • Report this Comment On December 09, 2009, at 7:47 AM, dbjella wrote:

    The solution is obvious. The Federal Reserve can print some money and pay off the debt. Problem solved!

  • Report this Comment On December 09, 2009, at 9:39 AM, dbillett1 wrote:

    Bernie Madoff created a Ponzi scheme and they called him a crook and sent him to jail. The US government created a Ponzi scheme and they called it Social Security and congratulated them.

  • Report this Comment On December 09, 2009, at 10:30 AM, TMFHousel wrote:

    "The more people watching Cavuto and Beck, the more awakening we have"

    That comment makes me want to cry.

  • Report this Comment On December 09, 2009, at 1:00 PM, dpbeall wrote:

    I can't stand Beck but for once I agree with his idea of a Value Added Tax for 10 years via a Constitutional Ammendment that would expire after the 10 years and with the proceeds mandated strictly to reducing and paying off the National Debt. Another comment..why did none of the Conservatives complain about the first 10 trillion when they were in power most of those years but now the second 10 trillion is "stealing" from future generations??

  • Report this Comment On December 09, 2009, at 1:55 PM, mollykat wrote:

    There is no political will or courage to scale back entilements or "pork." Sadly both DEMS and GOP party "buy" their election to office by promising more entilements and spending and hold their position by continuing to spend. Right now the DEMS have "bought" more voters than the GOP but are rapidly losing seniors like me because we fear losing Medicare, and see Social Security threatened and runaway inflation soon. We all: DEMS,GOP, and INDEP must force our corrupt shortsighted political leaders to begin NOW to scale back spending by using every tool we have, our vote, email, money, protests etc. Can I absorb cuts in Medicare or SS that would cost me more of my own nestegg ? It would be very hard now after the 08-09 meltdown but I think I could survive a freeze on increases or even say a onetime 2% cut. Would I? Only if a balanced budget agreement with teeth was passed. You can forget ever getting an amendment..never happen. Most politicians only care about their short (say 50 yrs) "good" life so finding statesmen who truly care about the USA and our grandchildren and electing them is an enormous task when pitted against the DEM and GOP machines. God help the USA.

  • Report this Comment On December 09, 2009, at 2:15 PM, mollykat wrote:

    This is my understanding: The debt had grown to $5.5 T from 1776 to 2008 when Pres Bush term ended. As I understand the numbers Pres Obama has in 11 months both added and permitted the national debt to grow from $5.5T to $12 T by 2012. And keep in mind he and his party have TOTAL control of the government. One very important fact: most entilements including automatic increases are mandated by earlier legislation and the interest on the national debt is growing rapirly. Another words if our politicians do NOTHING our annual expenditures will increase based on demographics like the babyboomers retiring and drawing SS and not paying as much income taxes. I'm one of them.

  • Report this Comment On December 09, 2009, at 2:20 PM, TMFHousel wrote:

    mollykat,

    When Obama took office on January 20, the national debt was $10.6 trillion, not $5.5 trillion. $5.5 trillion was the debt when Bush's presidency *started*, not ended.

    -Morgan

  • Report this Comment On December 09, 2009, at 3:17 PM, nome11 wrote:

    & we would have continued to have a surplus, if the US would have elected a decent person in 2000, and not foolishly sent him back to the White House in 2004. Doh!

  • Report this Comment On December 11, 2009, at 4:06 PM, charler wrote:

    Come on, didn't caring about the national debt go out of style with fanny packs, zubaz, and .com stocks?!?!

    Morgan, get out of the 90's dude! Only Ron Paul wingnuts care about the debt!

    Real politicians like the Republicans and Democrats know how to run this thing. Democrats promise more programs without having to raise most people's taxes. Republicans promise lower taxes without getting rid of most people's programs. That's what the national debt is for, silly! It's like paying with your credit card - it feels good because it's not real money. Right?

  • Report this Comment On December 26, 2009, at 2:05 PM, ombowstring wrote:

    It seems that there's a greater than 50% chance that the US is going to go bankrupt or as close to it as we can get, whatever that means. What can they do? Print more money? Default on the debt? It most certainly seems that we will not be able to pay off the debt -- I don't see any way the Treasury is going to come up with $12 - $20 trillion. We'll find out the repercussions in the coming years.

  • Report this Comment On February 17, 2010, at 7:25 PM, NotJesseL wrote:

    If I understand correctly, the budget is 3.5t and the deficit is 1.5t. This would be like a person who makes 20,000 per year spending 35,000. (Except that the person can't print money and the US government can). So, that is really really messed up, not to say it doesn't ever happen, but the end is near. Also, if the debt is 12t and the income is 2t, that is like the same person owing 120,000 (not really practical either, unless you can get the banks to lend you at a very low interest rate, but much less messed up.)

  • Report this Comment On March 03, 2010, at 4:45 AM, ilovesumm wrote:

    A individual must spend less and cut costs when their bills get higher. Why does the govt spend more and increase costs when bills pile up?

    Doesn't make sense that the govt doesn't follow simple common sense or basic economics.

  • Report this Comment On April 16, 2010, at 5:47 PM, statecitizen wrote:

    Well, any amateur armchair Economist can tell you that forecasts are based on the fact that if you keep going in one direction, what will happen. Clinton managed a surplus after 8 years because of higher taxes on the rich and reduced spending on the 'Standing Army." After Bush's empire-building and money give-aways to his rich banking buddies and corporations, he managed to turn the suplus into a huge deficit. Obama is just hitting the last nail in the coffin of our once great Republic.

  • Report this Comment On April 21, 2010, at 12:47 AM, dmiles2 wrote:

    As another Fool article pointed out, we can not inflate ourselves out of this debt because the largest liabilities are indexed to inflation.

    We do ourselves a disservice when we credit or blame presidents for surpluses or deficits. No president can spend money Congress has not given him. The surpluses of the 90's came from the Republican Congress's Contract with America (Congress didn't give Clinton everything he wanted) and from the explosion of technology. Neither the Pres nor Congress can take credit for the latter.

    Much of the deficit explosion after 2000 was because Bush refused to use his veto pen, for which I roundly condemn him. Not only Bush, but many Republicans in leadership are NOT real Republicans, ie, true to the limited government, fiscal conservative tradition of the GOP. In other words, RINO's.

    When the Democrats took control of the Congress in 2006, they helped the RINO's open the throttle on a train that was already a runaway.

    The only hope is that, somehow, the indexing will be repealed. That will be hard on not only my dad, but on me as well, but it is the only hope. If inflation were kept to less than 2% p.a. it would take a long time to pay down the debt, if at all, but 2% would not be a killer for those who depend mostly on the entitlements.

  • Report this Comment On April 21, 2010, at 1:50 AM, dmiles2 wrote:

    As another Fool article pointed out, we cannot inflate our way out of this debt because it is indexed to inflation. That is also one of the main reasons it is so big now.

    We fool ourselves when we credit or blame presidents for surpluses or deficits. No president can spend money Congress has not given him. The surpluses at the end of the 90's were the result of the Republican Congress's refusal to give Clinton everything he asked for and the tech boom, which neither Clinton nor Congress could legitimately take credit for.

    Bush refused to use his veto pen, but Congress gave him the money in the first place. Both he and the Republican leaders have NOT followed the limited-government, fiscally responsible tradition of the GOP and so I consider them RINO's. Democrat Light is not really Republican.

    The only hope is to repeal the mandated indexing and keep inflation under 2% so that people who are already or soon will be on SS will not suffer too much from eroding purchasing power. And phase out SS for the young.

    I apologize if this turns out to be a double post. I couldn't see that my first one was received.

  • Report this Comment On April 23, 2010, at 10:11 AM, BenMccloud wrote:

    it's about govt control and abortion...

    It always amazes me how our society refuses to do the math about old age entitlements.

    When social security was originally created, the federal govt had huge deficits because of govt control programs created by FDR, and they needed an inventive way to get more tax revenues. With social security, they instantly were able to have everyone contribute more, and all they had to do was set the withdrawal age high enough and they would never have to pay it all out. When social security was enacted in 1935, the average life expectancy was 60 years, but the withdrawal age was 62, and they didn't have to start paying out till 1940. (Take taxes for 5 years, then start paying benefits - sounds like Obamacare!) Easy math says that the govt would pay out less than they would take in, so they could use the extra funds however they wanted. It was always intended to be revenues for the govt, not really about caring for the elderly.

    The second point that people never focus on is perhaps more subtle...

    In any pyramid scheme, the late comers pay for the early comers. In social security, the youth pay for the elderly. For this plan to be sustainable, you would need the birthrate to remain close to constant. The birthrate has fallen off quite badly, which is why we even have the "baby boomer" generation as a separate designation. When you investigate some of the causes of this decrease in births, you have to consider the effect that abortion has had since 1973. The estimates are 35 - 50 million births that were aborted during that time frame. I wrote a paper detailing out all the factors that come into play, average salary, unemployment, early death, etc, but even with all that factored in, you still ended up with 20-30 million individuals paying social security taxes that would equal up to 40-80 billion per year currently and roughly 500 billion additionally added during those 37 years. (19 years of actual revenues, since the aborted children would need to be around 18yo)

    It doesn't really matter which side you hold in the pro-life v. pro-abortion, you can't elect a group of individuals to give something to another, and then eliminate the first group.

  • Report this Comment On April 23, 2010, at 10:11 AM, BenMccloud wrote:

    it's about govt control and abortion...

    It always amazes me how our society refuses to do the math about old age entitlements.

    When social security was originally created, the federal govt had huge deficits because of govt control programs created by FDR, and they needed an inventive way to get more tax revenues. With social security, they instantly were able to have everyone contribute more, and all they had to do was set the withdrawal age high enough and they would never have to pay it all out. When social security was enacted in 1935, the average life expectancy was 60 years, but the withdrawal age was 62, and they didn't have to start paying out till 1940. (Take taxes for 5 years, then start paying benefits - sounds like Obamacare!) Easy math says that the govt would pay out less than they would take in, so they could use the extra funds however they wanted. It was always intended to be revenues for the govt, not really about caring for the elderly.

    The second point that people never focus on is perhaps more subtle...

    In any pyramid scheme, the late comers pay for the early comers. In social security, the youth pay for the elderly. For this plan to be sustainable, you would need the birthrate to remain close to constant. The birthrate has fallen off quite badly, which is why we even have the "baby boomer" generation as a separate designation. When you investigate some of the causes of this decrease in births, you have to consider the effect that abortion has had since 1973. The estimates are 35 - 50 million births that were aborted during that time frame. I wrote a paper detailing out all the factors that come into play, average salary, unemployment, early death, etc, but even with all that factored in, you still ended up with 20-30 million individuals paying social security taxes that would equal up to 40-80 billion per year currently and roughly 500 billion additionally added during those 37 years. (19 years of actual revenues, since the aborted children would need to be around 18yo)

    It doesn't really matter which side you hold in the pro-life v. pro-abortion, you can't elect a group of individuals to give something to another, and then eliminate the first group.

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