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
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
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.
