Consider two components of the discretionary spending budget; (1) Food Stamps, and (2) the Earned Income and Child Credits.
1) Food Stamps cost the government $82b in 2012, up from $25b in 2003 (325% increase).
2) The Earned Income and Child Credits cost $80b, up from $33b in 2003 (240% increase).
These two categories of spending represent 12.5% of all discretionary spending. These costs go up when the economy is weak, they have never declined.
Now put your economist hats on and project what these two drivers of the budget will be in 10-years.� Keep in mind that in a decade the cost for everything, especially food, will be much higher due to inflation. What’s your guess?
According to the CBO the cost of Food Stamps and Child Credits will actually fall over the next ten-years. The CBO believes that Food Stamp costs will be 11% less than today, while Child Credit costs will fall by 3%.
Surprised by that result? I was. Do you believe that these cuts will be realized? I don’t. It would take an economic miracle to achieve those results. The CBO is counting on that miracle happening. The CBO forecast is for uninterrupted growth in the economy. A few of the key variables that the CBO is hanging its hat on:
GDP in the USA is about to soar. 2013 will be so-so, but 2014-2016 will be a rip snorter, After the big surge in growth the economy will stabilize at at steady 2+% growth rate. The CBO is forecasting perfection:
With the great economy, unemployment will fall like a rock – any day now.
Even with all of this good stuff happening, there will be no inflation!
Labor income, as a percent of GDP has been falling for the past forty years! The CBO is forecasting that this trend will not only stabilize, but it will make a huge recovery. And this is going to start any minute now!
The CBO assumes there will be no recessions. Imagine that! Fifteen-years of uninterrupted growth is projected. The CBO has concluded that the business cycle is over. It thinks that governments have finally figured out how to avoid the laws of gravity. History tells a different story.
With all of the great stuff going on in the economy, interests rates will shoot higher. The move up in rates is going to start next year! Forget ZIRP. Forget QE. Forget the Fed. The Fed Funds rate is going to 4.5%(36Xs higher than today). At same time, the long end of the curve is going to get back to 5.5%! The CBO believes that long rates (AKA mortgage rates) are going to triple. This explosion of interest rates will have no,� repeat� no negative consequences at all! Housing and the economy will continue to boom even though mortgage rates are going back to 7%!
One more piece of the beautiful pie that CBO has created; there will be no OCO costs in the next decade. OCO -� � Overseas Contingency Operations� – is the code word for war. No more of that stuff in our future!
I don’t think that the CBO should be in the business of forecasting wars and recessions. That would be an impossible task. But the assumptions used and the conclusions drawn by CBO will not be realized. Fairyland doesn’t exist, and the business cycle is far from dead. As a result, the economic future will not be as bright as CBO has presented.
When you put all of the pieces of the CBO forecast together you get a trajectory of future deficits/debt that looks manageable. After exploding higher the past five years, the red ink is going to stop. The US debt levels are going to level off. The good news is that big improvement is scheduled to start in just a few months!
I”m not denying that the US economy has stabilized. The 10% deficits we saw in 2009 will probably not be repeated any time soon. But I don’t see how all of the good things the CBO is anticipating can happen. The problem with the CBO’s optimistic outlook is that it has given ammunition to those who would love to ramp up discretionary spending.
Of course there will be more business cycles. There will be stock booms and busts. There will be geopolitical issues that force more of the unwanted OCO. There will be commodity shortages and weather chaos. Other key economic areas of the world will have their ups and downs too. All of these things have happened in the past. They will happen again.
When things do go wrong, the deficits will jump higher than CBO’s projection. With the deficits, the debt will be much larger than assumed. What bothers me is that those who are now pushing the story that deficits aren’t a problem, are the same ones who will be crying,� “We never could have seen that happening”,� when the SHTF again.
Bernanke, Geithner, Greenspan and many economists like Krugman have all said they missed the dark clouds that were forming in 2006-2007. One of the reasons they all missed the signs was that CBO was telling them that the base case for the economy was blue skies ahead. From the 2006 CBO report.
The CBO never saw 2008 coming. Its projections for debt were way off the mark, about 25