Summary
- The Congressional Budget Office believes that the federal government will generate over $19 trillion in new debt in the next decade.
- Government programs will do little or nothing to help spur the economy on to faster economic growth, the compound growth rate may be similar to the growth rate in 2010s.
- Furthermore, with all the new debt being created and the higher interest rates, more and more spending will be in areas that contribute little to economic growth.
- And, we get this new information with the debt ceiling battle just heating up.
- Radical uncertainty!
The Congressional Budget Office has now confirmed just how dire the current U.S. fiscal situation is.
Check out this chart.
I have just expressed my concerns about how the fiscal future is panning out. It is not a pretty picture .
Let's start out our analysis of the budgetary future with the foundation that goes with the projections.
Government budgetary policy is supposed to stimulate the economy and produce sustainable growth that can support sufficient revenues to support government expenditures.
What kind of growth does the Congressional Budget Office ((CBO)) see coming out of all this stimulus?
Well, these are the assumptions on economic growth that accompany the work of the CBO. In 2023, the U.S. economy is expected to show a growth rate of 0.1 percent. Do we have a recession, with say two quarters of negative real economic growth or do we just have a year of mediocre growth?
Doesn't really matter because real GDP is not expected to do much during the year.
But, it does indicate that the year 2023 will produce less growth than was achieved in 2022 when real GDP grew by just 1.0 percent, year-over-year.
And, going forward?
Growth is projected to be 2.4 percent from 2024 to 2027.
But, then the CBO sees the annual growth rate dropping to 1.8 percent through 2033.
Wow! The growth rate of the U.S. economy between 2023 and 2033 seems to be just about what it was between 2010 and 2020. During the 2010-2020 decade, the compound rate of growth of the U.S. economy was about 2.1 percent.
As I describe in the post cited above, the failure of faster growth to arise can be attributed to the fact that the growth of labor productivity during the 2010-2020 period was below 1.0 percent. It was a supply-side problem.
Fiscal (and monetary) stimulus seemed to provide very little help in generating real capital investment expenditures that could produce rising productivity that could serve as the foundation of faster economic growth.
From the assumptions supporting the economic forecast of the CBO, it would seem as if the rising government spending will be contributing little or nothing to the growth rate of the economy.
Another decade with lots and lots of "good talk" coming from the politicians in Washington, D.C. about how the government is providing programs to help Americans, without any evidence that such stimulus is happening.
And, if the economy is not growing very rapidly and if inflation is relative low (the CBO is assuming that inflation will drop to near 2.0 during the period), revenues will not rise by much.
Right now, in 2022, total government revenues amounted to 19.6 percent of GDP. But, in 2033, total revenues will be only 18.1 percent of GDP.
Outlays, however, will go from 24.8 percent of GDP to 24.9 percent in 2033.
The economic picture for closing the deficits is not very good.
Another Drag On Economic Performance
The rising level of the debt, combined with the rising level of interest rates will also result in much higher outflows of cash going to pay off the interest cost of all this financing.
The CBO is now expecting the percentage of net interest payments to rise from the actual 2022 figure of 1.9 percent of GDP to 3.6 percent in 2033, an almost doubling of the amount.
These outflows of cash will not, most likely, go into the real sector of the economy, but will stay in the financial circuit and, hence, provide very little, if any, stimulus to the real output.
And, there have been in recent years more components of the budget that do not go into the "real" sectors of the economy. These components must be financed, but do little or nothing to generate economic growth.
So, we are getting boosts to the size of government outlays with little or nothing taking place to finance them.
And, this seems to be the trend in what the federal government has been doing, is doing, and... it looks like more and more every day... will be doing.
Take a look at the chart above.
There is no way that this can continue.
The Debt Ceiling
This gets us into the concern about the growing battle about the debt ceiling.
Debt always comes back to haunt those that dismiss the responsibilities connected with taking on more and more debt.
I ran banks. I still like the statement that banks should only lend money to those that don't need it.
Well, enough frivolity.
But, I believe that it is true, that people that keep developing justifications for taking on more and more debt eventually get into situations that are impossible or nearly impossible to get out of.
The U.S. government, as I have written about, began its policy of credit inflation in the 1960s. The government experienced difficulties in the 1970s, creating a situation that Paul Volcker corrected in the early 1980s. In the 1990s and 2000s, the new financial arrangement allowed credit inflation to prosper as the government's stimulus programs saw more and more money go into the financial circuit of the economy. It thereby avoided consumer price inflation, but created inflation in various assets like stock prices, gold and other commodities, real estate and other tradeable assets.
We got the Great Recession from December 2007 through June 2009, but then-Fed Chairman Ben Bernanke took us back into an environment of credit inflation as he generated periods of quantitative easing that continued to support increases in asset prices, like those mentioned above, without creating consumer price inflation that was too high. Thank goodness for the Phillips Curve.
But, all during this time period, government debt increased, and as one can see in the chart above, government debt as a percent of GDP increased rather dramatically.
Then the pandemic hit. The Federal Government and the Federal Reserve reacted to "save" the economy and pumped trillions of dollars into the financial markets. This generated lots and lots of new debt as well as lots and lots of money.
Now, we are dealing with the aftermath.
And, the CBO expects us to add $19 trillion in new debt over the next ten years, adding on to the $31.4 trillion of old debt that already exists.
Do we have a problem?
I think that we do!
For further details see:
The Government's Fiscal Picture: $19 Trillion In New Debt Over The Next 10 Years