Saturday, May 23, 2009

Even in 2002 the Congressional Budget Office saw the unsustainable path we're following

And everyone in Washington knew. Maynard at had this recent post, about where the Congressional Budget Office said we are headed, even before the economic crisis kicked in:

Things to Come
[...] Take a look at this report from the Congressional Budget Office, "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075". This report was prepared in 2002, before the budget went to hell. So this is a projection from a better day. Take it as an optimistic projection. (Fox just issued a report noting that Social Security and Medicare would go broke several years sooner than previously expected, and that many trillions of dollars would be needed to close the gap. Again, this is independent of the recent spending binges.)

Here's the key chart, based on spending patterns and demographics as of the good old days of 2002:

Federal outlays as a percentage of GDP

Two notes: First, overall expenses are rising steadily and dramatically from approximately now until the end of the graph in 2075, where it's at 40% of GDP and rising.

Second, the cause of the rise is Social Security, Medicare, Medicaid, and interest on the rising debt. Demographics will catch up with us, pushing claims through the roof.

In other words, the Federal Government has long been on autopilot to transform itself into a machine whose major function is to seize wealth from party "A" and hand it over to party "B". (And, with respect to servicing the national debt, our government's fundamental job will be to suck money out of our children's pockets and pay it to China.) None of the rise has to do with defense or infrastructure maintenance or any of what we would regard as legitimate functions of government. In fact, real government functions will get crowded out by the mandatory giveaway programs.

This other chart is also important. It's the projected graph of Federal income and outgo. As you see, the anticipated expenses rise but the income does not. That's because the taxation levels were projected to be stable. So the deficit heads skywards.

Federal revenues versus outlays as a percentage of GDP

So we were heading for a big problem as of 2002. And everyone in Washington knew it.

Then along came George Bush and Barack Obama, evil twins that decided the Federal Government hadn't made enough commitments. So they both grew the government and made more big, unfunded promises and are spending even more money.

On the revenue side, George Bush cut taxes for everyone. And Barack Obama promised to cut taxes for 95% of the people.

In other words, with disaster looming on the horizon, our political leaders have aggressively chosen the course that will magnify the problem and cause it to strike sooner.

How can this be happening? Have we gone mad? Am I saying anything here that is either unimportant or less than obvious?

Will we change course?

So where does this all lead? Obviously to some sort of unpleasantness on a grand scale. [...]

Maynard reluctantly speculates about where all this might go, and what might be done about it. Or not. I've done speculation of my own about what sort of "unpleasantness" this could be leading to, such as the collapse of US currency, or a growing vulnerability due to increasing military weakness and poor technology decisions without safeguards.

I hate all that depressing stuff. On the whole, I prefer to cultivate a positive outlook, and work toward improvement. But to be balanced, you also have to be aware of dangerous pitfalls, so you can avoid them. Sometimes ringing the alarm bell is enough to keep the ship from hitting an iceberg. Forewarned is forearmed, for those who are paying attention.

I don't know what is going to happen, but it does seem obvious that we are going down a path that is unsustainable. Something, somewhere, sometime, has gotta give, it just can't continue on like this.

Related Links:

Deep Impact: The Federal Deficit

Global Banking Crisis? Leading to...?

Is Obama compounding Bush's mistakes?

Can the Dow Jones Industrial Average and Age Demographics foretell Economic Depression?

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