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The Chart of the Year

Thursday February 20th, 2014   •   Posted by Craig Eyermann at 6:16am PST   •  

Via Stanford professor and former presidential economic adviser Keith Hennessey:


Hennessey also provides one of the best summaries of the CBO’s 2014 Budget and Economic Outlook report that we’ve seen anywhere:

In their recently released annual Economic and Budget Outlook CBO lays out the four costs of higher debt (page 7).

  1. “Federal spending on interest payments will increase substantially as interest rates rise to more typical levels;”
  2. “Because federal borrowing generally reduces national saving, the capital stock and wages will be smaller than if debt was lower;”
  3. “Lawmakers would have less flexibility … to respond to unanticipated challenges;”
  4. “A large debt poses a greater risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”

CBO attributes these damaging effects to “high and rising debt,” and doesn’t distinguish between high (where we are now, in the mid 70s as a share of GDP) and future entitlement spending-driven growth. The same logic applies both to today’s high debt and to future even higher debt. These are real and significant costs we are bearing today.

Hennessey then goes to expand on each of the items in the list above in reverse order, concluding with the following analysis of the first item:

Finally, the item at the top of CBO’s list is the one most likely to drive Congressional action. Our government debt is now 37 percentage points above its pre-crisis average, but government interest payments are relatively low because interest rates are low because the short-term economy is still weak. When the economy eventually recovers and the government debt rolls over, that additional debt is going to increase government net interest payments by about 1.85 percent of GDP (37% X CBO’s 5% 10-year Treasury rate). Relative to the rest of the federal budget, 1.85% of GDP is enormous. That increased interest cost is as much as the federal government will spend this year on all military personnel (uniformed + civilian) plus all science, space, and technology research plus all spending on the environment, conservation, national parks, and natural resources plus all spending on highways, airports, bridges, and all other transportation infrastructure. Higher debt means higher interest costs which will squeeze out spending for other things that government does. It will also increase pressure to raise taxes even further.

This analysis quantifies the point we made earlier this week, as we tracked the timing of when just the net interest payments on the national debt will exceed the amounts of major categories of the federal government’s spending.

But now, I wonder if part of what Hennessey observes doesn’t explain the Obama administration’s willingness to adopt job-killing policies and regulations.

Earlier this month, the CBO reported that they anticipate that the implementation of the Affordable Care Act will reduce the number of employed Americans by the equivalent of 2.5 million full-time workers over the next 10 years.

Earlier this week, the CBO reported that they anticipate that a half million fewer Americans can expect to be employed by 2016 if President Obama’s proposal to increase the minimum wage to $10.10 per hour is implemented.

By reducing the effective number of working Americans, the United States will experience less economic growth than it would otherwise (remember, GDP is national income, which is the aggregate measure of all the income earned within the nation – if fewer people are earning incomes than otherwise might, the potential for solid economic growth is dragged down.)

By pursuing such job-killing policies, which we know is not an accident given recent statements by the Obama administration, it would appear that the administration has adopted the goal of deliberately weakening the U.S. economy.

While that would appear to be insane to most rational observers, if the Obama administration is really hoping to keep the interest rates for the money the federal government borrows as low as possible for as long as possible, then acting to keep the U.S. economy mired in a state of persistent stagnation and near-recession would make a perverse kind of sense. Especially if they have indeed all but thrown in the towel on ever generating jobs and economic growth during the next several years, which is also suggested by their recent statements.

Adam Smith once observed that there is a great deal of ruin in a nation. It’s a shame that we have so many public officials who are determined to find out just how much.

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February 2014