The Congressional Budget Office (CBO) recently estimated that President Obama’s deficits would add an additional $9.3 trillion to our national debt in the next decade. Many have expressed dismay at the enormity of this number, but few seem to fully grasp its devastating implications. This should be a matter of great concern, since even simple analysis shows that the CBO estimate spells out fiscal disaster ahead.
Since the enormous figures relating to national debts are difficult to grasp, they are often expressed in a form that makes them easier to comprehend. To make them more relatable, they are given as a portion of the country’s overall economic output, its gross domestic product or GDP. This is a more telling measure of a nation’s red ink, because it shows not only the relative size of its debt burden, but also makes it possible to rank countries according to the degree of their indebtedness. To illustrate this, $100 billion would represent very different debt levels for the United States and Tunisia. Due to the vast difference in the size of their economies, this number would mean negligible indebtedness for America, whereas for Tunisia it would mean a burden that would exceed its yearly economic output by nearly one-third.
In 2007 – the most recent year for which complete data are available – the list of world’s debtors was led by Zimbabwe whose national debt was 218 percent of GDP. Zimbabwe was followed by Lebanon (188 percent), Japan (170 percent), Jamaica (126 percent), and Sudan (105 percent). America’s debt that year – even thought the largest by far in nominal terms – constituted some 60 percent of our GDP, putting us into the 26th place.
Keeping this in mind, let us return to the $9.3 trillion that the CBO projects will be added in the next decade. When we combine this with our current debt – which today stands at some $11.3 trillion – we will get a figure of $20.6 trillion in 2019. This is an eye-popping number to be sure, and one that is certainly difficult to grasp. But its enormous size notwithstanding, America’s fiscal soundness will be ultimately determined not by the nominal value of this item, but by what portion of the GDP it will constitute.
Among its many areas of analysis, the Congressional Budget Office also forecasts the future growth and size of the American economy. According to a report it issued March of this year, the CBO projects that in 2019 our economic output will be $21.1 trillion. When we express the estimated $20.6 national liability as a portion of this, we will get a debt of more than 90 percent of GDP. Today this figure would place the United States in the top ten of the most debt-ridden countries in world.
Bad as this is, things are likely to be appreciably worse when 2019 rolls around. There are two main reasons for this. To begin with, the government almost invariably underestimates its expenditures when projecting future spending. We saw this recently when the deficit was first forecast to be $1.4 trillion, then $1.6 trillion and then again $1.85 trillion in March. But there is still a long time to go before the end of the fiscal year and with diving tax receipts, the deficit is likely to shoot even higher. There are some who have been warning that it will likely exceed $2 trillion. When, therefore, the Congressional Budget Office estimates a deficit of $9.3 trillion over the next 10 years, we can be reasonably certain that the actual number will be higher when the time comes.
Secondly, the CBO has been using rather optimistic assumptions about our future growth. It assumed that America’s real GDP would increase on average by 3.05 percent between 2010 and 2019, a forecast which is above the 2.7 percent average of the last 30 years. Furthermore, there are many who think that GDP increases of more than 2.5 percent are not realistic given that the policies of this administration will lead to an expansion in the size of the federal government, increased regulation and higher taxes, all of which will have a dampening economic effect. There are even those who argue that we are entering an era of European rates of growth.
If we make allowances for these considerations and assume that the CBO has understated its debt projection by 10 percent, and that we will see European-like average growth of 2.2 percent, we will get at some worrying results. On these assumptions, we get indebtedness of 21.53 trillion and an economic output of less than $20 trillion in 2019, which would mean a national debt in excess of our yearly gross domestic product.
This is not at all an unlikely possibility. To arrive at this number we merely took the government figures and made modest allowances for the kind of errors the government routinely makes in its projections. It is entirely possible that the differential between reality and the CBO’s current estimates will be even greater than the one obtained above.
This likelihood is further augmented by the fact that the CBO’s assumptions do not factor in the full cost of the president’s planned agenda or the prospect of future military contingencies. Robert J. Samuelson, an editorial writer at The Washington Post, recently wrote this:
Even these totals [CBO’s] may be understated. By various estimates, Obama's health plan might cost $1.2 trillion over a decade; Obama has budgeted only $635 billion. Next, the huge deficits occur despite a pronounced squeeze of defense spending. From 2008 to 2019, total federal spending would rise 75 percent, but defense spending would increase only 17 percent. Unless foreign threats recede, military spending and deficits might both grow.
One of the campaign themes of candidate Obama was the need to bring fiscal responsibility to Washington. But rather than seeking to fulfill his promise, the president has embarked on a spending spree that is unparalleled in this country’s history. Would that the president realize that the math and the rules of finance cannot be cheated and that the only way to avert the looming fiscal catastrophe is to change the course.