CBO -Unless We Act Soon The US Economy Is Screwed

The CBO published its latest Federal budget outlook and reported that unless we do something to reverse the growing national debt (and soon)  the U.S. economy will collapse under its own weight. 

Between 2008 and 2012, financial turmoil and a severe drop in economic activity, combined with various policies implemented in response to those conditions, sharply reduced federal revenues and increased spending. As a result, budget deficits rose: They totaled $5.6 trillion in those five years, and in four of the five years, they were larger relative to the size of the economy than they had been in any year since 1946. Because of the large deficits, federal debt held by the public soared, nearly doubling during the period. It is now equivalent to about 74 percent of the economy’s annual output, or gross domestic product (GDP)—a higher percentage than at any point in U.S. history except a seven-year period around World War II.

According to the report there will be a relatively short period where the debt will go down, but then because of the aging of the population it will jump higher than before.

The deficit would grow from less than 3 percent of GDP this year to more than 6 percent in 2040. At that point, 25 years from now, federal debt held by the public would exceed 100 percent of GDP.

Boys and girls can you say Greece? If the U.S. Government does not act to reduce the rising debt, our debtors will lose their trust in our ability to pay back our loans and raise the interest rates the government pays, which will increase the debt even further. The increasing debt is being driven by entitlements specifically Obamacare:

Throughout the next decade, however, an aging population, rising health care costs per person, and an increasing number of recipients of exchange subsidies and Medicaid benefits attributable to the Affordable Care Act would push up spending for some of the largest federal programs if current laws governing those programs remained unchanged. Moreover, CBO expects interest rates to rebound in coming years from their current unusually low levels, raising the government’s interest payments on debt. 

And by 2040 we will see a debt that was only approached once in U.S. history, the last year of WWII and the year after.

The harmful effects that such large debt would have on the economy would worsen the budget outlook. The projected increase in debt relative to the size of the economy, combined with a gradual increase in effective marginal tax rates (that is, the rates that would apply to an additional dollar of income), would make economic output lower and interest rates higher than CBO projected when producing the extended baseline. Those macroeconomic effects would, in turn, feed back into the budget, leading to lower federal revenues and higher interest payments on the debt

.....The large amount of federal borrowing would draw money away from private investment in productive capital over the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital, and therefore lower output and income, than would otherwise have been the case, all else being equal.  

Federal spending on interest payments would rise, thus requiring the government to raise taxes, reduce spending for benefits and services, or both to achieve any targets that it might choose for budget deficits and debt.

The large amount of debt would restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.

And as the national debt and the interest gets higher so is the likelihood of an economic crisis according to the CBO.

The only way to stop this doomsday projection is to cut the national debt:

The sooner significant deficit reduction was implemented, the smaller the government’s accumulated debt would be; the smaller the policy changes would need to be to achieve the chosen goal; and the less uncertainty there would be about what policies might be adopted. However, precipitous spending cuts or tax increases would give people little time to plan and adjust to those policy changes, and the changes would weaken the economic expansion during the next two years or so—a period when the Federal Reserve would have little ability to lower short-term interest rates to boost the economy.

Spending cuts or tax increases that were implemented several years from now would have a smaller negative effect on output and employment in the short term. However, waiting for some time before reducing spending or increasing taxes would result in a greater accumulation of debt, which would represent a greater drag on output and income in the long term and increase the size of the policy changes needed to reach the chosen target for debt.

Even if the government wanted to give a few years for people to anticipate and prepare for cutbacks in spending, it is important to establish a plan quickly to " reduce uncertainty, and enhance businesses’ and consumers’ confidence. Such decisions could thereby make output and employment higher in the next few years than they would have been otherwise."

The CBO warnings should generate fear in the hearts of all Americans. As as the national debt grows, the economy slows and it is the middle class and working poor who will suffer the most. At the same time, Medicare and Social Security, vital health and retirement programs, are nearing bankruptcy. Which means that Medicare and Social Security won’t be there to help the seniors who have contributed to these programs their entire working lives, and like the slowing economy will hurt the people who need the programs the most.

The national debt has grown by 80% from approximately $10 trillion to over $18 trillion during the Obama presidency, according to the CBO that accelerated growth needs to stop and reverse. The National debt is no longer an issue that can be "kicked down the road," because relatively soon it will be too late to fix.