The CBO’s deep, unappreciated gloom
In this article from LBO #128 (yes, it’s posted quickly to the web, but that doesn’t happen often, so you really should subscribe if you don’t), I talk about the lust that some people—within Wall Street, the Federal Reserve, and the world of punditry—have for getting the federal deficit down. Contrary to this I argued that this is really the wrong time to start thinking about that—we still need the short-term kick of deficit spending to help get the economy off the mat, and then over the longer term we need to rethink our economic model. But I do want to take a look at the evidence that deficit hawks use to scare people into the need for austerity: projections for the growth in federal debt over the next seven decades.
(Quick definitional housekeeping. The deficit is the difference between what the government takes in and what it spends. To make up the difference, the government has to borrow, which adds to its total debt outstanding. In the jargon of the trade, the deficit is a flow and debt is a stock.)
Seven decades is a really long time to do forecasting over, since the economics profession isn’t really all that good at forecasting next year. But you do have to think about these things, if only to do some half-rational planning. People who worry about pools of red ink say that countries face the risk of debt crisis when their total debt reaches somewhere around 100% of their GDP. There’s nothing magical about this, but let’s just assume that this is more or less correct for a moment. On the Congressional Budget Office’s projection, which I characterized as hysterical without much elaboration in the original article, the U.S. won’t reach that point until 2074. Yet scaremongers are using that possibility as an argument for hacking away at Social Security and Medicare starting sometime in the next few years.
But what about those projections? Why did I call them hysterical? Becase, for one reason, they assume that starting about 10 years from now, the U.S. will settle into a period of profound economic stagnation. To put a number on it, they project that from around 2020 through 2084, GDP growth will average 2% a year. To underscore the point, that’s over a period of 64 years—enough for a person born at the beginning of that period to reach very close to today’s retirement age by the end. How weak is 2% growth? It’s only a little over half the 3.7% average that prevailed from 1870 through 2009. There have only been a few brief periods in U.S. history when trend growth was this low—the 1930s and around about now, in fact. And that’s about it.
For the full historical perspective, see the graphs below. The top graph shows yearly GDP growth from 1870 through 2009 and the CBO’s projections for 2010–2084. The heavy line shows the underlying trend using a statistical technique called a Hodrick–Prescott (HP) filter. It’s sort of a high-tech average. Note that the projected 2020–2084 trendline is lower than just about every period in the long sweep of history. The next graph does the same, but with per capita figures. The results are very similar: the projected average of 1.2% (using population assumptions detailed in a moment), vs. a long-term historical average of 2.1%. And the trend is lower than almost every bygone period. And the bottom graph isolates the HP trends to emphasize just how at odds with the historical record the CBO’s projections are.
How do they come up with these numbers? I asked the CBO for clarification, but they haven’t responded. But asking around yields something like this. Over the long term, economic growth is a function of labor force growth and the productivity of that labor—how much workers can produce in an hour or year of work. The CBO apparently assumes that the labor force will grow very slowly—around 0.3–0.4% a year. That’s less than half the current rate, and about half the rate that the Census Bureau projects the population will grow in the coming decades. If that’s true, the share of the adult population working will shrink to levels we haven’t seen since, well maybe forever, and certainly in modern times. At the same time, they’re assuming record-low growth in productivity, probably around 1.5%, which is something like a third below the long-term average, and well below the rate clocked in the much maligned 1970s.
These assumptions are very similar to those underlying projections that the Social Security system will go broke. But if the economy grows at something closer to its long-term average, then that won’t happen. And the massive growth in debt won’t happen either, because the government will collect more in taxes than it would if we were locked in a semipermanent slump.
So what’s going on here? Is the CBO pushing these strange projections to promote an austerity agenda—cutting social spending and privatizing Social Security? Or are they really serious that a seventy-year near-depression awaits us? Inquiring minds want to know.