First the GDP numbers. They show a substantial growth over the next twenty years and this is a very optimistic assumption. This will be the key to their analysis because they then tend to peg all their numbers on a percent of GDP. Thus the greater the GDP the smaller the percentages. There is truly no reason to assume that the 2013 ans 2014 growth rates will ever be achieved especially given the current status of the economy. In fact they may be substantially lower if not negative as the costs of health care kick in. No one has managed to factor those costs in yet.
The following are the key annual percent changes for what made up the preceding numbers.
The key will be unemployment returning to 5% by 2014. That is a critical assumption. Employment generates taxes and also reduces costs. If as some suspect we may have entered into a new employment domain then this assumption may be far off the mark. The CBO does not perform "what if" analyses.
Then we look at the revenue and outlays and thus the deficit and debt. The summary is below:
The deficit drops from the trillion plus range in 2013 but that makes the assumption we discussed above regarding growth. There are no clear indicators for any of this at the current time.
The final chart is the debt and deficit in % of GDP as shown below.
The debt held by the public levels off at 70% of GDP. However that assumes the GDP growth rates which we question. Expenditures will always continue unless a massive change in Washington. Worse is that if we do net see the recovery then not only will GDP not grow but revenues are lower and outlays are higher. One can see not a 70% number but one approaching 100%.
In a recent post on VOX by Reinhart and Rogoff the authors look at this issue in broader terms. They contend that historically as debt approaches 90% of GDP there are major structural changes. Specifically they state:
Debt thresholds and nonlinearities: the 90% benchmark
Thresholds and non-linearities play a key role in understanding the relationship between debt and growth that should not be ignored in casual re-interpretations.
(i) Thresholds. Those who have done data work know that mapping vague concepts like “high debt” or “overvalued exchange rates” into workable definitions requires arbitrary judgments about where to draw lines; there is no other way to interpret the facts and inform the discussion. In the case of debt, we worked with four data “buckets”: 0-30%, 30-60%, 60-90%, and over 90%. The last one turned out to be the critical one for detecting a difference in growth performance, so we single it out for discussion here.
(The article in Figure 2) shows a histogram of public debt-to-GDP as well as pooled descriptive statistics (inset) for the advanced economies (to compliment the country-specific ones shown in Table 1) over the post World War II period. The median public debt/GDP ratio is 0.36; about 92% of the observations fall below the 90% threshold. In effect, about 76% of the observations were below the 60% Maastricht criteria.
Put differently, our “high vulnerability” region for lower growth (the area under the curve to the right of the 90% line) comprises only about 8% of the sample population. The standard considerations about type I and type II errors apply here. If we raise the upper bucket cut-off much above 90%, then we are relegating the high-debt analysis to case studies (the UK in 1946-1950 and Japan in recent years).
Only about 2% of the observations are at debt-GDP levels at or above 120% – and that includes the aforementioned cases. If debt levels above 90% are indeed as benign as some suggest, one might have expected to see a higher incidence of these over the long course of history. Certainly our read of the evidence, as underscored by the central theme of our 2009 book, hardly suggests that politicians are universally too cautious in accumulating high debt levels. Quite the contrary, far too often they take undue risks with debt build-ups, relying implicitly perhaps on the fact these risks often take a very long time to materialise. If debt-to-GDP levels over 90% are so benign, then generations of politicians must have been overlooking proverbial money on the street.
We do not pretend to argue that growth will be normal at 89% and subpar (about 1% lower) at 91% debt/GDP any more than a car crash is unlikely at 54mph and near certain at 56mph. However, mapping the theoretical notion of “vulnerability regions” to bad outcomes by necessity involves defining thresholds, just as traffic signs in the US specify 55mph (these methodology issues are discussed in Kaminsky and Reinhart 1999).Thus the CBO optimistic assumptions keep this below 70%. In reality three things should be noted:
1. This is just debt held by the public. We should consider total debt and with that we are over 100% now.
2. The numbers from the CBO fail to account for any downside. Thus 90% is readily achievable in three years.
3. We seem to leave out the FED and its cryptic balance sheet. One need just track Nomi Prins excellent data on the FED to see the scope of that problem as well. It doubles the current problem today!
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