“Eventually Increasing the Risk of a Fiscal Crisis”

By Alan R. Davis

“Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.”  CBO Director Douglas Elmendorf to Senate Budget Committee 2/11/2014

See more at: http://cnsnews.com/news/article/susan-jones/cbo-director-large-and-growing-federal-debt-could-produce-fiscal-crisis#sthash.JVxpfDmA.dpuf

On Tuesday February 11, 2014 Director Elmendorf of the Congressional Budget Office warned the Senate that the Nation’s increasing federal debt “could have serious negative consequences” including “…increasing the risk of a fiscal crisis”.  His choice of words was intriguing. It’s a lot like watching someone’s house on fire and saying that it “could have the serious negative consequence of increasing the risk of having to find alternative housing”.  If someone’s house catches fire they WILL have to find alterative housing, at least for awhile.  And having already run deficits for all but four years since 1969 we already have a fiscal crisis.

Washington is full of tricks to keep from recognizing the size and immediacy of the crisis.  Just a few of them are:

-          Using unrealistically low values for the inflation and interest rate assumptions in their projections.  Both the CBO and WH OMB have made a habit of using artificially low assumption values.  The CBO is projecting inflation won’t exceed 2.4% and the WH OMB used 2.2% in their 2014 Budget.  We’ve only had nine years of inflation that low or lower since 1965.  Each of those were years of recession or extremely low economic growth.  Using low inflation values allows them to use low interest rate values since they are in large part based on inflation.

-          Using current law even when Congress makes a habit of ensuring that some of current laws’ provisions don’t get implemented.  There's no better example than the required reduction in physician Medicare payments.  Each year Congress passes the “doctor fix” which applies to only one year leaving the required reduction in the remaining nine years of projections.  I believe that’s gone on for 15  years and the current value for the reduction is 24%.

-          Using newly defined ratios.  Look back prior to the WH OMB’s 2012 Budget and see if you can find any reference to “Primary Deficit”.  I didn’t.  But now they calculate the deficit without Net Interest Outlays because Net Interest Outlays are about to explode.  They also use Public Debt to compare to GDP rather than using Gross Debt because we've already exceeded 100% of GDP when Gross Debt is used.  100% is the "point of no return."

-          We all know how Washington also used the Government Trust Funds as a “free” source of funds.  There's no better example than the Social Security Trust Funds.  Individuals were required to contribute into the trust funds so there would adequate funds to pay future benefits.  But the money has already been borrowed to offset General Fund Deficits.

The CBO’s baseline projection report starts by showing a graph of budget results from 1974 through the 2023 projections.  There are only four out of those forty one years in which we've had surpluses.  For a Nation that had more than twice as many surpluses than deficits in its first 140 years of existence that’s a terrible record.  We once believed we should run surpluses in times of peace and prosperity so we could run deficits in times of war and economic difficulty.  Now we accept deficits just because we've happened to run them in the past.  That’s a sure sign of a significant fiscal crisis.