Larry Lindsey, who was George W. Bush’s initial chief economic adviser, has written a piece I thought you’d want to know about on why the deficit is so much worse than we realize. He concludes that the current negotiations are likely to yield little more than a drop in the bucket if entitlement reform is not addressed, which it probably won’t be in any serious manner.
If our politicians run from reforming Social Security and, especially, Medicare, then you’ll know they are sacrificing the Republic for their own selfish political ends.
Lindsey, you may remember, was a good economist but was fired by Bush for being disorganized and for publicly predicting that truth that the Iraq War was going to cost a lot more money than the administration wanted to let on.
Lindsey notes in today’s piece that current budgetary forecasts assume interest rates that are paid on the debt remain at today’s historic lows. But they inevitably will rise, making the government’s debt payments a lot more expensive.
First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5 percent. The average over the last two decades was 5.7 percent. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.
The 10-year rise in interest expense would be $4.9 trillion higher under “normalized” rates than under the current cost of borrowing.
Meanwhile, the White House’s optimistic forecasts for economic growth, he insinuates, are hilarious happy talk. And less growth than expected means less revenues than expected, and bigger deficits.
That consensus holds that economies tend to return to trend growth of about 2.5 percent, without ever recapturing what was lost in the downturn.
But the president’s budget of February 2011 projects economic growth of 4% in 2012, 4.5 percent in 2013, and 4.2 percent in 2014. That budget also estimates that the 10-year budget cost of missing the growth estimate by just one point for one year is $750 billion. So, if we just grow at trend those three years, we will miss the president’s forecast by a cumulative 5.2 percentage points and—using the numbers provided in his budget—incur additional debt of $4 trillion.
And then there’s Obamacare. You may have noticed that the number of short term waivers has already hit 1,400. That’s to stop companies from ending insurance for employees and eventually forcing the government to subsidize them. That is, it’s to make Obamacare seem friendly and cheap, at least until Election Day.
But a recent McKinsey survey, for example, found that 30 percent of employers with plans will likely take advantage of the (government subsidization) system, with half of the more knowledgeable ones planning to do so. If this survey proves correct, the extra bill for taxpayers would be roughly $74 billion in 2014 rising to $85 billion in 2019, thanks to the subsidies provided to individuals and families purchasing coverage in the government’s insurance exchanges.
So things are worse than I thought. These clowns negotiating the budget better come up with something real this time.