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Why the Deficit is Worse Than We Thought

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.

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18 Responses to Why the Deficit is Worse Than We Thought

  1. The typical American response to news like this is: hands over ears, humming..la,la,la, la,…just don’t mess with my stuff.

    The popular thought among our elected officials is that we will punish them by taking away their really cushy jobs if they do something we don’t like.
    That was true of the forcefull enactment of Obamacare, but this is different, we’re not going to blame Congress for righting what’s wrong and trying to put our fiscal house on the right path.
    We’re going to blame them if they do nothing or too little.

    • Absolutely right srdem. They need to grow a spine and do the hard work. Go big with the cuts and the populous will be unhappy, but the politicians will have our respect for doing the job they were sent there to do. If they settle for something piddly like the $300 million in cuts Boehner convinced them to accept with the budget, Congress will see a much larger freshman class after the 2012 elections.

  2. I totally depend on SS at this point–so if you mess with my stuff, you will have to being me a meal in a wagon under a bridge. But this does not mean people shouldn’t wait longer if they are young now (and bounding up mts at every opprtunity, as they like to tell you), or that public service people couldn’t wait beyond the 20 yrs they put in instead of collecting for decades while in other jobs, or that about a GAZILLION stupid wastes of money could not be ended… or that they could not collect on what a person earns, not just $106K of it or whatever it is. What we need is some big popular brainy president to tell it like it is and coax people into believing…oops on that one.

    • As someone who bounds up mountains every chance he gets (this weekend is the Biennial AT Conference in Abingdon, VA if anybody wants to sign up http://www.virginia2011.org) I have no problem with waiting for Social Security. In fact, I don’t even want it. I want to live my life as a rugged, self-reliant, free-born individual in the manner of the original settlers of North America.

      • You go, William. The rest of us who have disabilities, were behind the door genewise, made it this far and now have no marketplace salute you!

  3. 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.

    Given this administration’s unemployment prediction (see chart on page four: http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf), Mr. Lindsey is completely justified in disbelieving the economic growth prediction. Also, given this history of reality going in the opposite direction of this administration’s predictions, it’s terrifying to imagine what the real economic growth will be.

    • Thank you for the link William. That pdf is a keeper. Not surprising that Christina Romer and Jared Bernstein hightailed it out of the Obama administration when they saw the effects of the stimulus, unless that was the plan all along.

      Jared Bernstein is an alumni of the Economic Policy Institute, which gets funding from George Soros’ Open Society Institute. The death of capitalism is the goal of this evil man, and it looks like Soros is well on his way with the American taxpayer footing the bill for our own demise. Now that is what I call surreal.

  4. Gee Beeve, golly Wally….you mean this administration isnt quite telling it like it is???? This is me, pretending to be shocked.

  5. It seems pretty much criminal to me, when they know they are cooking the numbers to paint a rosy picture,of the current economy. Since they have no success at making positive change (like they PROMISED they would), then betting the country’s future on tomorrow’s successes is completely asinine.

    If they had any REAL concern for the future of the country, they would prepare their budget assuming the worst unemployment, and therefore tax revenues. Dishonestly betting the country’s future on the best case scenario should get them tossed out on their asses, with no sweetheart retirement from the gubmint. These people are crooks.

  6. Thank you Keith and all your readers !
    For every day seems to bring something new for me to learn..
    For such great, intelligent postings & articles to read..
    So rich and thought provoking from folks who really care
    about our country, our world and threatened way of life..
    And thank you Keith for maintaining your integrity in a
    profession which has thrown it’s standard in the sewer..
    Thank You,
    ol’ gator
    st. augustine fl

    • Howdy from Central Texas ol’ gator. Honest and ethical journalists like Keith are a rarity in D.C. We’re all fortunate to have found his site. The people who post here are all good patriots, with the exception of the occasional kool-aid drinker who pops in every now and then ;-)

      • Thanks for your truths-usually humorous and informative, Larry Lindsey is a smart and truthful economist and his vision is important to the half hearted negotiations supposedly going on in Washington. Whether they heed it is questionable. Usually they listen only to themselves as in self evident truths.

    • ol’ gator you are very kind. And I agree – hats off to the readers. So many people comment to me about how much they enjoy reading the comments here. This is the best group of critics, cynics, optimists, humorists and politicos around!