Do the Math

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The deficit reduction ‘super commission’ has now begun its deliberations amid fractious discord among its members.  The official target is to reduce the deficit by a total of $1.5 trillion over a period of 10 years, although the actual number may still be up in the air.  The question is whether this is a sincere effort or simply a cosmetic and symbolic action to create the appearance of progress as the election next year comes into increasing focus.

Let us briefly the review the problem.  The country is on a non-sustainable fiscal path.  Government revenues have been nearly constant as a percentage of GDP, which has averaged 17.9 percent of GDP since 1952.  In contrast, while expenditures have averaged over 20 percent of GDP,  spending has been on a stead upward trend, standing now at about 25% of GDP.  The current deficit is about 10% of GDP, which is the gap between revenues and expenditures. 

Unless the current gap is addressed, the deficit will only become worse.  OMB projections show that under likely scenarios entitlement spending – principally Social Security and healthcare – will exceed expected revenues by 2050, leaving nothing for discretionary spending or defense.  The main cause of this problem is not, as the current presidential debates may imply, Social Security.  Rather, the principal problems are accelerating expenditures on Medicaid and Medicare. 

Now consider what the ‘super commission’ will accomplish if it achieves its goal of reducing the deficit by $1.5 trillion within 10 years.  Current GDP is slightly less than $15 trillion, and assuming it were to grow at even the modest rate of 1.5% per year over that period, the cumulative estimated deficit would total about $10.5 trillion.  A reduction in this total by $1.5 trillion is trivial compared to the size of the problem. 

Even if the commission were totally successful in achieving its goal, we would still be faced with a 60% increase in the outstanding public debt putting the nation in the danger zone identified by Reinhart and Rogoff in their study of 200 years of financial and economic crises.  Furthermore, the projections imply the need for a series of additional agreements to serially increase the public debt ceiling.  The recent pattern has been to authorize debt-ceiling increases of from $400 to $500 billion at a clip.  So, unless things change, we will be faced with a series of debt-ceiling crises, at least once a year over the next ten years. 

These back-of-the-envelope calculations suggests that the current attempts to deal with the nation’s fiscal problems are at best a sham and assume that the general public will be fooled into believing that the Congress has righted its ways and is attempting to put the nation on a sound financial footing. 

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About Bob Eisenbeis