September 8th, 2014
07:06 PM ET

Some good news out of Washington

For more What in the World watch Sundays at 10 a.m. & 1 p.m. ET on CNN

By Global Public Square staff

We’re always on the lookout for good news – and we have some important good news this week, and it's actually coming out of Washington, despite all the polarization. Of course, true to form, the two parties disagree about this piece of news. So what is it?

Well, the nonpartisan Congressional Budget Office recently released its semi-annual outlook of the U.S. economy over the next decade. And the CBO's headline is that things are going better than expected. We are firmly in an economic recovery with substantially lower federal deficits, low interest rates and, we would add, little danger of inflation.

The CBO says that the federal deficit – the gap between revenues and spending – is projected to be $506 billion in 2014. That is just 2.9 percent of GDP, slightly lower than the average shortfall over the last four decades.

Keep in mind that in 2009 the federal deficit was 9.8 percent of GDP. The current number is much better than most believed was possible just a few years ago. 

Nobel Prize winning economist Paul Krugman argues that the debt and budget crises were "imaginary" and have "fizzled." He says the new CBO projections are further proof that the "debt apocalypse has been called off."

Given the aging population, the U.S. debt to GDP ratio will increase after the next decade, Krugman says. But, he notes that health care costs, which play by far the largest role in doomsday budget scenarios, have slowed dramatically.

In 2019, the CBO projects that the federal government will spend $95 billion dollars less on Medicare than it had anticipated spending on the program just 4 years ago. The New York Times' Upshot blog points out that $95 billion is more than the government will spend on that year on welfare, unemployment insurance, and Amtrak combined.

Sounds great, right?

Okay, let's check out the view from the worry warts. The long view, they say, is not so promising. Federal spending on entitlement programs, they argue, are unsustainable. The federal debt – that is the debt held by the public as a percentage of GDP – will reach 74 percent by the end of the fiscal year. That is about twice what it was at the end of 2007, when the federal debt was just 35 percent of GDP. And that number is projected to be more than 100 percent of GDP in 25 years.

According to the CBO, that is "a level seen only once before in U.S. history, just after World War II."

Rob Portman, a Republican Senator from Ohio, warns that the retirement of 77 million baby boomers will create an "entitlement meltdown." By 2030, he says, there will only be two workers to support each retiree, whereas there were five workers to support each retiree in 1960.

What's more, 85 percent of future deficit increases between now and 2024 will be driven by three things – interest payments on federal debt, Social Security, and spending on health care programs like Medicare and Medicaid. Given that projection, discretionary spending – which includes defense, housing assistance, infrastructure, education – would be whittled down to just 5.2 percent of GDP by 2024. That would mean massive cuts in all these programs.

Keep in mind that such spending accounted for 6.8 percent of GDP in 2014 and has averaged about 8.3 percent over the last 40 years, according to the CBO. So we're already way down. We can't keep cutting the programs that will ensure our future prosperity.

Now, the final piece of good news. It wouldn't take all that much to fix the situation. The CBO estimates that the U.S. could stabilize the debt to GDP ratio by finding tax increases or spending cuts equivalent to just 1.2 percent of GDP.  How about a compromise that does both at 0.6 percent of GDP each?

The bad news, of course, is that even this modest, commonsensical solution is going to go nowhere in Washington – for now at least.


Topics: Economy • What in the World?

soundoff (70 Responses)
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    September 10, 2014 at 10:46 am |
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    September 14, 2014 at 4:28 pm |
  6. Glenn Young

    The issue we need to be looking at is not just wages, but how wealth is developed. I think of it as more or less as a three legal legged stool (not counting inheriting money,nor money from illegal activities) .. This legs are wages (and bonuses), fundamental investments (houses/conservative investments/mutual funds bond funds) and speculative investments (Markets) For the most part for the middle classes and working classes and poor, they have basically only had two legs (no real investments) and those who had the second leg ... housing and conservative investments, lost a great deal of their wealth in the 08 event and have not really gotten most of that wealth back ... for those with speculative investments ... they have recovered or better ...

    SO for those who are without speculative investments ... they are rightfully feeling poorer. So the question is ... how do we get more people to use part of their resources into speculative investments ... will all the risk and rewards involved

    All the other factors you listed will continue to impact wages ... and keep them lower ... so the need is upon people to adjust and learn how to participate in the other leg of wealth.

    October 12, 2014 at 10:58 am |
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