Monday, September 21, 2020

News on CBO's 2020 Long-Term Budget Outlook

David Lawder of Reuters summarized the Congressional Budget Office's Long-Term Budget Outlook (released today) in Coronavirus recession to push U.S. debt to nearly twice GDP by 2050.

Without changes to tax and spending laws, the federal debt held by the public will reach 195% of GDP by 2050 ... a level approaching the current debt ratios of Japan and Greece ... 

CBO director Phillip Swagel said the long-term U.S. fiscal path is unsustainable, putting long-term confidence in the dollar at risk.

"There is no set tipping point at which a fiscal crisis becomes likely or imminent, nor is there an identifiable point at which interest costs as a percent of GDP become unsustainable," Swagel said in a statement, "But as the debt grows, the risks become greater."

Scott Lanman of Bloomberg summarized the outlook in CBO Sees U.S. Federal Debt Almost Double Economy's Size in 2050

While low interest rates "indicate that the debt is manageable for now and that fiscal policy could be used to address national priorities," the budget path is unsustainable over the coming decades and borrowing costs will eventually become an issue, CBO Director Phillip Swagel said in a statement.

Some scholars are increasingly taking issue with such views in recent years. The school of Modern Monetary Theory argues that countries like the U.S., which borrow in their own currency, don't need to worry about boosting debt to support growth, so long as inflation remains under control.

Kate Davidson of the Wall Street Journal summarized it in CBO Downgrades Long-Term Projections of Economic Growth

Rising debt is at the center of a debate in Washington over how much more support the economy needs to recover from the pandemic ... The agency expects slower growth over the coming decades as the U.S. crawls out of the deep downturn brought on by the pandemic ... The forecasts are highly sensitive to changes in the pace of economic growth and the path of interest rates.

To the point that the forecasts are highly sensitive to assumptions, Kelly Evans of CNBC questioned the estimate that deficits will equal 17.5 percent of GDP in 2050, tweeting "i'd like to see the 2020 projections that were made in 1990."

Scott Fullwiler tweeted "On the day CBO puts out its updated long-term govt debt projections, it's crucial to recognize that on this issue CBO has gotten everything important dead wrong for decades running." He links to an earlier blog for New Economic Perspectives where he summarizes assumptions of CBO's models and finds them "inapplicable to a sovereign, currency-issuing government operating under flexible exchange rates such as the US." On CBO's assumption of crowding out, Fullwiler writes

"The analysis is based on the loanable funds market--which DOES NOT EXIST in the real world. In reality, the funds that banks lend are created out of thin air, not constrained by saving, the flow of deposits, or fractional reserve requirements ... CBO's analysis is simply inconsistent with how the modern financial system actually works."

In response to CBO's statement that "there is no identifiable tipping point", Fullwiler writes "this is true of course, since there isn't a tipping point at all if it's your own currency and you have the ability to set the interest rate on it."

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