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The Jobs Picture Crashes Into Debt Realities

Friday, December 4, 2009

If President Obama is serious about the economy, he should start by tackling the debt and its cost before he thinks of adding yet more money to the deficit for job programs.

President Obama hosted a job summit this week with academics, business leaders, and labor representatives at the White House. Some of the ideas discussed included spending to create jobs, potential tax credits for employers for new hires, a payroll tax holiday for employers, and big government work programs like those of the 1930s.

Weighing against new jobs programs, however, are two main issues. First, the $800 billion stimulus didn’t achieve much in the way of recovery. Unemployment remains high and millions of jobs haven’t been created as promised by the administration. The concept of “saved” jobs has been discredited, much of the money spent so far seems to have been wasted, and the promise of good reporting and oversight has gone unrealized.

Second, trillions of dollars in projected federal budget deficits over the next decade threaten long-term economic stability and complicate the president’s spending plans.

The chart below illustrates this point. Based on Congressional Budget Office data, it represents the interest the government paid on the federal debt as a percentage of GDP between 1962 and today and the projected debt service payments up until 2082. The projections are illustrated under the current CBO baseline and under the CBO alternative, more realistic, scenario. For comparison, the graph also shows CBO’s projections for the cost of Medicare and Social Security as a percentage of GDP. Notice that under either of CBO’s scenarios, the net interest payments, or the costs of the debt, rival the cost of two of our nation’s most expensive social programs.

deRugy chart 12.3.09

The CBO baseline assumes that the projected 2009 spending level will stay the same as a share of GDP indefinitely, minus stimulus and related spending—it represents “CBO’s best judgment of how economic and other factors would affect federal revenues and spending if current laws and policies did not change,” CBO explains. The more likely “alternative” scenario factors in policy changes “that are widely expected to occur and that policy makers have regularly made in the past.”

The net interest payments, or the costs of the debt, rival the cost of two of our nation’s most expensive social programs.

The CBO alternative assumes that excise taxes and estate taxes remain constant as a share of GDP over the long term (instead of changing as scheduled under current law). It also assumes that tax provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003—the so-called “Bush tax cuts”—would be extended, and that the Alternative Minimum Tax would be indexed to inflation.

Both scenarios assume that Medicare and Medicaid will continue to pay benefits as currently scheduled, but this is highly unlikely since the long-feared explosion of spending on Medicare and Social Security is now just around the corner as many baby boomers approach retirement. The alternative scenario assumes greater spending on federal programs other than Medicare, Medicaid, and Social Security than the baseline scenario does.

As CBO points out, "many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policy than the extended-baseline scenario does.”

Another point to note is that for now, the government is facing a very low interest rate on its debt. However, things will change when the economy recovers and the Federal Reserve feels it can increase the rates.

This chart draws a very dramatic picture of our country’s fiscal outlook. Starting in 2012, the cost of the debt as a percentage of GDP will explode from a mere 1.8 percent of GDP to more than 30 percent of GDP in 2082.

Starting in 2012, the cost of the debt as a percentage of GDP will explode from a mere 1.8 percent of GDP to more than 30 percent of GDP in 2082.

To give you an idea of what this means, if I get to retire at 65, in 2035, the cost of debt will have more than tripled from 1.8 to 7.5 percent of GDP. And by the time my daughter Juliette retires, in 2070 (assuming that she is still allowed to retire at 65) the cost of the debt will have reached 23.8 percent.

How much money are we talking about? Today, the national debt is topping $12 trillion and the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year. To put these numbers in perspective, Edmund Andrews writes in the New York Times that this means an additional $500 billion a year in interest payments in less than 10 years, which is "more than the combined federal budgets this year for education, energy, homeland security, and the wars in Iraq and Afghanistan."

Needless to say, if President Obama is serious about the economy, he should start by tackling the debt and its cost before he thinks of adding yet more money to the deficit for job programs.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: De Rugy has pored over government spending for THE AMERICAN. She uncovers that the federal deficit came from enormous government spending in “A Peek Inside the Deficit” and further details how unemployment has increased in tandem with stimulus funds in “So How Is the Stimulus Working Out?” She shows how Obama has been “Making Bush Look Like a Piker” and asks “Is This What Deregulation Looks Like?”
AEI’s John Makin reviewed the U.S. economy and government policy in November’s “Post Crisis Risks.” Andrew Biggs also examines the unpredictability of Social Security benefits in an AEI Outlook.

Image by Darren Wamboldt/Bergman Group.

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