The Bubble Budgets<\/em>, Financial Times 2001). But the great majority embraced the super surplus story. It didn\u2019t require anyone to dream dreams. All you needed do, to believe in these riches, was to imagine that the next ten years would, in most respects, approximate the last five years. A steady as she goes forecast landed you in Shangri La by decade\u2019s end.<\/p>\n\n\n\nOf course that is not exactly how things worked out. Instead we witnessed a stock market crash, wiping out the inflated individual income tax payments, a recession, ill-timed tax cuts, two wars, a spectacular financial crisis and a big recession. In short, almost everything that could drive the deficit higher came to pass. The end result? Deficits reappeared and then soared. The 2011 deficit was over 8% of GDP\u2014quite a miss, relative to the 5% surplus expectation championed in the 2001 outlook.<\/p>\n\n\n\n
The 2014 forecast, I think, suffers from the same kind of myopia that helped create the 2001 outlook. The forecast embraces a paltry growth trajectory. Why? Powerful reasons are given, but they all amount to elaborations of the same simple linkage:<\/p>\n\n\n\n
We expect a disappointing backdrop, because the backdrop for too long\u2014five
years\u2014has been disappointing.<\/p>\n\n\n\n
In effect, CBO is saying, that notwithstanding a 50 year history of 3% real growth for the U.S. economy, the last five years are sufficient to allow them to assert that those longstanding trends are now a thing of the past. So just as CBO dismissed worries about excessive options income, the ineluctable arrival of recessions and a myriad of other things as they promised a $5 trillion boon, they now dismiss the prospects for any meaningful recovery and project a dismal backdrop as far as the eye can see.<\/p>\n\n\n\n
In 2001 I was adamant that the vision of eternal bliss was bound to be very wrong. Indeed, forecasting that eternal perfection was unlikely was about the easiest pronouncement I ever made. In current circumstances, I cannot say I KNOW CBO\u2019s pessimism on growth is unfounded. The point, however, is that the pessimism they champion on the deficit and debt outlook, is almost certainly unfounded. And that, of course, is because the debt explosion is almost entirely a product of the mismatch they have with dismal growth and normal real interest rates.<\/p>\n\n\n\n
The CBO effort is therefore captive to a much more insidious computation. Again, for emphasis, the forecast embraces a traditional rise for interest rates, notwithstanding no climb for economic growth. I guess the charitable thing to say is that, having no evidence that things should be different for interest rates, they impose a \u2018more of the same\u2019 interest rate forecast\u2014a move to a 1990s invented Taylor Rule neutrality. And lo and behold we are in a debt service crisis.<\/p>\n\n\n\n
But the crisis disappears if interest rates reconcile themselves with the rotten real economy outcome. Likewise the crisis evaporates if real growth returns to a more traditional trajectory. My own tastes lean toward the second notion. An Irish colleague of mine at Johns Hopkins thinks the pessimism on the economy is justified. We like to think our different biases reflect stereo-typical differences between American and Gallic sympathies. But we completely agree on the point of this essay. Deficit and debt possibilities are much less threatening if we demand coordinated opinions about interest rates and real economy trajectories.<\/p>\n","protected":false},"excerpt":{"rendered":"
The CBO\u2019s recent projection of a federal-debt disaster rests critically on the combination of two projections: 1. Real interest rates will rise substantially, increasing the cost of debt service. 2. Real GDP growth will remain tepid, resulting in tepid growth in tax receipts. Either of these outcomes might plausibly occur. But both history and basic […]<\/p>\n","protected":false},"author":470,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[112,114],"tags":[],"coauthors":[150],"acf":[],"_links":{"self":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts\/1520"}],"collection":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/users\/470"}],"replies":[{"embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/comments?post=1520"}],"version-history":[{"count":1,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts\/1520\/revisions"}],"predecessor-version":[{"id":6674822,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts\/1520\/revisions\/6674822"}],"wp:attachment":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/media?parent=1520"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/categories?post=1520"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/tags?post=1520"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/coauthors?post=1520"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}