The Congressional Budget Office (CBO) will release a new set of economic and budget projections for the next decade on Tuesday. These projections are likely to show a cumulative deficit over the next 10 years that is $2 trillion higher (at 1 percent of GDP) than the deficit CBO projected in January.
The reason for the higher projected deficit is not that Congress has suddenly blown another 2 trillion of the taxpayers' dollars on frivolous projects. Rather, the main reason for the jump in the projected deficit is that CBO is now projecting lower growth and higher unemployment over this decade than it did last January.
In other words, CBO now believes that the collapse of the housing bubble will cause even more and longer lasting damage than it did back in January. As a result of slow growth and high unemployment, the government will collect considerably less in tax revenues over the next decade than would have been implied by the earlier set of economic projections. The government will also be paying out more money in unemployment benefits, food stamps and other transfer programs than would be the case if the economy were healthier.
The real story in the new CBO projections should be the more dire economic outlook. CBO now expects the unemployment rate to be near 10 percent through most of 2010. Its new projections will show that the unemployment rate will only return to more normal levels in 2013 or even 2014, more than six years after the collapse of the housing bubble threw the economy into recession.
The implication of the new CBO projections is that millions more people will be needlessly suffering because of the economic mismanagement of the Greenspan-Bernanke-Bush crew. CBO views 4.5 percent unemployment as being the sustainable rate of unemployment. If the unemployment rate is 10 percent, more than 8 million people are needlessly out of work, with another 5 million or so being forced to work part-time because they cannot find full-time employment. These people will be struggling to pay their health care bills, cover their mortgage or rent payments, and meet other necessary expenses for themselves and their families.
The rational response to the news that the economy will be far worse than had previously been projected should be a demand for more stimulus. After all, why should millions of people lose their jobs, their homes, and their health just because the people who managed the country's economic policy over the last decade were incompetent?
Unfortunately, the same people who wrecked the economy are largely still running it and they still have the same set of economic priorities. Therefore, instead of talking about the economic weakness implied by the new CBO projections, the discussion will focus almost completely on the larger projected budget deficit. Instead of discussing ways in which we can reduce the unemployment rate and stimulate growth, the media will be highlighting calls for tax increases and spending cuts -- measures that will slow the economy and raise the unemployment rate further.
The deficit hawks who wrecked the economy will be insisting that the government cannot borrow this much money. They will do their best to scare people by talking about "trillion" dollar deficits. To be sure, these are big deficits, but there is no reason to believe that the economy cannot support them.
Japan now has a debt to GDP ratio of close to 180 percent. This would be the equivalent of a $27 trillion debt in the United States. Yet investors around the world are happy to hold yen and in fact hold 10-year Japanese government bonds at interest rates of less than 2.0 percent.
Looking back to U.S. history, after World War II, the debt to GDP ratio rose to 120 percent. This would be $18 trillion in today's economy. Yet, the three decades following the war were the period of most rapid growth in U.S. history, and the debt to GDP ratio fell to less than 30 percent.
The basic story is that we need to have large deficits now for the next several years in order to boost the economy back to full employment. Forcing a large portion of our workforce to endure a prolonged period of unemployment will inflict an enormous cost on these workers and on their children (i.e. the future generations whom the deficit hawks claim as their main concern).
The deficit hawks were hugely wrong in ignoring the $8 trillion housing bubble and the country is paying an enormous price for their mistake -- including much higher deficits. It is time to stop taking these birds seriously.