Weather and economics are similar in that they are difficult to forecast in the near term but the job gets easier the further out you look. For example, we may or may not have a white Christmas, no one knows, but the long term the forecast is warm and warmer.
Similarly, we find it difficult to project the economy over the next few months. We can grind all the data and interpret historical trends, but the economy has a mind of its own. Who knew last year that oil would fall below $40 a barrel?
But the long term the picture is shockingly clear. If we don't get our fiscal house in order, climate change will be the least of our worries. The long term fiscal problem our political leaders are struggling to ignore is our aging population which is placing ever greater demands on the government's resources. Conservative Republicans in Congress make a mighty stink about wasteful government spending programs, and for sure their complaints are valid, but like their liberal Democratic colleagues, they duck the challenge of the real spending problem which is the entitlement programs - Social Security, Medicare and Medicaid.
The problem is our aging population. In 2007 there were 44 million people relying on the entitlement programs. By 2025, there will be 70 million. Today the seniors consume about 10 percent of GDP. By 2025 it will be 12 percent, and by 2040 it will be 14 percent. Already, Social Security is spending more than it takes in from payroll taxes. This little detail gets lost because the gap is supposedly covered by the Social Security Trust Fund. But the Trust Fund consists entirely of federal bonds which are basically pieces of paper saying the government owes itself money. When the Social Security Administration redeems those bonds to pay beneficiaries, the real money comes out of the federal treasury.
The fundamental near term challenge facing the U.S. economy is monetary policy. We need to have the fed modestly raise interest rates in order to preserve its credibility but also to provide forward guidance that indicates further increases are unlikely. In other words, the best that the Fed can do right now to provide some certainty to credit and investment markets is to pursue a policy of "one and done" on interest rates. But regardless of what the Fed does, no one really knows where the economy will be a year from now.
As for the long term, it is true that the federal budget deficit has fallen from 8.7 percent of GDP in 2010 to only 2.5 percent today, but that is due mainly to hard cuts in discretionary spending - the military, roads and bridges, education, and such. The real spending machines are the entitlements and both parties are united in their determination to ignore that problem.
In 2010, President Obama, acknowledging the challenge of entitlements, convened a high level panel of experts to deal with it, the Simpson-Bowles Commission, which produced some sensible, balanced recommendations for handling the problem. But President Obama and leaders of both parties soon realized that action would mean tough political decisions on the big ticket items. They stood firmly together in their resolve to avoid the issue. They put the commission's report away and it hasn't been heard from since. But our long term fiscal problem remains.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. December 2015