James Pethokoukis

Politics and policy from inside Washington

Gloomy CBO forecast is now Obama’s best-case scenario

Aug 24, 2011 20:16 UTC

After reading one bearish Wall Street economic report after another, the new Congressional Budget Office budget and economic forecast looks absolutely glowing by comparison. The CBO sees the U.S. economy growing 2.4 percent this year, 2.6 percent next — and then a brisk 3.6 percent through 2016.

By comparison, Goldman Sachs forecasts just 1.5 percent growth this year and 2.1 percent next. JPMorgan is even gloomier with a prediction of 1.5 percent this year and 1.3 percent next. If only the CBO knew something the bank didn’t. Actually, it’s just the opposite. The CBO forecast doesn’t include any of the deteriorating economic data from recent weeks, nor does it take into account the stock market’s stomach-churning volatility of late.

Yet even CBO’s dated optimism still shows the average annual unemployment rate staying above 8 percent until 2016. If the budget scorekeeper saw the world like Goldman and JPMorgan, its unemployment prediction would be more like their’s. Goldman sees the jobless rate hitting 9.25 percent in 2012, while JPMorgan thinks it will climb to 9.5 percent.

The rosy economic forecast is one reason I place little confidence in the CBO’s budget projections. The CBO now sees just $3.48 trillion in additional borrowing over the next decade, allowing the debt burden to fall to 61 percent a decade from now. Back in January, the CBO baseline forecast saw the federal government borrowing another $6.97 trillion from 2012 to 2021, pushing the country’s debt-to-GDP ratio to 76.7 percent from 69.4 percent in 2011. (Two-thirds of the difference between the two forecasts is due to the recent Budget Control Act. Keep your fingers crossed on that one.)  If CBO overestimates growth by just 0.1 percentage point a year, the debt will be $300 billion larger. A full percentage point equals $3 trillion in additional deb

In addition, CBO thinks that with a more realistic policy forecast,  annual deficits from 2012 through 2021 would average 4.3 percent of GDP instead of 1.8 percent. And with cumulative deficits of 8.5 trillion, total public debt would be 82 percent of GDP by the end of 2021. Once you add in the slower growth forecast, we might easily be talking about $10 trillion in new debt over a decade. And that would likely push the debt-to-GDP ratio to around 100 percent of total output (not counting Social Security IOUs.) There is nothing in this report to make one feel better about the economy, debt trajectory …  or President Obama’s chances for reelection.



James, James you keep predicting Obama as being a one-termer. Well, I wouldn’t ’cause I see him stacking
his cards and playing the angles again. One little nod from Oprah and he’s in again. It doesn’t matter if he created a birth certificate or not. It doesn’t matter if the economy is tanked. Voters aren’t that bright anymore and thinking someone else is always going to pay.
Life is going to be getting worse, trust me.

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Is Elmendorf’s CBO too pessimistic or is Orszag’s OMB too optimistic?

Apr 12, 2010 17:01 UTC

White House budget chief Peter Orszag thinks his old colleagues at the Congressional Budget Office are being too pessimistic over the potential budget savings of healthcare reform (via The Hill):

“I think if anything, the deficit impact may well turn out to be larger than what was projected by the Congressional Budget Office for two reasons,” Orszag said at an event sponsored by the Economic Club of Washington. ”One, if you look at the history of projections on major pieces of legislation, they’ve tended to be too conservative rather than too optimistic,” he said. “And second, the scoring largely does not take into account this evolution toward paying for quality, which I think in this decade will begin to pay off.”

Me: Interesting, the International Monetary Fund thinks Orszag’s Office of Management and Budget might be too optimistic about its overall fiscal forecasts. This from the folks at e21:

The IMF working paper makes a compelling case that the Office of Management and Budget (OMB) uses unrealistically low interest rates in its forecasts of future debt and deficit levels, assumes too rapid a recovery, and overstates the speed at which countercyclical entitlement expenditures will fall in response to economic growth. As the IMF explains (page 14), “aging and health related spending are not the key drivers of this debt build-up.” Indeed, policy choices are.

Optimism is nothing new. As the IMF explains, “the past record of budget projections shows a strong tendency for ‘optimistic’ budget forecasts.” With the exception of 1993 to 1997, OMB projections have underestimated the growth of deficits and debt. What’s different about the Obama team’s projections is the magnitude of their optimism. The IMF estimates that to stabilize debt below 70% of GDP would require a fiscal adjustment of about 3.5% of GDP. In nominal terms, that would require some combination of spending cuts and tax increases equal to roughly $600 billion in 2014 alone.

What’s next for financial regulatory reform

Feb 12, 2010 18:10 UTC

With healthcare on ice, financial reform is the hottest game in town. Now Dodd is trying to bypass Shelby to somehow gin up a bipartisan bill with Corker –  who takes the issue extremely seriously. A few thoughts:

1) A CFPA is still the stickler. GOP, including Corker probably, will only accept a non stand-alone regulator will narrow rule-writing and enforcement powers. But  CFPA is dominant issue for Obama WH.

2) Corker is more easily undercut by McConnell than old bull Shelby. If McConnell doesn’t want a bill, there will not  be a bill.  At this point, the smart betting is that GOP views denying Dems a victory more important than anti-populist backlash for opposing reform. They will label it a bailout bill if there is even a hint at giving Treasury TARP 2.0 powers. But if it is watered-down enough, it can pass.

3) If a Dodd-Corker bill gets to the floor, both Left and Right will push a flurry of amendments that they would’t try with Dodd-Shelby. Should be a chaotic mess.

4) Looks like the Volcker rule isn’t going anywhere.

3 myths about ObamaCare, the Baucus bill and healthcare reform

Oct 16, 2009 13:17 UTC

I just wanted to highlight some items from a previous post on healthcare reform:

1) It costs $829 billion.

It accomplishes this financial feat, however, through budgetary trickery. The plan includes a start year of 2010, even though no money is spent that year and just $14 billion through 2013. Cost the plan out from 2011 through 2020 and it suddenly morphs into a trillion-dollar plan. Indeed, the average annual cost from 2015 through 2019 is $150 billion a year

2) It will cut entitlement spending.

The CBO projects $81 billion in savings over the first decade and then “the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion.”

Great news. But those savings will materialize only if Congress actually cuts a projected $400 billion in government healthcare spending — including Medicare reimbursements to hospitals, doctors and other providers –  over 10 years.

Skepticism here is warranted. Previous congressional promises to cut reimbursements haven’t panned out. And Senator Debbie Stabenow, a Michigan Democrat, has just introduced a bill that would actually increase Medicare fees to doctors by $247 billion over the next decade  That $247 billion should, by all rights, be added to the cost of the Baucus bill. (Interestingly, if Congress actually stuck to the cuts, the tax increases would not be necessary, according to the Tax Foundation.)

3) It only raises taxes on companies.

Then there are the hidden fees. The Baucus bill imposes a $200 billion excise tax on expensive insurance plans. That’s a cost insurers will certainly pass onto consumers, nearly 90 percent of whom would make under $200,000, according to the Joint Committee on Taxation.  That kind of sounds like a stealth middle-class tax increase.

And you can be sure few taxpayers understand that a catch accompanies new government subsidies to cover the cost of private insurance. Those subsidies phase out as incomes rise. The result is a huge effective tax increase. As the CBO puts it: “Marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.”


3 myths. Here’s the deal. How far are the dumbascraps ready to go. Harry Reid speaks of the nuclear option. What’s next illegal alien 30 million amnesty and union workers with lower wages since there will be 30 million newly legal citizens competing for their jobs. All this talk about the nuclear option…just let reid do it. He’s already gonna be out of office in 2010. Watch Corzine go by by. Obama’s approval is 47% in rasmussment. Facts are if the dumbascraps are willing to destroy america like that then they who can support that garbage. Hey hispanic and white women come back home to the republican party. the black mentality will only take you to the poor house.

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Why the US budget deficit is worse than you think

Sep 25, 2009 14:40 UTC

The great Dan Clifton of the Strategas Research finds this gem:

Douglas Elmendorf, director of the Congressional Budget Office, told the National Economists Club that today’s deficits are more troublesome than in the early 1980’s. Projected deficits are twice the deficit in the early 1980’s but more importantly there is a growing disconnect between current law and provisions set to expire which will eventually be extended. Most notably there is (and will be) growing pressure to extend the expiring stimulus provisions in addition to the usual expiring provisions.

Me: See, while tax cuts get sunsetted, spending programs never die. And this is why the $800 billion stimulus is going to cost a lot more than $800 billion.


The budget deficit is the most significant issue at the federal level.

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Social Security may be in worse trouble than we think

Sep 22, 2009 18:00 UTC

Over at Hot Air, Ed Morrissey has gotten hold of an internal CBO report distributed to Congress that  predicts Social Security will start running a cash deficit next year as opposed to 2019. And even that, apparently , is based on some pretty rosy revenue projections.  Indeed, over the span of  2017, 2018, 2019, SS will run a $126 billion deficit, according to the CBO. Gee, and you wonder why the Chinese are getting skittish about the dollar?


When people talk about debt and ar aghast at the $1.7 trillion deficit this year and national debt of $11 trillion now, just think how horrified/terrified they would be if they knew the whole picture! If you inlude gov’t pledges and underfunded liabilities – fancy naming gimmickery for what is plain old DEBT – the total is closer to $70 trillion, or roughly 375-400% GDP. When the Social Security ‘situation’ finally really comes to public attention there will be some scared people, and most of them foreign investors. I don’t like to be a doom and gloomer, but I don’t see lots of happy numbers to change my mind…

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Scary fun budget facts from the CBO

Jun 26, 2009 14:23 UTC

Pay no attention! Nothing to see here! Excerpts from the Congressional Budget Office:

1) The Congressional Budget Office projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035 and to more than 17 percent by 2080 .

2) That projection means that in 2080 the federal government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

3) Almost all of the projected growth in federal spending other than interest payments on the debt comes from growth in spending on the three largest entitlement programs— Medicare, Medicaid, and Social Security.

4) By CBO’s estimates, the increase in spending for Medicare and Medicaid as a share of GDP will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080.

5) The current recession has little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II.

5) As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010.

The CBO bottom line:  Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States. Over time, the accumulation of debt would seriously harm the economy.

Alternatively, if spending grew as projected and taxes were raised in tandem, tax rates would have to reach
levels never seen in the United States. High tax rates would slow the growth of the economy, making the
spending burden harder to bear.

The CBO takes away, the CBO gives

Jun 23, 2009 14:26 UTC

Just as a Congressional Budget Office estimate of the cost of healthcare reform ($1.6 trillion over ten years) threw a spanner into the works of that effort, a CBO study of cap-and-trade costs ($175 year in 2020) may have given some oomph to the energy plan which is coming to the floor fo the House. Still, the Senate is going to be a quagmire …