The 2024 election contest between Biden and Trump is farcical not just because it pits the mentally lame against the egomaniacally blind. The more compelling absurdity is that America is now hurtling headlong into an existential fiscal crisis, but neither candidate ever mentions this clear and present danger, let alone proposes even a semblance of a remedial plan.
During his recent State of the Union (SOTU) address, for instance, Joe Biden even had the nerve to brag that “I’ve already cut the federal deficit by over one trillion dollars”.
Well, actually aside from the $6 trillion of UniParty deficits he and the Donald ran-up during the pandemic stimmy bacchanalia of 2020-2021, the deficit of $1.7 trillion incurred in 2023 was by far the largest in American history. And yet the puppeteers who scroll the “Joe Biden” teleprompter are taking a bow for purportedly stemming the red ink?
Federal Deficit/Surplus, 1955 to 2023
Actually, if any reality-therapy is needed on the banks of the Potomac, the March release of CBO’s latest long-term budget outlook should do the job. It is based on a bunch of Rosy Scenario assumptions where there are no recessions, no inflation flare-ups, no interest rate spikes, no financial crises, no big wars, no global energy crises—-just good economic sailing for the next 30 years!
Then again, where they end up is positively horrifying, even if the Rosy Scenario underlying the report is utterly incompatible with the fiscal disaster it projects. Accordingly, the real debt numbers are sure to be a lot worse as the future unfolds.
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Still, CBO’s optimistic projections show the publicly-held debt hits 166% of GDP by 2054, which towers far above even the WWII peak of 106%. And back then there was a plenitude of Treasury bond buyers owing to the 24% of GDP national saving rate generated by an economy fully mobilized for war and which was subject to such harsh rationing that there were few consumer goods to buy.
Not suprisingly, therefore, the payrollers at the Congressional Budget Office were discreet enough to present this dismal story in the “percent of GDP” metric because the actual numbers stated in greenbacks are literally coronary-producing. The blue line below translates to $140 trillion of public debt in 2054.
Apparently, the Capitol Hill staffers who penned the report don’t wish to have some yokel Congressman from Kansas doing his own math with a hand calculator. That’s because at the 3.8% blended average interest rate the US Treasury is projected to pay at the end of this 30-year period, annual Federal interest expenditures would amount to $5.3 trillion per year!
That’s right. And that also assumes Uncle Sam could borrow $7 trillion in 2054 alone to cover that year’s projected deficit and do so at just 180 basis points above the assumed rate of inflation (2.0%).
Needless to say, the whole report embodies a phantasy that is way beyond the pale. Self-evidently, there would be an economic and financial crash landing long before 2054.
Still, for want of doubt consider the big strokes in the report. The aforementioned interest expense would vastly exceed almost every other big thing in the budget. Again, putting these ratios in whole greenback numbers adds some zip to the message.
Republicans, for instance, have spent more than a decade denouncing ObamaCare, the related Medicaid expansion and various low-income oriented tax credits. Yet down the road a couple of decades from now the interest expense that they have helped incur with massive defense spending and neocon Forever Wars, along with taking a powder time after time on the big entitlements, will be more than double the $2.4 trillion projected for these Dem programs.
Ironically, interest expense will also be 2.5X baseline defense spending—assuming no more Forever Wars—and will well exceed each of Social Security and Medicare.
Indeed, these clinical ratios also show that fully 61% of the haul from the entire Federal income tax will go to interest expense, and the 10.3% of GDP in question isn’t exactly chopped liver. Income tax collections would actually amount to $8.7 trillion in 2054 and the bulk of it would go to bond holders.
Then again, that would be true if bondholders are happy to buy up $110 trillion of new bonds during the next 30 years at a weighted average yield that is actually 120 basis points lower than the average yield on the Treasury curve this very week!
In fact, current yields range from 5.4% to 4.6% across the spectrum from 30-day T-bills to 30-year bonds. Perchance should interest rates remain in that average range of 5.0%— to say nothing of substantially higher—-the interest expense in 2054 would rise to $8 trillion owing to the higher rate and interim additions to the debt.
That is to say, interest expense would consume 92% of the cash from Uncle Sam’s primary revenue source.
CBO Outlay Projections for 2054:
- Interest Expense: $5.3 trillion,
- Social Security: $5.0 trillion.
- Medicare: $4.6 trillion.
- Medicaid, ObamaCare & related tax credits: $2.4 trillion.
- Defense: $2.1 trillion.
Long-Term Federal Budget Outlook By % of GDP.
At the end of the day, there are three numbers across the bottom of the stack that tell you all you need to know. Most of the 30-year “lookback” in the first column of the table for the 1994 to 2023 period was one of rampant fiscal profligacy. The Federal deficit averaged 3.8% of GDP, which cumulative flow of red ink raised the publicly-held debt from $3.5 trillion to $27.o trillion during that three-decade span.
But that was just spring-training for what lies ahead. Based on the fiscal policy now extant, Washington’s structural deficit will weigh-in at 5.6% of GDP this year and then rise to more than 6.0% during the 2030s. Thereafter it will reach in excess of 7.0% in the 2040s and the aforementioned 8.5% of GDP by 2054.
Needless to say, the above belies every major fiscal tenent the Trumpian GOP is now offering to the voters. Thus, the Trumpites say no cuts in Social Security and Medicare. Period. But those programs, which cost 8.4% of GDP in 2023, will rise to 11.3% of GDP by 2054 owing to rising caseloads and benefit levels.
And, again, these “percent of GDP” metrics are nothing to sneeze about. By 2054 the latter ratio will amount to $9.5 trillion in annual Social Security/Medicare expense, representing growth of $2.4 trillion per annum relative to the current cost ratio (8.4%).
Indeed, when you include Medicaid and other health care programs, the annual cost figure jumps from $8.1 trillion at the 2024 ratio to $12.0 trillion at the 2054 level. As shown below, the impact of higher caseloads and per capita benefit costs is especially pronounced in the health care programs. And yet the Donald and his minions gave up fighting ObamaCare long ago and effectively say the rest of that prospective $12 trillion per year cost is fine by us.
Percent Of GDP Cost of Major Entitlement Programs, 2024 Versus 2054
On the other hand, the CBO baseline shows that the individual income tax take will rise from 8.1% of GDP in 2023 to 10.3% by 2054, mainly owing to the expiration of the vaunted (and unpaid for) Trump tax cuts of 2017 and three decades of real bracket creep. That is to say, despite indexing for nominal gains in income, the growth of real income over time moves more and more taxpayers into higher rate brackets. Between 2034 and 2054, for instance, the share of income taxed at between 20% and 39.6% will rise from 37% to 44%.
Needless to say, the GOP warhawks and entitlement chickenhawks insist on extending the Trump tax cuts permanently and offsetting bracket creep as well. Yet the effect of these “cuts” to current law would be a staggering $1.9 trillion of reduced Federal revenue per year by 2054.
That’s right. At the current 8.1% take, the Federal income tax would generate just $6.843 trillion per year of annual revenue by 2054 compared to $8.701 trillion built into the CBO baseline under current law.
To be sure, the Dems don’t even make a pretense of addressing the fiscal disaster hurtling down the pike. They just ignore it, lie about it like Biden or expect the Fed will print tens of trillions of additional inflationary monies to finance it during the decades ahead.
In short, Washington is locked in a fiscal death grip. Neither candidate of the two wings of the UniParty has the slightest interest in addressing the calamity that surely lies ahead.
Distribution of Taxable Income By Rate Brackets, 2034 versus 2054
A few decades ago Nixon’s chief economic adviser, Herb Stein, famously said that which isn’t sustainable will tend to stop! What we mean is that the brown stuff will hit the fan long before 2054 or even the 2040s. That’s because there is a ticking fiscal time bomb embedded in the Social Security trust funds that is fixing to explode within a matter of one or two more presidential terms, at most.
Owing to the phony trust fund accounting that has been in place since the 1930s, the social insurance trust funds are now living on borrowed accounting time and have been for a while. That is, for decades Uncle Sam collected more payroll taxes than the amount of benefits being paid out, and used the excess to fund aircraft carriers, mass transit boondoggles and subsidies to affluent farmers etc., In turn, the trust funds were then credited with an inter-governmental “asset” that can now be drawn down to cover any shortfalls as between cash outgo for benefits and actually payroll tax collections.
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The problem is that these “asset” balances are shrinking rapidly, even as the annual cash shortfall in the trust funds rises relentlessly owing to the Baby Boom retirement wave and the high level of actuarily unearned benefits built into the programs. To wit, at the end of FY 2024 the OASDI trust fund “asset” balance will be $2.727 trillion, while the actual cash outlays will exceed payroll tax collections by $373 billion during the year ahead (FY 2025). In turn, that cash deficit number will steadily rise, reaching $532 billion per year by 2034. Accordingly, over the next ten years the OASDI cash deficit will cumulate to $3.495 trillion.
At that point, the old folks and the disabled folks will not be hearing “bingo!” at their gaming parlor. It will be “busted!” at their bank window because the phony “asset” balance in the trust funds will have been entirely consumed by the interim cash deficits. At that point in FY 2034, annual cash benefits and admin expenses will total $2.479 trillion while cash collections from the payroll taxes will total only $1.947 trillion.
Under current law, accordingly, benefits will be cut by at least 21.5% if the OASI and DI trust funds are combined, and even more on the OASI (i.e. retirement benefits) side if they are not. As it happens, projected average social security benefits by 2034 would amount to $28,000 per year, meaning a $6,000 slash for the average beneficiary.
Of course, in the years ahead it will become apparent to upwards of 80 million retirees that their incomes are about to be monkey-hammered by $6,000 per year. And, also, by a lot more among beneficiary receiving the maximum benefit. In the latter case, the hit would be upwards of $15,000 per year.
Can the implied fiscal and political Armageddon be avoided?
Not if the UniParty gets its way. But in Part 2 we will outline an alternative path that RFK would be well-advised to embrace. It would create an honest, fair and doable route to balance the budget and save the trust funds by 2034, pivoting off some of the key fiscal, economic and political metrics which existed in 1998-2001, the last time the budget was balanced.
Stand by.
Federal Deficit/Surplus As Percent of GDP, 50-years Between 1974 and 2023
Reprinted with permission from David Stockman’s Contra Corner.
