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Politics : Liberalism: Do You Agree We've Had Enough of It? -- Ignore unavailable to you. Want to Upgrade?

To: Cogito Ergo Sum who wrote (87829)	7/20/2010 8:55:40 AM
From: Hope Praytochange	1 Recommendation Read Replies (1) \| Respond to of 224756

Slowing Economy Could Exacerbate Federal Debt Woes By JED GRAHAM, INVESTOR'S BUSINESS DAILY Posted 07:28 PM ET Fiscal retrenchment is like driving up a steep, muddy hill in a downpour. If the economy moves too slowly, it might lose traction or even start backsliding as more debt accumulates. Now, as the fiscal climb begins — unless Congress prolongs stimulus and tax cuts — the apparent economic downshift could make budget progress difficult. The White House's Office of Management and Budget sees 4% average real GDP growth from 2011 to 2014. But if growth is 3%, OMB says deficits would be $2 trillion higher through 2020 than the $8.5 trillion under its baseline scenario. A one-percentage-point shortfall in growth each year from 2010 to 2020 would raise deficits by $3.1 trillion. Instead of a debt-to-GDP ratio of 77% in 2020, as OMB projects, the latter scenario of persistently slower growth would push that to 99%. That slower growth scenario assumes the stimulus unwinds and the White House's budget prescriptions are on schedule. Proposed tax hikes on higher earners, corporations and the middle class with the phasing out of idiot Obama's Making Work Pay $400 tax credit would amount to $1 trillion the first five years, reaching $285 billion in 2015. Even so, slower growth would have a much larger deficit impact than delaying big tax increases for a couple of years. University of California, Berkeley, economist Alan Auerbach argues that debt levels are still manageable enough that it makes sense to give the economy more running room to solidify the recovery before embracing austerity. "I think the best strategy — which is not one that is politically likely — is to not worry so much about the short-term debt accumulation but to take very forceful action" to address long-term deficits tied to health care spending and Social Security, Auerbach said. The risk, said former Congressional Budget Office director Rudy Penner, is that a "dysfunctional" Congress will delay action on that longer-term problem and foreigners will begin to shun Treasuries, or at least demand a premium. A one-percentage-point hike in real interest rates from 2010-20 would raise projected deficits by $845 billion, OMB estimates. Another downside fiscal risk is that neither OMB nor the CBO tries to predict future recessions . After the U.S. returns to full employment — a 5.2% jobless rate in 2018 — OMB projects steady, if unspectacular, 2.5% growth. Lakshman Achuthan, managing director of the Economic Cycle Research Institute, argues that the economy has evolved in ways that haven't been built into the budget crunchers' models. In a new paper, the CBO touches on such a possibility: "The current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts probably exceeds the historical average." Achuthan believes the Great Moderation — a quarter-century of relatively low economic volatility with infrequent, shallow recessions — will give way to an era of heightened volatility. The 10-year budget forecasts "assume there is practically no cycle in the economy," Achuthan said. "That's a really risky thing to assume," he said. "The coming decade is going to bring with it much more frequent recessions than anyone is used to." Achuthan says measures of economic activity have been in a long-term downtrend for decades. Slower growth means that any deceleration has a greater chance of turning into an outright downturn. Elevated private debt that built up during the Great Moderation and public debt that built up in its aftermath also may impair the shock absorbers that helped the U.S. emerge from prior slumps. Until now, policymakers "could react to recessions without worrying about a debt crisis," Auerbach said. But room for maneuver will be limited as debt levels keep rising. By 2020, under CBO estimates of the White House budget, interest on the debt could reach 4% of GDP . Assuming a primary budget in balance, nominal GDP growth would have to equal 4% (2.5% real growth and 1.5% inflation, for example) just to keep debt from rising in proportion to the economy, explains Brian Bethune, chief U.S. financial economist at IHS Global Insight. "If you don't grow fast enough, you can fall into a fiscal trap," he said. Of course, one can only assume a primary balance if Congress takes unprecedented action