It took four years, but Team Obama has finally figured out that the economy is not growing at the rate it needs to.
When Barack Obama entered office in 2009, the White House Office of Management and Budget (OMB) projected in his first budget there would be a V-shaped economic recovery. And even better, it would happen because of their “stimulus”.
It projected Nominal Gross Domestic Product (NGDP) growth rates of 0.07 percent in 2009, 4.27 percent in 2010, 5.54 percent in 2011, and 6.37 percent in 2012. Importantly, those compare with an average 6.55 percent nominal annual growth rate from 1945 to present. (Note: Nominal growth differs from the inflation-adjusted headline real GDP reported by the Bureau of Economic Analysis.)
The formula was simple from Obama: If his plan was followed, the economy would return to its historical trend line by 2012.
So, Congress gave Obama his $800 billion fiscal “stimulus,” and the Federal Reserve responded with $1.9 trillion of its own monetary expansion. Obama got his way on health care. He got what he wanted on the Dodd-Frank financial “reform” legislation.
On paper, Obama got pretty much everything he wanted.
Then, something funny happened. The economy did not behave the way Obama had predicted. It shrank nominally by 2.22 percent in 2009, grew a disappointing 3.75 percent in 2010, 3.98 percent in 2011, and 4.04 percent in 2012. Rather than returning to its historical trend, it has stayed well below it. Obama’s NGDP estimates were “only” off by $1.046 trillion through 2012. Whoops! How embarrassing.
Now, after all the faulty guesswork, in his latest budget, Obama is finally projecting subpar, less than 5 percent average nominal economic growth for the rest of the decade and, we suppose, for the rest of our lives.
“These numbers reveal just what rank amateurs the Obama economic team really is,” Americans for Limited Government President Bill Wilson remarked. “They dramatically underestimated the economic impact of the financial crisis, and as a result, they were wrong about everything else that followed.”
Particularly, as it turns out, revenue. In his first term, Team Obama overestimated receipts to the Treasury by about $1.181 trillion.
Now, if nothing else had been different, this should have meant that that the debt would be that much larger today.
Except, in 2009, Obama projected the debt would be $16.566 trillion at the end of FY 2012. Instead, it came in at $16.066 trillion. $500 billion less, not $1.181 trillion more.
What happened? A large part of the reason is that as reckless as Obama’s spending has been, the government spent approximately $777 billion less than originally expected under OMB’s baseline assumptions in Obama’s first term. This in turn can be attributed to decisions to end the wars in Iraq and Afghanistan, but also to budget cuts that came when Republicans took control of the House of Representatives.
Also, interest rates have been much, much lower than was originally anticipated. Back then, OMB had projected that by today, 10-year treasuries would yield 5.2 percent. Instead, they only yield 1.84 percent. Largely, this is because of market manipulations by the Federal Reserve to push down rates through mass acquisitions of U.S. debt — it now holds more than $1.7 trillion of treasuries.
So, if not for Congress and the Fed bailing Obama out, the debt would be much, much worse right now. Good thing Obama didn’t get everything he wanted.
But if “deficits don’t matter,” as Dick Cheney once famously remarked, If the $16.8 trillion debt doesn’t matter, and it never, ever needs to be repaid, why all the fuss? Why do we need the central bank to keep rates down? Why enact any spending cuts? Why raise taxes?
Because presently Washington, D.C. is acting like deficits do in fact matter.
And the reason they matter is because there is a point where the debt can become so large it cannot possibly be refinanced, let alone be repaid.
As Americans for Limited Government has previously projected, if nominal GDP grows at just 5 percent every year for the next 30 years without interruption, by 2042, the economy will total $66 trillion.
The debt, which was $16.432 trillion at the beginning of the year, if it returns to its average 7 percent growth rate annually like it did the last 60 years, by 2042, the debt will be $125 trillion.
That’s a debt to GDP ratio of 189 percent. If interest rates simply normalize to 5 percent that will mean an annual interest burden of $6.2 trillion. But if they get as high as 25 percent as the U.S. Monetary Policy Forum has suggested they could, then interest owed would rise to $31.3 trillion owed — every single year.
Right now, thanks to sequester, the debt is projected to grow more slowly this decade. But the American people should take little comfort in this fact. The real discipline does not take effect for a few years. In 2013 — the only year that matters — the debt is still growing too fast at 7.46 percent.
The discipline projected for later years can and will be easily unraveled under the heady politics of compromise in the near future, and once it does, the debt will explode again.
And then, there will be no bailout. Interest rates cannot really be brought that much lower and, should inflation ever become a problem, contrarily they will need to rise. If that happens, all bets are off.
Robert Romano is the Senior Editor of Americans for Limited Government.