In the opaque world of sovereign debt credit ratings, one of the most important issues facing a rating agency is a country’s economic growth.
One of the reasons why the United States has had such large deficits is because economic growth for the last decade and a half has been anemic.
I highlight that here because recently I took umbrage with the Congressional Budget Office projections on the U.S. economy and the country’s budget deficit, writing for Townhall about the budget problems we will face once interest rates begin to rise.
The “thorny problem with the CBO forecast is that after this year the report is contingent upon the economy growing at its maximum sustainable level. The CBO pegs GDP growth as modest this year – again -- but bets the farm that GDP growth will hit ‘3.4 percent in 2014 and an average of 3.6 percent a year from 2015 through 2018.’”
This is important because rating agencies know that the growth rate of a country’s GDP, in large measure, determines the amount the government collects in taxes. The amount they collect in taxes, minus what they spend, equals the deficit.
And rating agency Moody’s has also now raised questions about the CBO forecast for both GDP growth and the deficit for at least the years 2014-18, according to MNI news.
Here’s a lengthy, but mostly relevant part, of MNI’s analysis.
“In the end, what will be decisive is whether overall measures taken by the U.S. government will bring back the debt trajectory on a sustainable path, and on that front, economic projections matter, with rating agencies often referring to the Congressional Budget Office. Moody's noted Tuesday that the CBO's projections rely on "strong growth rates" for the real GDP over 2014-2018. Those forecasts are, at least for 2015, also higher than the private-sector consensus and than the top of the Federal Reserve's range, the report continued.
"If these high rates of growth do not materialize, the modest reduction in the debt ratios in the middle of the decade will not occur, and the rising trend will be more pronounced in later years," the report warned.
In other words, if you are going to rely on the CBO projections of aggressive GDP growth here at home then Erskine Bowles and Alan Simpson are right: Either go big on cutting spending or go home.
It’s clear we won’t “grow” our GDP sufficient to outstrip sending.
As we highlighted this week on Ransom Notes Radio, Bowles and Simpson, the chairs of President Barack Obama’s bipartisan commission on deficit reduction, are so disgusted they have been proposing bigger reductions in government spending than originally recommended -- now that it looks like Obama will try to get away with no reductions at all.
"We learned the hard way with our commission, the harder we made (the proposal), the more support we got. It's either go big or go home. This is pathetic," Simpson said on CNBC of the government’s inability to cut spending through any means other than an across-the-board budget cut, known as sequester.
It’s also stupid -- at least according to President Bill Clinton’s former chief of staff, Erskine Bowles.
"When this really stupid, stupid, stupid sequester goes into effect, we're going to start to feel how this government is really dysfunctional. People will see it really quick and get really angry with these people in Congress and the administration." Bowles told CNBC. "We are operating our government on a month-to-month basis right now."
Thanks for the sequester Mr. Obama. And make no mistake, sequester is a product of the White House.
“The President’s part of the sequester,” said Sen. Max Baucus, D-Mont., “the White House recommended it, frankly, back in August 2011, so now we’re feeling the effects of it.”
And here’s the really bad news: The CBO report is predicated on spending cuts that most likely won’t happen if Obama has his way. If you combine it with GDP growth, that’s not very likely, historically speaking, and, well, uh-oh.
Since 2000, the economy has only enjoyed two years of growth in excess of 3 percent. And the long-term trend line for economic growth since 1970 is still downward for the country. Since Obama has become president, quarterly GDP has only come in higher than 3 percent on an annualized basis three times.
The idea that, suddenly, after our current year, we are going to realize growth rates around 3.5 percent is only a magician’s trick designed to downplay the size of the deficit from 2014-18.
So, the deficit will be larger than the CBO predictions if the economy doesn’t grow at the sunshine and roses rates the CBO has forecast. It will be larger if spending cuts don’t happen. And the economy can’t and won’t grow by the GDP growth rates forecast by the CBO.
Forget history. In this case just consult common sense.
Now that we’ve seen the effects on the economy of the several Obama tax increases since the first of year, what happens when further tax increases replace spending cuts?
I give you a three-word answer that happens to be the smartest thing coming out of Washington right now: Stupid, stupid, stupid.
This article orginally appeared at IBTimes.com on February 20th, 2013.