Tom Woods and Gene Epstein Discuss US Debt (aka: Our Fiscal Road to Hell)
Earlier this month, the Congressional Budget Office released a 55-page report on the long-term US budget outlook. Basically, it concluded what we already know: the US government is on a fiscal road to hell.
The federal debt currently stands at the highest level since shortly after World War II. But that’s not the worst of it. If the US government maintains current policies and economic trends continue, the debt will likely double over the next 30 years, rising to about 150% of GDP. CBS News characterized it as a ‘bleak report‘:
“The explanation for the CBO’s finding is no mystery: the government spends more money than it takes in, and that gap is projected to widen, not close, as time goes on. In 2017, the annual deficit is expected to be approximately 2.9% of GDP. The CBO report found that, by 2047, the annual deficit will be 9.8% of GDP. The swelling deficits will be driven primarily by increased spending in three areas, according to the CBO: Social Security, health care entitlement programs like Medicare and Medicaid, and interest on the debt.”
The biggest expense facing the federal government in the coming years isn’t Social Security, Medicare, or military spending. It’s the interest on the debt. And that will only increase if the Federal Reserve ever gets around to normalizing interest rates. The CBO highlighted two factors it expects will continue driving debt service costs higher:
“The first, and more important, is that interest rates are expected to rise from their current low levels, making any given amount of debt more costly to finance. The second reason is the projected increase in deficits: The larger they are, the more the government will need to borrow.”
On a recent podcast, Tom Woods talked with Gene Epstein about the CBO report. Woods made the point that it’s easy just to ignore CBO projections, or blow them off as unrealistic hysterical predictions. After all, the CBO has been issuing the same warning for several years, and we haven’t seen any doomsday scenarios playing out before our eyes – at least not yet. So, by-and-large, the mainstream simply ignores these annual reports.
But Epstein said this is really just the calm before the storm. And while policy changes could kick the can down the road, or even possibly reverse the government’s fiscal direction, the current situation certainly warrants concern.
“They keep citing their 2010 study comparing the US with Greece and Argentina and showing that they’re indeed uncomfortably parallel … The reason I think the CBO is right to point out the dangers are very great – that the US is on the road to hell – is that … this is no way to run a budget. This is no way for the federal government to operate, running the serious risk of causing a major fiscal crisis in the economy.”
Woods and Epstein break down the CBO report pretty thoroughly, take apart Paul Krugman’s arguments relating to CBO projections, and even offer some potential solutions to the problem. As a bonus, Epstein explains the difference between a good Keynesian and a bad Keynesian.
The bottom line is the US is on an unsustainable financial path. When even a mainstream government organization like the CBO recognizes the problem, you know it must be real. There is still time to reverse course, but knowing politicians have a future horizon that doesn’t extend much beyond the next election cycle, doesn’t warrant much faith. It seems unlikely they will take the steps necessary to divert us from the fiscal road to hell.
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