We have all heard that if you put a frog in boiling water it will jump out, but if you put a frog in warm water and slowly increase the heat it will stay there until it is boiled to death. That may or may not be true, but it's a useful allegory for how incremental change can reach dangerous or even deadly proportions if ignored.
The unfortunate frog came to mind as I read the Budget and Economic Outlook: 2024 to 2034 released last week by the Congressional Budget Office (CBO). Over the next decade, deficits will gradually increase from 5.6 percent of gross domestic product (GDP) to 6.1 percent under current law. For comparison: the average deficit over the last 50 years is 3.7 percent of GDP.
Meanwhile, government debt held by the public will rise from 99 percent of GDP this year to 116 percent in 2034, more than double the 50-year average and well above the record high in 1946 at the end of World War II.
The water is warming up and we are the frog.
This didn't have to happen. Looking back to the beginning of this century, the water wasn't nearly as hot. The budget was in surplus and debt, at 31.5 percent of GDP, was less than a third of what it is today, let alone what is projected in the future.
As the water temperature steadily rose, we missed every opportunity to free jump. Now the legitimate question arises as to whether we have waited too long.
The answer to this question depends on whether Congress, future presidents and the American public come to grips with three basic facts about our current situation.
We need more comprehensive spending restraint. Efforts to contain spending must go beyond annual appropriations (i.e. “discretionary” spending). It must also include popular “mandatory” programs related to retirement and health care, such as Social Security, Medicare and Medicaid. These programs, along with interest on debt, are the reason for higher spending.
Under current law, the CBO projects that mandatory spending plus net interest will increase by 2.0 percent of GDP over the next decade, while discretionary spending will decrease by 1.1 percent. As early as next year, the CBO predicts that mandatory spending plus interest on the debt will eat up all revenue.
To put it more bluntly, Congress could eliminate discretionary spending, including defense, in 2025 and still have a deficit. If we do not extend spending cuts further, fiscal policy will remain on an unsustainable path.
We need more revenue. Revenue needs will be higher in the future than in the past due to population aging, rising healthcare costs and higher costs of servicing accumulated debt. Revenues have averaged 17.3 percent of GDP over the past 50 years. However, it is worth noting that in the four years in which the budget was last in surplus (1998-2001), revenues averaged 19.3 percent of GDP – two points above the 50-year average.
CBO forecasts revenues will rise slowly over the next 10 years from 17.5 percent of GDP this year to 17.9 percent in 2034. However, this assumes that the planned expiration of the temporary tax cuts passed in 2017 will take effect after 2025. In the likely event that some, if not all, of these expiring tax cuts are extended, revenues will remain essentially unchanged and deficits even will go even higher than forecast.
If revenues of more than 19 percent of GDP were required to balance the budget a few years ago—before baby boomers were eligible for Social Security and Medicare and the cost of servicing the debt was much lower—we are unlikely to win. I won't need that much in the future. In addition to the necessary spending restraint, some higher contributions on the revenue side will be necessary to put the budget on a sustainable path.
We need more workers. Higher economic growth would help support the growing debt burden, but future growth will be constrained by slowing potential workforce growth, which the CBO forecasts will decline by about two-thirds over the next decade as the population ages and the Birth rates remain low. After 2034, the CBO estimates that “net immigration will increasingly drive population growth and will account for all population growth beginning in 2040.” In other words, by 2040 there will be more deaths than births in the United States.
Largely because of these demographic constraints, the CBO predicts that annual real GDP growth will fall to just 1.5 percent by the 2040s. This compares to an annual rate of 2.4 percent from 1993 to 2022. Unless we find a way to increase labor force growth through immigration or other means, the economy of the future will become increasingly unable to cope with the growing debt burden to manage something.
All of this requires difficult compromises and a high level of cross-party cooperation. We can either suck it up and do that, or we can, like the frog in the allegory, stay there and boil to death.
Robert L. Bixby is executive director of the Concord Coalition.
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