The Economic Impact of the COVID-19 Pandemic on America's Economy

The shuttering of the American economy has led to unprecedented hardships for an unprecedented number of Americans and their families.  A recent interim economic projection from the Congressional Budget Office (CBO) shows us how the pandemic-induced recession will impact overall economic growth in both 2020 and 2021.  The CBO's projections include two economic metrics; unemployment and economic output.   We will start by examining the CBO's projections for employment followed by the projections for economic growth. 

1.) Employment projections:  Between February and April 2020, the number of people employed in the United States dropped by more than 25 million and the size of the overall labor force fell by more than 8 million with the labor force participation rate falling by 3.2 percentage points since February, ending April at 60.2 percent, an unprecedented fall since 1948.  Between the third week of March and the first week of May, more than 30 million unemployment claims were filed, pushing the unemployment rate from 3.5 percent in February to 14.7 percent in April.  As shown on this graphic, the CBO's estimate projects that unemployment rate will reach 15.8 percent in the third quarter of 2020:

Job losses were concentrated in industries that rely on person-to-person contact including retail trade, leisure and hospitality,  education and health services.  The leisure and health services sector was the hardest hit, losing 8 million of its 17 million jobs in March and April alone as shown here: 

Thanks to the mass furloughs and layoffs that resulted from the shuttering of businesses, 25.6 million fewer people are projected to be employed in the second quarter of 2020 than were employed in the fourth quarter of 2019.  This reflects an increase of 17.8 million unemployed (the unemployment effect) and a reduction of 7.8 million in the labour force (the labor force effect).  Here is the CBO's projections for employment over the next two years, combining both the unemployment and labor force effects:

2.) Economic Output:  Over the next two years, economic activity is projected to fall by the greatest amount in the second quarter of 2020 with real GDP expected to pick up during the second half of wow as shown here:

The CBO projects that real GDP will shrink by 37.7 percent in the second quarter of 2020 and nominal GDP will shrink by 38.7 percent.  Even with reasonable economic growth over the second half of 2020 and all of 2021, real economic output is expected to be 1.6 percent lower in the fourth quarter of 2021 than it was in the fourth quarter of 2019.  Consumer spending, the key to economic growth in the United States, is projected to be 2.9 percent lower in the fourth quarter of 2021 than it was in the fourth quarter of 2019.

To put these economic output numbers into perspective, the CBO projects that over the decade between 2020 and 2030, GDP output could be $15.7 trillion lower than what the CBO had been projecting in CBO had been projecting in January 2020.  This equals 5.3 percent of lost GDP over the next decade.  Here is a graphic from the CBO's June 1, 2020 letter to the Senate showing the collapse in GDP:

Here is a graphic showing the percentage drop in real GDP and nominal GDP from the January 2020 analysis to the May 2020 analysis (i.e. the impact of the COVID-10 economic shuttering):

Let's summarize with this table showing the CBO's economic projections for 2020 and 2021:

There is no doubt that the unprecedented shuttering of the economy during the COVID-19 pandemic has led to a new economic reality for millions of American workers who may well find themselves having to change careers or remain unemployed as corporations attempt to maintain new social distancing regulations.  Given that the American economy relies on consumer spending for over two-thirds of its size as shown here:

...the economy and will continue to sputter until America's furloughed workers sense that they, once again, have job security and are willing to consume.

A New Deficit Record for Washington

The latest Monthly Budget Review from the Congressional Budget Office is now out and it contains a mixed bag of news.  In this posting, I’ll briefly look at the overall picture, followed by some detail on the data for the month of July and close with a more detailed look at total receipts and total outlays for the first ten months of fiscal 2012.

Overall, the CBO reports that, to the end of July 2012, the deficit was $975 billion, $125 billion less than the $1.1 trillion deficit incurred for the first 10 months of fiscal 2011.  Revenues rose by $114 billion and outlays dropped by $11 billion as shown on this screen capture:

The deficit in July alone was $71 billion, down $58 billion from a year earlier, however, if one eliminates one-time shifts in payment, the deficit for the month of July 2012 would only have been down $22 billion from the same month a year earlier.

Revenues in July were up 15 percent from the same month a year earlier, largely because of increased receipts from individual income and payroll taxes.  While that looks good on paper, about half of the increase was due to an additional work day in July 2012.

Outlays in July were $35 billion lower than a year earlier, unfortunately, once again because July 1, 2012 fell on a Sunday, about $36 billion in payments that would ordinarily have been made in July, were made in June.  Basically, eliminating yet another one-off, outlays in July 2012 were $1 billion higher than in July 2011. 

Now, let’s look at the entire 10 month period starting with revenues and closing with outlays.

Here is a screen capture showing revenues for the first 10 months of this fiscal year:

Revenues were up 6 percent on a year-over-year basis with the largest increase coming from corporate taxes which grew by $42 billion or 30 percent.  This is largely a result of changes in tax rules which govern how quickly firms can deduct their capital expenditures.  Individual tax receipts grew by only 4.1 percent with much of the increase due to growth in wages.  Total receipts grew from $1.893 billion in 2011 to $2.007 billion in 2012, an increase of 6 percent.  There was one interesting drop in revenue; receipts from the Federal Reserve dropped by $6 billion largely due to lower interest rates and the shift to lower-yielding less risky assets which resulted in smaller profits and thus, smaller payments to the Treasury.  See, there is another unintended consequence of the Fed’s actions!

Here is a screen capture showing outlays for the first 10 months of this fiscal year:

Spending through July was down less than 1 percent on a year-over-year basis.  Allowing for one-off events, Department of Defense spending dropped by 2.6 percent, Medicaid spending dropped by 11.4 percent while Social Security spending rose by 6 percent and spending on Medicare rose by 4.3 percent net of receipts.  By far, the largest year-over-year percentage drop in spending was for unemployment benefits which fell 21.1 percent from $104 billion to $82 billion despite the fact that the number of unemployed only dropped by 8 percent from 13.908 million in July 2011 to 12.794 million in July 2012.  As we all know, long-term unemployed Americans are simply falling off the statistical radar screen.

In closing, let’s take a quick look at two of my favourite numbers starting with the debt-to-the-penny and closing with the interest owing on the debt for the end of July 2012:

The total debt on July 31, 2012 was $15.933 trillion compared to $14.342 trillion on July 29, 2011, a rise of 11.1 percent.  The interest owing on the outstanding debt for the first 10 months of fiscal 2012 is misleading because of a one-time accounting adjustment.  Without the $75 billion adjustment, the total interest owing thus far this year would have been just over $398 billion.  Despite the fact that interest rates on Treasuries are at or near all-time lows, it looks like the interest owing on the debt for 2012 will come very close to hitting a new record, somewhere in the $450 billion range without the one-time event.  To put this into perspective, that’s roughly what Washington will spend on Medicare for all of 2012.

In closing, as most of us expected, Washington is headed for its fourth year in a row of trillion dollar plus deficits, a new record even when adjusted for inflation.  While the deficit is down from the levels “achieved” between 2009 and 2011, the only thing saving the current administration’s bacon is ultra-low interest rates on the outstanding debt.  If interest rates were to rise to a historically normal level of 5 percent, the amount of annual interest owing on the debt would swell to nearly $800 billion, more than what is currently spent annually on Social Security.  That pretty much puts things into perspective, doesn't it?

The Pain of Austerity

If you've been awake over the past few months, you're aware that the world, particularly Europe, is suffering from a rather uncomfortable debt situation.  As I posted here, it is going to be an uphill battle for the world's advanced economies to reduce their rapidly growing debt levels; the Bank for International Settlements (BIS) recently stated that to bring government debt-to-GDP ratios back to Great Recession levels, it will take 20 consecutive years of surpluses exceeding 2 percent of GDP!  The odds of that - slim at best and most likely nil.

Earlier this year, the Congressional Budget Office released an interesting paper entitled "Sovereign Debt in Advanced Economies: Overview and Issues for Congress" by Rebecca Nelson.  In this paper, Ms. Nelson notes that the high levels of debt among the world's advanced economies are a new global concern that has erupted out of the 2008 - 2009 global financial crisis.  As we have seen, governments are embarking on fiscal austerity programs in a last ditch effort to get their books in order, however, some economists note that these measures may well undermine the very weak global economic recovery, now into its third year.  As one would expect from a non-science science, other economists argue that current government austerity measures do not go far enough to rein in burgeoning debt loads, particularly as most developed nations will be experiencing top-heavy population trees.

How does all of this fit into the mandate of Congress?  There are two factors to consider:

1.) Is it likely that the U.S. is headed for a Eurozone-type debt crisis?  Current bond interest rates would suggest that this is unlikely, however, looking back five years, one would have never suspected that the PIIGS sovereign bonds would be suffering from interest rates in excess of 6 percent.

2.) What impact will Europe's debt crisis have on the United States economy?  Slower growth in advancing economies could impact trade between America and its main trading partners.  As well, in September 2011, direct U.S. bank exposure to Greece, Ireland and Portugal reached $55 billion, leaving their balance sheets somewhat vulnerable.

Let's start by looking at several graphs from the report.  The first graph shows the changes in the gross public debt levels for the G-8 nations since the end of World War II:

The sovereign debt level for the G-7 rose from 84 percent of GDP in 2006 to a forecasted 119 percent of GDP in 2011, a 42 percent increase in just five years.

The second graph shows the gross government debt for both advanced economies and developing economies between the year 2000 and 2010, projected forward to 2016:

Sovereign debt levels for the G-7 economies rose from 84 percent of GDP prior to the Great Recession to 114 percent of GDP in 2010 and are projected to rise to 127 percent of GDP by 2016, an increase of 51 percent over 10 years.  In sharp contrast, debt levels in developing economies fell from 52 percent of GDP in 2002 to 39 percent of GDP in 2010 and are projected to fall even further to 29 percent of GDP by 2016, a decrease of 44 percent over 14 years.

Here is a graph showing the variation of gross public debt among advanced economies in 2011:

Here is a graph showing the variation of net public debt among advanced economies in 2011:

Please keep in mind that the difference between gross and net public debt statistics refer to that particular government's financial assets which are subtracted from gross public debt to give us net public debt.  In the case of Japan, its gross public debt in 2010 was 220 percent of GDP but, thanks to large assets, its net public debt is "only" 117 percent of GDP.  In sharp contrast, Greece's gross government debt and net government debt were both 143 percent of GDP in 2010 since the Greek government has no assets.

What kind of measures would be required to get this debt problem straightened out?  Here is a graph showing the fiscal cuts that would be necessary to reduce debt levels to 60 percent of GDP by 2030 for the world's advanced economies:

To help you understand the preceding graph, let's look at the United States.  Please note that a primary budget surplus is the budget balance excluding interest owing on the debt.  The U.S. would have to achieve a primary surplus of 5.1 percent of GDP by 2020 and sustain it through to 2030 to achieve the 60 percent debt-to-GDP goal.  In 2010, the primary deficit was 8.9 percent of GDP.  This means that the total fiscal cuts necessary for the United States to achieve the 60 percent debt-to-GDP goal would be equal to 11.3 percent of GDP relative to the 2010 primary balance (deficit) or just under $1.7 trillion, the third highest among advanced economies after Japan and Ireland and just ahead of Greece.  Now that's painful austerity!

On average, the world's advanced economies would have to reach a primary budget surplus of 3.8 percent of GDP by 2020 and sustain it through to 2030 to achieve the average 60 percent ratio.  Currently, the advanced economies are running a primary budget deficit of 4.8 percent of GDP meaning that, to reach the target of 3.8 percent surplus by 2020, the average fiscal adjustment will have to be 7.8 percent of GDP.

With this data in mind, why does the United States seem exempt from the wrath of the world’s debt market?  The saving grace that is currently preventing the United States from becoming the next Greece, Portugal or Ireland is the fact that its currency is the world's choice for its reserves.  As well, generally strong economic growth has kept the debt wolves at bay.  That said, here is a graph showing how quickly Spain saw the yield on its 10 year bond rise from under 4 percent to just over 7 percent:

Basically, we cannot say that the interest rates on U.S. federal debt will never rise rapidly.  At some point, the world's bond traders may simply lose confidence in the ability of the American government to continuously grow its debt, particularly if there is a repeat performance from Congress over the debt ceiling.

To summarize, the solution to the world's sovereign debt issues look rather daunting.  As we've seen in Europe, the imposition of what have been until this point relatively modest austerity measures have resulted in both social upheaval and the tossing out of incumbent governments.  The world's economy is already showing signs of slipping back into negative growth even with the very modest measures taken.  There is one thing that I think we can count on; the next recession will be different than the recession that the world experienced in 2008 - 2009.  Since sovereign debt levels were not at the sky-high levels that we are seeing today prior to the Great Recession, we are entering uncharted fiscal territory.  The next global downturn could well be "The Big One".

First Half of Fiscal 2012 - How Is Washington Doing?

On March 31, 2012, the U.S. Federal Government is officially half way through fiscal 2012.  The Congressional Budget Office released the data for the first half of this economically confusing year in their Monthly Budget Review and here are a few of the highlights.

Overall, Washington racked up a budget deficit of just under $780 billion for the first half of the fiscal year, a drop of $53 billion or 6.8 percent from the previous year as shown here:

For the month of March 2012 alone, the deficit was $196 billion, up $8 billion from the previous year.  In this posting, I won't be focusing on the changes to the rather volatile monthly receipts and expenditures since I'd prefer to concentrate on the six month cumulative data.

Here is a screen capture from the report showing revenues through the six month period to the end of March:

Receipts for the first half of the year were $46 billion or 4.5 percent higher than last year with nearly 70 percent of the gain or $29 billion resulting from a net increase in net corporate tax receipts resulting from higher payments and lower refunds.  Corporate income tax revenues reached $84 billion, up 53.2 percent on a year-over-year basis.  While this seems like a big improvement, keep in mind that this is what corporations have paid in previous full fiscal years:

From the graph, it is still quite apparent that corporate taxes are set to be among the lowest in the last eight years if the remittances in the second half are the same as in the first half of fiscal 2012.

In the first six months of fiscal 2012, individual income taxes rose by $10 billion or 2.1 percent to $486 billion; corporate taxes still make up only 14.7 percent of the total income tax haul of $570 billion, well below the levels reached in the mid-2000s when Corporate America's contribution to Washington made up between 20.97 and 25.32 percent of the total.  The CBO attributes the rise in personal taxes to improving wage and non-wage incomes, however, the overall impact of the growth in incomes on individual tax receipts will not be known until taxes are collected in the month of April.

Here is a screen capture from the report showing expenditures through the six month period to the end of March:

Total expenditures were down a very marginal 0.4 percent on a year-over-year basis from $1.849 trillion in the first half of fiscal 2011 to $1.842 trillion in the first half of fiscal 2012.  Most notably, expenditures on unemployment benefits dropped by 21.8 percent on a year-over-year basis from $67 billion to $52 billion, largely because fewer new claims were filed as we well know from mainstream media reports in recent months.  Unfortunately, the number of insured unemployed Americans is dropping but still remains at levels that are nearly as high as the peaks after the 1990 - 1991 and 2001 recessions as shown here:

Nearly 1 million more Americans are unemployed as measured by continued claims than were unemployed during the economic "good times" prior to the Great Recession.  As well, the number of long-term unemployed is well above levels that would normally be experienced nearly three years after the end of a recession as shown here:

The long-term unemployed are of particular concern, necessitating costly federal "extended" unemployment benefits.  Currently, there are about 3.25 million people receiving these extended benefits along with the 3.69 million that are receiving continued benefits as shown in the chart above for a total of 6.94 million beneficiaries.  The situation could become critical if the "Eurozone Debt Influenza" floats across the Atlantic Ocean and results in an American recession since the baseline for employment is far worse now that in normal post-Recession periods.

The CBO also notes that net spending on big ticket items including Social Security and Medicare rose by 5.1 percent and 2.9 percent respectively for a total of $606 billion or just under 33 percent of all outlays.  Spending on Medicare dropped by 16.3 percent to $121 billion because legislated increases in the federal government's share of the program's costs expired in July 2011.

In closing, let's look at two of my favourite numbers:

1.) The debt to the penny on March 31, 2012:  $15,582,078,681,188.69 up $1.312 trillion or 9.19 percent on a year-over-year basis.  Here's a graph showing the growth of the debt since 1991, noting that, in general, the growth rate is rising:

2.) Interest owing on the debt for the first six months of fiscal 2012:  $211,352,941,695.70 or $674.50 for every man woman and child in the United States.

The only thing saving Washington's bacon is the ultra-low average interest rates on the debt as shown here:

Thank you Mr. Bernanke for your wonderful easing and twisting.

If the first half deficit figures are repeated in the second half of fiscal 2012, it looks like the U.S. federal government may well be headed for a new record level of over-expenditure.  A more likely scenario suggests that fiscal 2012 will find Washington overspending by roughly $1.3 trillion, the same level as fiscal 2010 and 2011.  Fortunately (or not), the government still has just over $855 billion worth of deficits that they can incur before they reach the new debt ceiling of $16.394 trillion.  At least we won't have to watch Washington bicker like school children over a new debt ceiling until the early part of fiscal 2013...hopefully.

Persistently High Unemployment In America: Is There A Solution?

A recently released study by the Congressional Budget Office entitled "Understanding and Responding to Persistently High Unemployment" examines the current state of the labour market and suggests an array of policy changes that could be made to reduce unemployment. 

The United States is currently suffering from its longest stretch of unemployment greater than 8 percent since the Great Depression, the unemployment rate passed the 8 percent marker in February 2009 meaning that the American labour market has now suffered for three full years.  The peak unemployment rate of 10 percent in October 2009 was only exceeded once since the end of World War II, during the 1981 - 1982 recession.  As if that weren't bad enough, the Congressional Budget Office (CBO) projects that the unemployment rate will remain above 8 percent until 2014.  As we all know, the official U-3 unemployment rate excludes individuals who would like to work but who have not searched for a job over the previous four week period as well as those who are working part-time simply because they cannot find full-time employment.  If those individuals were counted, the unemployment rate would be in excess of 15 percent.

Compounding the unemployment problem is the share of unemployed American workers who have been looking for work for more than six months - the long-term unemployed.  For the first time since data was collected in 1948, this number topped 40 percent in December 2009 and remains elevated as shown here:

The extent of long-term unemployed is much greater than what is normally experienced; had it followed its historical pattern, long-term unemployment would have been between 20 and 25 percent of all unemployed rather than 40 percent.  This means that the burden of unemployment has fallen on the shoulders of Americans who have been unemployed for long periods of time, rather than the normal pattern of more workers being unemployed for shorter periods of time.

Now, let's take a look at who made up America's unemployed and long term unemployed in March of 2011:

Interestingly, the distribution of both unemployed and long-term unemployed came disproportionately from certain groups of Americans; males, people with a high school diploma, married people, African Americans, construction workers and people under the age of 25.  As well, while the geographic distribution was more-or-less distributed in rough proportion to the size of the workforce, there were exceptions.  Unemployment in the western states of California and Nevada was higher than would have been expected as was the case in Florida and Michigan where real estate and difficulties in the automotive industry led to higher rates.

These employment issues have a marked impact on the economy.  Households with unemployed workers note a drop in earnings that often persists even when the unemployed family member finds a new job because of fewer hours worked and lower hourly wages.  Older workers, in particular, often find that new jobs pay less and have less potential for earnings growth. As well, people that start their careers during times of high unemployment tend to have persistently lower earnings than their peers that start employment during when the economy is strong.  Data compiled by the Bureau of Labor Statistics shows that among workers that lost their jobs between 2007 and 2009, 55 percent earned less per week once they were employed and 36 percent took at least a 20 percent cut in weekly earnings.  This drop in income can persist for decades; workers displaced during the 1982 recession were still making 20 percent less than their non-displaced peers 15 to 20 years later.

What factors are causing high unemployment and high long-term unemployment?

1.) Weak demand for goods and services following the recession was related to a fall in household spending and the end of the wealth effect attached to home ownership.  The CBO estimates that this accounts for 2.5 percentage points of the elevated unemployment rate.

2.) Mismatches between the needs of potential employers and the skills or location of the unemployed or frictional unemployment generally ranges from 4 to 5 percent but was at elevated levels after the end of the recession because of the inability of many workers to move to new geographic locations for work because of the collapse in housing prices that resulted in underwater homeowners.  The CBO estimates that this factor accounts for 0.5 percentage points of the elevated unemployment rate.

3.) Incentives from extensions of unemployment insurance for people to stay in the labour force (i.e. not drop out of the statistical database) and continue searching for work accounts for about 0.25 percentage points of the elevated unemployment rate.  The availability of UI also discourages unemployed people from taking jobs that are less than suitable because the benefits paid reduce the hardship of being unemployed, particularly as benefits are extended by the government with studies showing that these UI extensions elevate the share of long-term unemployment.

4.) Many employers believe that the skill sets of long-term unemployed workers erode and that long-term unemployed workers are of "lower quality" (stigmatization).  Fortunately, when unemployment levels are very high, this affect is minimized as potential employers attribute the length of unemployment to economic conditions rather than individual issues.  Unfortunately, even during periods of weak economic growth, long-term unemployment is still regarded as a stigma and results in a self-perpetuating cycle.  The CBO estimates that this factor accounts for about 0.25 percentage points of the elevated unemployment rate.

Okay, what solutions does the CBO suggest for fixing the unemployment problem?

The CBO suggests that there are three main pathways that can be taken to prop up the job market; first by assisting households by increasing their disposable income thereby propping up the demand for goods and services, second by supporting businesses and third by increasing aid to state governments and government spending on infrastructure.  The impact of these spending policies is measured using the number of full-time-equivalent employment (FTE) (one FTE is 40 hours of employment per week for one year) that is created per million dollars spent over the next two years.

Here is a chart showing the impact of various policy options on employment as noted above:

The CBO suggests that, as a rule of thumb, an additional $30 billion expenditure used in 2012 for an option that would boost employment in 2012 - 2013 by about 9 FTE-years per million dollars of total cost would reduced the unemployment rate by one-tenth of one percentage point.  For example, the American Recovery and Reinvestment Act of 2009 which spent $825 billion, resulted in a 0.4 to 1.8 percentage point drop in unemployment in 2010.

In looking at the results of the CBO's analysis, it is apparent that the biggest employment gain bang for the buck is to increase aid to the unemployed, followed by reducing the employers share of payroll taxes for firms that increase their payroll and, in third place, by reducing employers payroll taxes for all firms.  The poorest returns are for both reducing taxes on business income (not a surprise to me and a lesson to both President Obama and the remaining Republican Presidential candidates) and reducing tax rates on repatriated foreign earnings, a lesson the Bush II Administration learned the hard way in 2004 when they extended a generous tax holiday to American corporations that were supposed to create jobs in return as posted here.  You'll also note that the jobs gain resulting from increased spending on infrastructure is also very, very low compared to the other alternatives, tied for third least effective policy with reducing personal income taxes in 2013.

As I noted above, the CBO's study shows that by far, the greatest employment gains are made by changing the current structure of the Unemployment Insurance system.  Modifications to UI could be used to encourage unemployed people to return to work more quickly.  Changes could include awarding reemployment bonuses to people who find a job quickly, offering wage insurance payments to people who accept a job that pays less than their previous job, using UI benefits to temporarily place unemployed workers with private-sector employers so that they can gain experience in a new occupation or industry or supplementing the earnings of workers who agree to accept shorter working hours rather than being laid-off (short-time compensation).  As well, the UI system could be used to help unemployed workers relocate to areas where employment opportunities are greater; unfortunately, the general goal of programs that assist underwater homeowners are designed to keep owners in their current homes rather than moving them to a new location.

As well, the CBO suggests that direct government employment in public service jobs could reduce unemployment, as was the case during the Great Depression.  As well, specialized training programs that improve workers skills that target specific industries and geographic locations could address the issues of skills mismatch, loss and the attached stigma faced by long-term unemployed Americans.

  

Programs also need to focus on America's youth who are suffering from 23.2 percent unemployment (January 2012).  The use of career academies, small learning communities of high school students that focus on specific careers, have been proven to increase employment among young men from low-income families.  In addition, apprenticeship programs that provide specific trade skills have been shown to result in both employment and earnings gains when compared to the training received at community colleges.  With baby boomer tradesmen about to retire by the tens of thousands over the coming decades, there will be an increasing demand for trained journeymen.

The CBO's study shows that by far, the greatest employment gains are made by changing the current structure of the Unemployment Insurance system.  Modifications to UI could also be used to encourage unemployed people to return to work more quickly.  Changes could include awarding reemployment bonuses to people who find a job quickly, offer wage insurance payments to people who accept a job that pays less than their previous jobs, use UI benefits to temporarily place unemployed workers with private-sector employers or supplementing the earnings of workers who agree to accept shorter working hours rather than being laid-off.

All in all, the CBO has done a very interesting job in trying to solve what seems to be an unsolvable employment problem in America.  While Mr. Bernanke suggests that America’s economy appears to be recovering more quickly than he expected, there are millions of unemployed Americans who would argue otherwise.  At least the CBO is making an effort to suggest policies that would be most effective and efficient in changing the employment situation for the better, particularly in light of growing levels of government debt.

As an aside, I apologize for the length of this posting but the CBO study had so many interesting points that I felt should be included.

Government Forecasts of Fiscal Balance: How Accurate Are They?

Every year, the Congressional Budget Office releases its annual Budget and Economic Outlook for the next decade, as testified before the Committee on the Budget in the United States Senate.  I thought that it would be an interesting exercise to see how accurate these predictions were, particularly in light of the release of the President's budget which, of course, predicts better fiscal balance somewhere down the road.

Let's start by looking at the older Outlooks first, starting with the 2008 version and looking at how the debt projections changed every year for two selected years, 2011 and 2018.  As well, I'll point out when the CBO projected a return to balance and/or which year was projected to have the lowest deficit over the decade-long period in the study.

Here's what the CBO predicted in their 2008 - 2018 Budget and Economic Outlook:

You will notice just how optimistic the 2008 version was.  The CBO predicted balance by 2012, with debt held by the public rising to no more than $5.827 trillion by 2011 and dropping to $5.050 trillion by 2018.  As well, the annual deficit was projected to peak at $241 billion in 2010, falling relatively rapidly into balance over most of the decade.  Things certainly looked great, didn't they? 

Here's what the CBO predicted in their 2009 - 2019 Budget and Economic Outlook:

The 2009 version is not quite as optimistic as was the case in 2008.  The Great Recession (i.e. TARP among other things) had massively impacted Washington's ability to balance its books and the CBO totally eliminated any prediction of returning to fiscal balance over the decade with deficits falling to a minimum of $188 billion by 2018.  Rather than a debt of $5.827 trillion in 2011, the debt was projected to reach $8.238 trillion, up 41.4 percent from their predictions one year earlier.  Debt was projected to rise to $9.127 trillion in 2018, up 80.7 percent from their prediction just one short year earlier.  

Here's what the CBO predicted in their 2010 - 2020 Budget and Economic Outlook:

The 2010 version is even less optimistic than the 2009 version.  Let's look again at the CBO's predictions for achieving fiscal balance and the debt in both 2011 and 2018.  Once again, the CBO projected that Washington would not achieve fiscal balance by 2020 with the lowest deficit coming in at $475 billion in 2014.   By 2011, the debt was projected to reach $9.785 trillion, up 18.8 percent from the previous year's projections.  As well, the debt was now projected to rise to $13.678 trillion by 2018, up 49.9 percent from the previous year's projections.

Moving right along, here is what the CBO predicted in their 2011 - 2021 Budget and Economic Outlook:

The CBO, consistent with last year's projections, threw optimism out the window again and projected that Washington would not achieve fiscal balance by 2021 with the lowest deficit coming in at $533 billion in 2014.  By 2011, the debt was projected to reach $10.430 trillion, up 6.6 percent from the previous year's projections.  The debt was now projected to rise to $15.767 trillion by 2018, up 15.3 percent from the previous year's projections and triple the projection of $5.050 trillion in 2008.  As Rick Perry would say, "Oops!".

Now, lets take a look at the most recent 2012 - 2022 Budget and Economic Outlook released earlier in February:

This year's version is far more optimistic than what we have seen for the previous three years.  While not showing a return to fiscal balance, the CBO projects that the deficit will reach its lowest level in 2018, dropping to a relatively small $196 billion.  The deficit for the fiscal year 2011 was an "actual" now, reaching $1.296 trillion with the debt hitting $10.128 trillion, up 73.8 percent from what was projected back in 2008 and roughly what was predicted one year earlier.  By 2018, the debt was projected to reach $13.801 trillion, down a substantial $1.966 trillion or 12.5 percent from the projections one year earlier.  Most of this year's improvement in fiscal balance is predicated on one thing; an increase in revenues as a share of GDP; rising from 16.3 percent of GDP in 2012 to 20.0 percent in 2014 and 21.0 percent in 2022.  Between 2012 and 2014, revenues are projected to rise by more than 30 percent based on recent or scheduled expirations in certain tax provisions that have kept tax rates lower.  As well, revenues are projected to rise relative to GDP because increases in taxpayers' real income (after inflation) is expected to push more taxpayers into higher income brackets.  Unless, of course, Congress rescinds the tax changes and then it's back to the drawing board for the CBO because all bets are off.

It is interesting to look back in time and see just how inaccurate government fiscal projections are, even when looking from one fiscal year to the next.  While our politicians love to assure us that all is well and that their projections "prove" that the debt situation is manageable over the long-term, we can see from this posting that their reality is far removed from our own and from that of the rest of the world.

From this posting, we can also see the impact of unanticipated events on Washington's projections; the impact of the 2008 - 2009 contraction is still working its way through the federal government's books.  From that lesson, it becomes quite apparent that, if the world is entering either Part II of the Great Recession or another as yet unnamed contraction, all of the CBO's projections will be worth about as much as their 2008 version in which they predicted a return to fiscal balance by 2012 and a debt held by the public of $5.75 trillion.