It’s Official—USA is Greece

The Congressional Budget Office (CBO), the non-partisan agency charged with evaluating U.S. fiscal policy, has come out with a report discussing the current fiscal year 2011 budget, and the U.S. fiscal situation through 2021.

It’s ugly like a vomit splatter.

The headline was—as expected—that for FY 2011, the Federal government deficit will reach $1.5 trillion, an increase from $1.267 due mostly to the extension of the Bush ear tax cuts that just happened.

Insofar as the economic outlook, the report says,

“Although recent actions by U.S. policymakers should help support further gains in real (inflation-adjusted) GDP in 2011, production and employment are likely to stay well below the economy's potential for a number of years. CBO expects that economic growth will remain moderate this year and next. As measured by the change from the fourth quarter of the previous year, real GDP is projected to increase by 3.1 percent this year [2011] and by 2.8 percent next year [2012].”

Grinding through the data supporting this analysis, essentially the CBO is inferring (but without saying) that the short term high of fiscal stimulus, tax cuts and Federal Reserve shenanigans will wear off by 2012—assuming of course that it’s not goosed along by the new Congress. 

An issue the CBO addressed, of course, was employment: 

“The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job.”

The report of course doesn’t mention this, but obviously, underwater housing is a serious constraint on the middle-class labor force: Estimates vary, but almost 25% of the U.S. housing is underwater. Therefore, these homeowners cannot move, in order to find work—dragging out the issue of labor misallocation. 

Based on CBO data and common sense, The Hourly G concludes: If one of the strengths of the American economy was the willingness of the work-force to move for the sake of a job, then so long as the Mortgage Mess remains in place, with all these underwater homes like rocks around the necks of the middle-class, then one of the principal virtues of the American economy will not be a factor for years to come. 

The eye-popping stuff is regards the deficit—and the interest payments thereof: 

The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government's annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.

(This is referring, of course, to outstanding Treasury and Agency debt, not Social Security liabilities, funding for which has been treated like the perennial piggy bank with the hole in its belly.)

As bureaucratically circumspect as the CBO report has to be, there’s no avoiding the obvious fact: The current level of fiscal indebtedness is unsustainable, and will rapidly reach a crisis point. 

Folks, it’s official: The U.S.A. is Greece