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Stranger Than Fiction
In 1977, Jimmy Carter confessed to Playboy magazine that he lusted after women other than his wife.
For years afterwards, Art Buchwald re-told the story, deadpan; then paused, staring at his audience through coke-bottle lenses, and concluded: "Could I make that up?"
Here's another one, Art.
The Congressional Budget Office says the Federal budget deficit this year will not be the $129 billion forecast in January, nor the $68 billion forecast in June: it will be only $34 billion, the lowest in 20 years. Despite the brand new tax cut, the CBO further projects that in three years the budget will balance, and then run a $32 billion surplus in 2002. Surpluses will continue unbroken to an $86 billion crest in 2007, and then decline until 2015, when retiring Boomers will put us back modestly in the red.
Could I make that up?
More. Today, the national debt is equal to about 50% of the gross domestic product; by 2007, it will fall to only 30% of GDP. By 2015, if the country needs to borrow some money again to help with the Boomers' Social Security and MedicareÉ fine, then we'll be able to afford it. Pay no further attention to the mega-deficit scare propaganda.
Could I make that up?
Despite its association with Congress, the CBO is a straight outfit, and its new forecast is confirmed at the Treasury, and oddly enough, by the IRS. How could a January forecast for a $129 billion deficit drop to $34 billion in only nine months?
Here's how: so far this year, the IRS has raked in over $90 billion in "unanticipated revenue" -- roughly an extra $10 billion each month. It's amazing what happens when you put another two million people to work every year, and then tax the bejesus out of 'em. As Everett Dirksen might have said, ten billion here, and ten billion there, and sooner or later you're talking real money.
Naturally, none of this glorious news is due to an unanticipated reduction in Federal spending. When our worthy representatives get word of our windfall, they will undoubtedly think of ways to spend it, whether by writing checks or cutting taxes.
If we can keep the pols under some control, the CBO forecast is sustainable. This year, Federal tax receipts will be 19.8% of GDP, the highest since World War II (thanks, Bill, for that 1993 adjustment), but within 1.5% of the post-war average. Spending will equal 20.3% of GDP, the lowest since 1979 (Bill gets credit for that one, too), but again within a percent or two of the post-war average.
Right there -- "within a percent or two" -- lies the math behind the miracle, and vulnerability in the future. If revenue and spending creep two percent apart in an eight trillion dollar economy, the deficit will go back out to $160 billion. A recession could drive revenues down that far, but the revenue momentum is going up, and fast. If there is a flaw in the CBO forecast, it's that future revenue growth is understated.
About now, since the Treasury is finally out of the borrowing business, some of you are drooling over the prospects for lower interest rates. Having the Treasury out of the market is good news, but not necessarily for rates.
Excessive Treasury borrowing (as measured by fraction of GDP, at its highest around 4% of GDP during the '80's) did its worst damage by "crowding out" other borrowers: home buyers, and businesses of all kinds. If any of these borrowers wanted to elbow the Treasury hog away from the trough, they had to pay higher rates. Many could not, and private sector credit was often scarce.
Rates won't fall on balanced budget news: they'll fall on good inflation news, just like always. Aggregate loan demand is higher than it's ever been, as private sector borrowers are lined up at the trough, more than replacing the Treasury's demand for cash.
In 1997, issues of new junk bonds alone will approach $100 billion, roughly triple the net new borrowing by the U.S. Treasury.
I couldn't make that up, either.
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