America's debt problem grows by $600 billion

In America's debt problem, I made a simple calculation of the federal government's interest costs as a percentage of revenue. It assumed no feedback, positive or negative, to change the path of accumulating deficits. The model is simplistic, but the result has value because it shows that if the trends hold the debt costs are going to trigger a crisis. To use an imperfect analogy, it's like a patient with a compromised immune system. We don't know what will finally break the remaining immune response—an infection, a bad flu, a bad fall. Or maybe the doctors are successful and the patient outlives their expectations, but as the patient ages, their immune system continues to weaken. Unless the immune system recovers, the patient is constantly in danger of any small illness.

I am wholly open to the chance that forecasts are too pessimistic. As a follower of socionomics though, I believe the odds are against the U.S. solving the debt crisis. The fighting and hostility displayed in the fiscal cliff debate, and the intraparty fighting over the Sandy Relief bill, shows that compromise will be next to impossible. Where compromise is made will be in the path of least resistance—avoiding short-term pain and hard decisions.

In the conclusion of the previous post, I said that forces of austerity suffered a total defeat in the fiscal cliff debate. Not a few days later, we're already seeing the deficit estimates increased.

Friday Night Dump: CBO Admits Error, Now Expects Another $600 Billion In Deficits From Obama Tax Cuts
That dramatic widening of the budget deficit will increase interest payments on the federal debt, an impact that is not included in CBO’s cost estimates. The additional debt service will cost about $600 billion. Thus, if we added the estimated cost of the legislation and the related debt service to our previous baseline budget projections (which followed current law at the time), we would show additional deficits between 2013 and 2022 of roughly $4.6 trillion.
My static model of the deficit assumed the situation remains the same: revenues, expenditures and the deficit all grow at 3%. This $600 billion isn't included, meaning my model is less likely to be wrong.

Now, the CBO is no stranger to extending trends into the future, and ending up with wildly inaccurate forecasts in the process. This is one reason why one doesn't use static scoring in most cases, and why I don't consider my model a forecast as much as a acid test. If you run a simple model and find the trend is unsustainable, then negative feed back is going to blow the system up because events unfold in a non-linear fashion. Interest rates won't stop at 5% as forecast in my model, rather if interest rates climb that high, they will quickly jump to 7%, 10% and beyond. The baseline is unsustainable, let alone a deviation from it.

Positive data can change the situation completely, but the positive feedback is digging out of a hole. It only takes small errors to trigger a negative avalanche, while big positive changes are needed to create a virtuous cycle. I just don't see that large positive shock coming, as this $600 billion increase shows. From the CBO:
Although we expect that the legislation just enacted by the Congress will lead to higher output and income in 2013 we also expect that it will lead to lower output and income later in the decade than would have occurred under prior law. The legislation lowers tax rates for many people—thereby boosting output—but it also expands budget deficits—which will reduce national saving and lower the stock of productive capital, thereby reducing output relative to what would have occurred under prior law. CBO has not estimated the longer-term economic effects of the legislation itself, but we previously estimated the economic effects of the aforementioned alternative fiscal scenario, which embodied the assumption that many policies that were in effect or had recently been in effect would be continued. Under that scenario, as described on page 37 of our Update, we estimated that real gross national product (GNP) would be 1.7 percent lower in 2022 than would have been the case under prior law.
Deficits are now at the point where there is negative feedback on the economy. GDP growth will slow and spending cuts will slow it further in the short-term, while taxes slow it permanently. The government will continue avoiding the short-term pain of cuts until it is too late, when making cuts will slow the economy at precisely the wrong moment as investors worry the government cannot finance the existing debt. There is no room for error.

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