The party controlling Congress may have changed this month. However, as Federal Reserve Chairman Ben Bernanke made clear in his inaugural appearance before the Democratcontrolled Senate Budget Committee on Jan. 18, the serious fiscal problems confronting Congress and the administration did not change at all on Nov. 7. Consider:
At the end of fiscal 2006, the federal government debt held by the public, which excludes Social Security and other trust funds, amounted to 37 percent of gross domestic product (GDP). Twenty-five years ago, publicly held federal debt totaled 25.8 percent of GDP, and five years ago it was 33 percent of GDP. That trend has been moving in the wrong direction.
Notwithstanding the horrendous budget deficit that have characterized most of the past quarter century, Mr. Bernanke observed: “Unfortunately, we are experiencing what seems likely to be the calm before the storm” as spending on entitlements (Social Security, Medicare and Medicaid) “will begin to climb quickly during the next decade.” Indeed, the first baby boomers will begin receiving Social Security retirement benefits next year, and three years later they will become eligible for Medicare.
Last year, spending on Social Security, Medicare and Medicaid represented about 40 percent of all federal outlays and roughly 8.5 percent of GDP. According to projections by the Congressional Budget Office (CBO), spending on those three programs will rise to 10.5 percent of GDP by 2015 (less than a decade from now) and to about 15 percent of GDP by 2030. Today there are about five people between the ages of 20 and 64 for each person 65 and older. By 2030 that ratio will plunge to three people between 20 and 64 for each person 65 and older. By 2030, CBO projects the federal deficit will approach 9 percent of GDP. Last year’s $248 billion deficit was less than 2 percent of GDP.
As future budget deficits become increasingly larger when measured as a share of GDP, CBO projects that the level of federal debt held by the public (ex- pressed as a share of GDP) will soar as well, reaching roughly 100 percent of GDP by 2030 compared to 37 percent today.
By design, these CBO projections ignore the effects such soaring deficits would have on the economy, which is assumed to grow at a steady, moderate rate commensurate with a labor force likely to expand much more slowly than in the past. In fact, Mr. Bernanke warned, “if government debt and deficits were actually to grow at the pace envisioned by the CBO’s scenario, the effects on the U.S. economy would be severe.”
Mr. Bernanke’s conclusion in his testimony before the Democrat-controlled Congress was not different from the conclusion former Fed Chairman Alan Greenspan repeatedly delivered in recent years to the Republican-controlled Congress. “[I]f early and meaningful action is not taken,” Mr. Bernanke warned, “the U.S. economy could be seriously weakened, with future generations bearing much of the cost.”