The International Monetary Fund has released its projections for global economic growth in 2011. The decelerating economic growth of the United States — from 2.6% this year to an expected 2.3% next year — will come as no surprise to anyone who has been paying attention.
For those like me who are monomaniacally obsessed with America’s looming fiscal meltdown, the IMF forecast also confirms that our trajectory is worse than the gloomy Obama administration 10-year forecast, which posits that the United States will add more than $8 trillion to the national debt by 2020. The latest Obama estimate, contained in the Office of Management and Budget’s Mid-Session Review, forecasts a real growth rate of 4.0% in 2011, generating enough revenue to bring down the deficit marginally, to $1.461 trillion from $1.471 trillion this year.
There are two reasons for worry as we ponder the IMF forecast. First, slower-than-forecast economic growth translates directly into lower-than-forecast revenue, on the order of magnitude of $50 billion next year. Project that lower economic base forward 10 years, and we could accumulate an extra $500 billion in national debt (not including compounding interest).
An even greater fear is that 2011 foreshadows weak economic growth for the entire business cycle, not just one y ear. The Obamoids in OMB paint a rosy economic picture for the decade ahead, with economic growth showing almost as much strength as the Clinton-era Internet boom, 3.4% annually — and with no recession for 10 years. If economic growth is lower than forecast year after year, the 2011 effect will be amplified many times over.
In an exercise conducted for my book, “Boomergeddon,” Chmura Economics & Analytics built a budget model using OMB’s budget figures and economic assumptions. By tweaking the rate of economic growth — assuming a 2.4% annual rate of economic growth plus a mild recession in the late 2010s — Chmura found that the annual deficit by 2020 would be $1.7 trillion a year (compared to less than $1 trillion under the official Obama scenario) and the national debt would surpass $29 trillion (as opposed to $21 trillion under the official forecast).
As the debt accumulates, U.S. policy makers will find themselves in a fiscal and monetary strait jacket, with less and less room to maneuver. Interest payments on the national debt will consume an ever-growing percentage of the economy. As recent World Bank research shows, the U.S. has probably passed a tipping point — when the national debt exceeds 77% of the Gross Domestic Product — at which each percentage point increase in the debt/GDP ratio erodes annual economic growth by nearly one-fifth of a percentage point.
So far, there is no evidence that the political class of the United States understands how fragile our economic and fiscal position is, much less that they have the political will to take the necessary measures.
