Unemployment Rate to Fall to 5.3 Percent...in 2016
Each year, the non-partisan Congressional Budget Office (CBO) crunches the numbers on the economy and the budget and delivers a sort of fiscal state of the union. In its latest report, the CBO had little cheery news to report for 2011 and beyond. CBO director Douglas Elmendorf called the road ahead "daunting." The CBO's outlook includes plenty of information that matters for your personal financial life, like your investments and job prospects, but it will also help you to follow along on the crucial debates about debt and deficit reduction that will be happening this year.
Here are some key takeaways from what the CBO says we should all be prepared for:
1. Unemployment will stay high for at least a few more years. The CBO forecasts that unemployment will get back to 5 percent or so -- what is considered "full" employment -- no earlier than 2016. Over the next few years it's going to be slow going. The CBO expects the unemployment rate to still be above 9 percent at the end of this year, and ease to 8.2 percent at the end of 2012.
2. The economy will slog around at a 3 percent growth rate through 2013. That level of growth, adjusted for inflation, is not nearly what you want to see coming out of a recession. And it likely won't be enough to push businesses to shift into a massive hiring rush; not what those of us itching to get a new job in 2011 want to hear.
3. Inflation will stay low. Finally, some good news. The CBO forecasts overall inflation won't venture higher than 2.0 percent in the next few years. (If that seems a lot lower than what you've been experiencing lately, MoneyWatch blogger John Keefe explains what the official overall inflation rate fails to capture.)
That said, an official inflation rate that stays low could mean the long-anticipated spike in bond interest rates won't be materializing for a while. The CBO forecasts the 10-year Treasury rate will range between its current 3.4 percent yield to 3.8 percent through 2012. Just keep an eye out for the bond vigilantes: if they don't see significant progress on cutting the deficit, they could get antsy and push rates up more.
4. The deficit will be $200 billion higher this year because of the tax cut extension. The federal budget deficit for the government's 2010 fiscal year (which ended in September 2010) was $1.3 trillion. The CBO now expects a $1.5 trillion deficit this year, in large part due to the extension of the tax cuts through 2012. While it's natural to be relieved that the tax compromise bill keeps tax rates steady for two years, and even delivered a small Social Security payroll tax reduction for 2011, there was indeed a serious cost to that "break." Every move to not raise taxes has a cost to our federal deficit.
5. The status quo just won't work long-term. OK, the tax compromise and its impact on our federal finances are already a done deal. But what happens after 2012 is up for grabs. According to the CBO, if we were to permanently extend the existing tax laws, and not reduce current Medicare payment levels to doctors (as current law mandates will start in 2012), the federal deficit will grow from 3.6 percent of GDP this year to 6 percent in 2021. The cumulative debt over the decade would be close to $12 trillion. And that brings us to another sobering fact....
5. Extending the tax cuts means the federal debt could equal nearly 100 percent of GDP by 2021. Before the financial crisis, our federal debt was about 40 percent of GDP. Today it is 70 percent. That's just not a trajectory that spells economic good times.
Of course, it's not just the tax side of the budget that needs to be addressed. We could raise taxes up the wazoo and it still wouldn't close the deficit gap, to say nothing of the fact that it would cripple the economy. It's not popular to consider, but it's going to take a combination of tax policy change and serious spending reductions to bring the national debt back into manageable territory.
And yes, that includes putting Social Security and Medicare on the table as well. As the CBO laid out, spending on these programs are forecast to grow from 10 percent of GDP today to about 16 percent over the next 25 years. But as noted in a previous post, Social Security is not going broke, nor is it really such a huge problem; it just needs some relatively small adjustments to remain solid. The bigger issue is Medicare and Medicaid spending, which are being held hostage by sharply rising health care costs. One of the many fiscal debates we will likely be hearing in the coming months and years is whether to severely slash those programs to "solve" the debt problem, or instead to take a scalpel to all parts of our federal spending -- from agricultural subsidies to yes, defense spending.