The economy is cooling but the US is a frog in hot water

We’ve all heard that if you put a frog in boiling water, it will jump out, but if you put a frog in warm water and slowly turn up the heat it will stay put until boiled to death. That may or may not be true, but it is a useful allegory of how incremental changes can accumulate to dangerous or even fatal levels if ignored. 

The unfortunate frog came to mind as I read through the Budget and Economic Outlook: 2024 to 2034 released last week by the Congressional Budget Office (CBO). Over the next 10 years, deficits will gradually rise from 5.6 percent of Gross Domestic Product (GDP) to 6.1 percent under current law. To put that in context, the average deficit over the past 50 years is 3.7 percent of GDP. 

Meanwhile, government debt held by the public will grow from 99 percent of GDP this year to 116 percent in 2034, more than twice its 50-year average and well above the record high set in 1946 at the end of World War II. 

The water is heating up and we are the frog.

This didn’t have to happen. If you look back to just the beginning of this century, the water was not nearly so hot. The budget was in surplus and the debt, at 31.5 percent of GDP, was less than a third of what it is today, let alone what it is projected to be in the future.

As the water temperature steadily rose, we passed on every opportunity to jump free. It is now fair to ask whether we have waited too long.

The answer to this question depends on whether Congress, future presidents and the American public come to grips with three basic facts about our current situation.

We need broader spending restraint. Efforts to restrain spending must go beyond annual appropriations (i.e., “discretionary” spending). It must also include popular “mandatory” programs linked to retirement and health care such as Social Security, Medicare and Medicaid. These programs, along with interest on the debt, are what drive higher spending. 

Under current law, the CBO projects that mandatory spending plus net interest will increase by 2.0 percent of GDP over the next 10 years, whereas discretionary spending will shrink by 1.1 percent. As early as next year, the CBO projects that mandatory spending plus interest on the debt will consume all revenues. 

To put it more starkly, Congress could eliminate discretionary spending in 2025, including defense, and still have a deficit. Unless we cast a broader net for spending reductions, fiscal policy will remain on an unsustainable path.

We need more revenue. Revenue needs in the future will be higher than in the past due to population aging, rising health care costs and the higher costs of servicing accumulated debt. Revenues have averaged 17.3 percent of GDP over the past 50 years. It is worth noting, however, that during the four years when the budget was last in surplus (1998-2001) revenues averaged 19.3 percent of GDP — two points above the 50-year average. 

Over the next 10 years, CBO projects that revenues will slowly climb from 17.5 percent of GDP this year to 17.9 percent by 2034. This assumes, however, that the scheduled expiration of temporary tax cuts enacted in 2017 will take effect after 2025. In the likely event that some, if not all, of these expiring tax cuts will be extended, revenues will remain essentially flat, driving deficits even higher than projected. 

If it required revenues above 19 percent of GDP to balance the budget several years ago — before the baby boomers had begun to qualify for Social Security and Medicare and the cost of servicing the debt was much lower — it is implausible to think that we won’t need at least that much in the future. In addition to needed spending restraint, some higher contributions on the revenue side will be needed to put the budget on a sustainable path. 

We need more workers. Higher economic growth would help support the growing debt burden, but future growth is constrained by slowing potential workforce growth, which the CBO projects will drop by about two-thirds over the next 10 years as the population ages and fertility rates remain low. After 2034, the CBO estimates that “net immigration increasingly drives population growth, accounting for all population growth beginning in 2040.” In other words, by 2040 the United States will have more deaths than births. 

Mainly due to these demographic constraints, the CBO projects that annual real GDP growth will fall to just 1.5 percent by the 2040s. This compares to an annual rate of 2.4 percent from 1993 to 2022. If we don’t find a way to increase workforce growth, through immigration or otherwise, the economy of the future will be less and less able to accommodate the growing debt burden. 

All of the above will require difficult tradeoffs and a high degree of bipartisan cooperation. We can either suck it up and do that or, like the frog in the allegory, we can stay put and boil to death.

Robert L Bixby is the executive director of The Concord Coalition.