OPINION:
The recent agreement to suspend the debt ceiling until 2025 was a political win for President Biden — it burnished his image as a bipartisan dealmaker — but it’s an economic disaster.
Mr. Biden’s ambitious agenda increases the budget deficit from $984 billion in 2019 to $1.5 trillion in 2024. That’s more than inflation or growth in gross domestic product.
The deal with House Speaker Kevin McCarthy raises defense spending 3% in 2025 — less than needed to keep pace with inflation — and freezes nondefense discretionary spending for 2024, and permits a 1% increase in 2025. Work requirements for food stamp recipients have enough holes to make their impact on the deficit negligible.
The Congressional Budget Office estimates the deficit will remain above 5% of GDP, and the debt held by the public will exceed GDP in 2024 and reach 115% by 2033. And these estimates are based on optimistic assumptions.
The projections don’t consider further support for defending and rebuilding Ukraine or that Congress may be compelled to substantially increase military spending to defend Europe and address growing tensions in the Middle East, the South Pacific and Taiwan.
The analysis assumes nominal GDP will grow about 4% a year — a bit less than 2% for real economic growth and that the Federal Reserve soon gets inflation close to 2%.
As this column has argued, the Fed will be challenged to keep inflation much below 4%.
Climate change and continuing hostilities in Ukraine are constraining global food supplies. Droughts and floods are impeding global transportation systems. De-risking supply chains — essential in light of growing tensions with Russia and China — raises manufacturing costs and import prices too.
Combating climate change — replacing fossil fuels with solar and wind power, expanding electrical grids and deploying electric vehicles — requires massive investments and will require higher prices for motor vehicles and other goods.
The CBO forecasts assume interest rates on Treasury securities vary from year to year but overall average about 3%.
To keep inflation in check, the Fed will likely have to maintain interest rates at about those that prevailed before the 2007-2009 global financial crisis rather than the very low rates just before the pandemic.
The average maturity for Treasuries generally fluctuates between five and six years. In 2006 and until the Fed started cutting interest rates to cope with the financial crisis, the rates on Treasuries with those maturities were above 4%.
The bottom line is the CBO potentially underestimates federal interest payments after 2025 by about one-third.
The CBO projects steady growth without another recession or similar disruption.
Given how close the Silicon Valley Bank failure took us to a financial crisis, assuming no hiccups in growth makes about as much sense as positing a cure for the common cold.
Similarly, the likelihood of another pandemic in the next decade on the scale of COVID-19 is estimated to be 27.5%.
The likelihood that a financial crisis, pandemic, war or simply a mistake in the conduct of monetary policy will disrupt growth for a year or two can safely be pegged at around 50%.
Overall, the federal debt held by the public should exceed 115% much sooner than 2033 and will likely reach 130% within 10 years.
In this environment, the federal government will have to borrow each year enough to cover the difference between what it spends and receives in taxes plus added funds to pay for a growing portion of its annually increasing debt service.
The interest cost of servicing the national debt will increase faster than nominal GDP.
International creditors — foreign central banks that keep Treasury securities as reserves, multinational businesses that use the dollar as their primary vehicle for cross-border transactions and private investors — will lose confidence in the dollar and Treasury securities as a secure store of value.
These are the ingredients of a sovereign debt crisis.
Like Greece, Spain and others in the wake of the 2007-2009 financial crisis, the United States would have to implement draconian tax increases that would smoother growth, borrow at high interest rates or rely on the Fed to run the printing press, unleashing punishing rates of inflation that effectively devalue the currency and the debt.
The negotiations between Messrs. Biden and McCarthy focused largely on nondefense discretionary spending. The antiquated state of information systems at the IRS that shut down the national air traffic control system last January bare witness that years of austerity to accommodate growing entitlement spending cannot continue.
Mr. Biden simply won’t seriously consider eligibility requirements and other cost containment measures for Social Security, Medicare and Medicaid, food stamps, Section 8 housing assistance and other entitlements that account for about two-thirds of federal spending.
The longer we wait, the harder it will be, so it would be best to replace Mr. Biden in 2024 rather than wait four more years.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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