CBO Report: Gloomy, with Unrealistic Optimism

By:  Bob Adelmann
02/06/2013
       
CBO Report: Gloomy, with Unrealistic Optimism

On its face the latest report from the Congressional Budget Office is gloomy enough, but careful sifting through it reveals excessive optimism that its predictions cannot hide: rising interest rates, increased healthcare costs thanks to ObamaCare, and the inevitable march of demographics and the aging Baby Boomers.

On its face the latest report from the Congressional Budget Office is gloomy enough, but careful searching reveals a surprising (and likely misplaced) optimism even in light of rising interest rates, increased healthcare costs thanks to ObamaCare, and the inevitable march of demographics and the aging Baby Boomers.

First, despite increasing regulatory overload and increased taxation of job creators thanks to the last minute fiscal cliff agreement, the CBO estimates that the economy will actually grow this year — by a paltry 1.4 percent. Next year the CBO estimates growth of nearly three times that amount: 3.4 percent. And then it predicts a robust 3.6 percent for the following years.

Second, the CBO thinks that despite the strengthening economy, unemployment will stay above 7.5 percent for the foreseeable future, partly because the economy is still recovering and partly because aging Baby Boomers will be staying in the workforce longer, which will take jobs away from others seeking employment.

Third, the CBO thinks the economy will resume “a virtuous cycle of faster growth” because of the rebound in housing construction, rising real estate prices, and an improving stock market. Each of these assumptions is fraught with difficulty. For example, the current “bump” in construction is from a very low level so any improvement looks rosy. Rising real estate prices are also showing a spotty rebound depending on where one looks, while the “overhang” of foreclosed but not-yet-sold homes remains substantial and elusive. And while the stock market averages have doubled since they hit bottom in March 2008, the real underlying strength of the markets has been anemic, at best, and some market experts are calling for a sharp decline in those averages over the coming months.

In addition, the CBO has attempted to build into their model the impact of rising interest rates as the federal government’s financial difficulties become more and more obvious to bond buyers around the world, estimating that by the end of 2017 interest rates on the 10-year treasury — a proxy for the rates charged by investors buying its debt — will increase from the current 2.1 percent to 5.2 percent. 

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