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The Congressional Budget Office

by James K. Galbraith

The forecasts of the Congressional Budget Office are holy writ in Washington, and they fuel scary headlines about an impending federal debt disaster. This is a shame, because the CBO's projections are indefensible, internally inconsistent and economically impossible.

The CBO predicts that unemployment will fall to near 5 percent by 2014 and stay there. It also expects a rapid recovery in the next few years, followed by a steady 2.4 percent GDP growth rate thereafter. Inflation is expected to stay below 2 percent indefinitely.

But alongside these rosy numbers, the CBO also projects that short-term interest rates will increase from less than 0.2 percent now to 4 percent in 2014 (and higher later), while rising health-care costs will drive Medicare expenditures ever higher. These figures imply that interest payments on the federal debt will by 2020 "rival the defense budget," as Clinton-era Treasury official Roger Altman recently wrote in the Financial Times.

These things cannot happen together. If the CBO's happy growth scenario is right, with low inflation and low unemployment, why would short-term interest rates rise? Conversely, if the CBO's assumptions about health-care costs and interest rates are correct, how can inflation stay low? Ballooning interest payments and health-care spending would spur the economy to full employment and drive up prices -- but also slow the rise in debt as a proportion of the nation's gross domestic product.

So where does the CBO get its numbers? That miraculous return to full unemployment and those higher interest rates both come from thin air. More likely, given the passivity of today's banks, high unemployment and low interest rates will linger, unless the government moves on a real jobs program. And that won't happen, because of fear-mongering about the debt -- buttressed by the CBO.

If we'd had a CBO in the 1930s, Franklin Roosevelt could never have gotten the New Deal off the ground.

James K. Galbraith is the Lloyd M. Bentsen Jr. chair in government/business relations at the University of Texas at Austin and a former executive director of the congressional Joint Economic Committee.

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