The Other Shoe

As should surprise no one, given S&P’s downgrading of U. S. federal debt last week, Moody’s has lowered its estimate of U. S. economic growth for 2011 and 2012:

Moody’s Analytics said its near-term outlook for the U.S. economy has fallen significantly in the past month wake of the debate over the U.S. debt ceiling and the downgrade of the nation’s credit ratings by Standard & Poor’s .

Moody’s Analytics, a sister company to credit-ratings company Moody’s Investors Service, now expects real gross domestic product to increase at an annualized rate of about 2% in the second half of this year and just over 3% next year, compared with its estimate a month ago for growth of 3.5% for the second half of this year and through 2012.

But that isn’t the “other shoe” of the title of this post. There’s another shoe yet to drop: when will the CBO and the Federal Reserve follow suit and reduce their overly rosy predictions of 2011 and 2012 economic growth?

That slowdown will necessarily be accompanied by a decline in federal revenue. Here’s the CBO’s estimates of expected federal revenue:

	2011	2012	2013
Revenue (billions)	2,228	2,555	3,090
YOY % increase	3.05	14.68	20.94

I presume that the reason for the large jump in the CBO’s estimates is due to some combination of economic growth and allowing the “Bush tax cuts” to elapse as provided in current law. Can anyone reasonably expect either of those things to occur now?

Additionally, because of the cockamamie way budgeting is done at the federal level that means we’ll borrow more, a lot more, over the next couple of years. That undoubtedly means that the $1.4 trillion in deficits for 2011 not to mention the $1.1 trillion for 2012 and the $704 billion (!) for 2013 will be seen in retrospect to have been hopelessly optimistic.