The 2020 Long-Term Budget Outlook

  • In CBO’s extended baseline projections, federal debt is much larger as a percentage of GDP than it was before 2007, reaching 109 percent by 2030 and 195 percent by 2050. The latter figure is about five times the average over the 1990–2007 period. Greater federal borrowing tends to crowd out private investment in the long term, reducing the amount of capital per worker and increasing both interest rates and the return on capital over time.
  • The capital share of income—the percentage of total income that is paid to owners of capital—has been rising for the past few decades. That share is projected to decline from its current level over the next decade but to remain greater than its average in previous decades. The factors that appear to have contributed to capital’s rising share of income (such as technological change and globalization) are likely to persist, keeping it above the historical average. In CBO’s estimation, a larger share of income accruing to owners of capital would directly boost the return on capital and, thus, interest rates.
  • The retirement of members of the baby-boom generation and slower growth in the size of the labor force means that fewer workers are in their prime saving years relative to the number of older people who are drawing down their savings, CBO projects. As a result, the total amount of saving available for investment is projected to be less than it otherwise would be (all else being equal). CBO expects that decrease to reduce the amount of capital per worker and thereby push up interest rates. (CBO estimates that the effect of that decrease only partially offsets the positive effect of increased earnings dispersion on saving, leaving a net increase in the amount of savings available for investment.)
  • CBO expects emerging-market economies to attract a greater share of foreign investment in coming decades than they did in the 1990–2007 period. As those economies recover from the global economic downturn caused by the pandemic, they become increasingly attractive destinations for foreign investment. CBO projects that development to put upward pressure on interest rates in the United States.

Some factors mentioned above are easier than others to quantify. For instance, the effect of labor force growth and rising federal debt can be estimated from available data by using theoretical models and the findings of existing research. The extent to which other factors affect interest rates is more difficult to estimate. A shift in preferences for low-risk rather than high-risk assets is not directly observable, for example. That shift is especially uncertain in light of the unprecedented increase in federal debt in response to the pandemic and recession. It is difficult to anticipate how financial markets will respond to that rising debt once the economy begins to recover. The effect on interest rates of changes in the distribution of earnings is also difficult to quantify.

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