By Rob Ryan
Despite recent 3 percent growth of the American economy, our nation's long-term fiscal challenges are likely to hinder the sustainability of such robust growth. To maximize growth in a sustainable fashion, elected officials must enact a more realistic, pro-growth strategy by supporting investment, encouraging expansion of the work force, and putting the federal budget on a responsible path.
The Committee for a Responsible Federal Budget (CRFB) highlighted these points in its recent report, “Can America Sustain the Recent Economic Boost?” The report differentiates the causes of the economy’s recent strong growth from the longer-term challenges that will hinder high growth in the future.
The Congressional Budget Office (CBO) also warned against over-optimistic growth expectations in its “Budget and Economic Outlook: 2018 to 2028,” released in April. In its report, the CBO projected economic growth of 1.8 percent per year, on average, over the next 10 years. Most private economists agree growth will be at or below 2 percent over the next decade.
While 3 percent growth in 2018 and 2019 might seem encouraging, this strong near-term growth is the result of the final stages of the economic recovery and an “economic sugar high” from recent legislation, notably deficit-financed tax cuts and discretionary spending increases.
The CRFB estimates that recent legislation passed by Congress will account for an additional 0.8 percent of growth in 2018 and 0.6 percent in 2019. These recent measures, however, will raise deficits and that will likely hinder longer-term economic growth by crowding out private investment.
While the December tax law will provide a small boost to labor and capital growth, no recent actions by Congress will offset the adverse economic and budgetary effects of the aging American population. Indeed, the recent legislation moves the country further away from a sustainable fiscal policy.
Rather than treat current strong growth as a permanent return to the post-WWII average of 3.2 percent economic growth, lawmakers should temper their expectations of sustained 3 percent growth while working to enact credible pro-growth policies.
As CRFB notes: “Over the long-term, policymakers should prepare for annual growth of 2 percent or less, but they should not accept it as an inevitability. Thoughtful pro-growth policies can improve the potential growth of the economy, lift incomes and improve the federal government’s fiscal position."
Donald Marron, an Urban Institute Fellow and a member of The Concord Coalition’s Board of Directors, sounded a similarly cautious theme in a blog post last year that took a close look at annual growth rate projections: “We can hope that luck and good policy lift growth by 3 percent. But it’s prudent to plan for 2 percent, and pray we don’t fall to 1 percent.”
In terms of long-term pro-growth policy, significant deficit reduction would be a good start. The CBO estimates that a $4 trillion reduction in projected deficits over 10 years would increase annual growth by 0.1 percent, on average.
Additionally, the CRFB report points out that lawmakers can promote growth by working to increase labor force participation and the nation’s capital stock.
Bipartisan immigration reform to increase the number of workers contributing to the economy could help achieve sustainable growth over the long term. Robert L. Bixby, Concord’s executive director, recently wrote an op-ed in The Hill supporting an increase in legal immigration to meet labor shortages, foster growth and improve the country’s fiscal position.
The bottom line is that the current 3 percent growth, while welcome, is likely unsustainable given our nation’s long-term fiscal challenges. As the CRFB report notes, lawmakers must be more realistic in their long-term growth expectations and must promote a more sustainable economic growth agenda going forward.