While the White House celebrates the economy’s strong second-quarter showing, it is important to keep in mind that economists generally consider this a temporary phenomenon rather than a harbinger of higher growth levels over the coming decade.
The U.S. Commerce Department, which had originally estimated GDP growth from April through June at an annual rate of 4.1 percent, recently nudged that figure up to 4.2 percent. This would keep growth on track to reach 3 percent for the current year.
The problem is that some administration officials and others are presenting a few recent months of unusually strong growth as sustainable for many years into the future. That is unrealistic.
Much of the recent growth spurt was brought about through deficit-financed tax cuts and deficit-financed spending increases. As a result, even the administration projects trillion-dollar deficits in each of the next three years. Such deficit increases are not sustainable.
Even for the short term, Congressional Budget Office (CBO) Director Keith Hall recently cited several factors that increased April-through-June growth this year but are expected “to either fade or reverse.” These factors included a second-quarter “rebound in the growth of consumer spending after a weak first quarter and a surge in agricultural exports.”
Economists point to a number of other obstacles to high growth in the longer term, notably an aging U.S. population and recent productivity trends.
In mid-August CBO projected that real GDP would grow by 3.1 percent this year, 2.4 percent next year, and then drop sharply to an average of just 1.6 or 1.7 percent growth in the nine years that follow.
The budget office noted that its economic projections “do not differ significantly from those of other forecasters.”
Unfortunately, the administration has used its unrealistic growth projections to justify proposals for large increases in government borrowing in the years ahead.
Administration officials contend that the projected growth will eventually pay for the additional borrowing, particularly when the money has been borrowed for tax cuts.
But as many analysts outside the administration have pointed out, running trillion-dollar-plus deficits when the economy is already strong is irresponsible. Taking that course, we can expect mounting federal interest costs, dwindling funds for even top national priorities, and little room for Washington to maneuver in unexpected crises.
Just a few weeks ago a survey found that large majorities of business economists thought that current U.S. fiscal policy has been over-stimulating the economy and should be aimed at reducing the federal deficit rather than increasing it.
Earlier this summer three former policymakers who dealt with the financial crisis a decade ago — Ben Bernanke, Henry Paulson and Timothy Geithner — warned that rising federal debt posed a particularly worrisome vulnerability to the country. Geithner, for example, lamented “the new complacency about federal deficits.”
The economy’s recent strong performance does not call for additional short-term boosts, particularly through higher deficits that we and future generations will have to pay off.
The current state of the economy, however, does tell us one thing: This would be a good time for Washington to drop the deficit complacency and start putting the country on a fiscally responsible path — one that can lead to faster and more sustainable long-term economic growth.
That’s a difficult challenge even in good economic times such as we are currently enjoying. It will be much more difficult if we wait for another recession — or for another $5 trillion or $10 trillion in federal debt.