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Let’s first grasp a little history. Since 1950, for example, real annual GDP growth has averaged 3.5 percent. That includes recessionary, recovery and expansion years. If one only looks at recovery/expansion years, real average annual GDP growth obviously has been even faster - about 4 percent.
What does that tell us about recent years? Well, by historical standards, economic growth has under-performed. For example, from 2002 to 2006, real GDP growth averaged 2.7 percent, though after the 2003 pro-growth tax cut was passed, growth averaged 3.2 percent. Solid, but certainly not stellar.
In its economic and budget outlook for 2008-2018 released on Jan. 23, the Congressional Budget Office put its estimate for 2007 growth at 2.2 percent - hardly anything to write home about. And now, of course, the threat of recession looms in 2008.
We’ve had slowdowns and recessions before, and will again. But over the long haul, the U.S. economy has expanded at a solid clip, and we can expect it to do so in the future. Right?
Well, if you believe the CBO forecasts, that might no longer be the case. From 2008 to 2018, except for a couple of years, U.S. economic growth is projected to look more like sluggish Europe than the robust U.S.
For 2008, the CBO projects real GDP growth of 1.7 percent, which actually might appear optimistic to many right now, and then moving up to 2.8 percent in 2009. Interestingly, 2010 and 2011 are pegged as the most solid years of growth - 3.5 percent and 3.4 percent, respectively - in the CBO long run estimates. But that 2011 number is a hard one to accept, since the CBO assumes that the 2001/2003 tax relief measures will expire as scheduled at the end of 2010. Would our economy actually grow at this pace when socked with a huge tax hike? Doubtful.
After that, growth estimates decline - to 2.9 percent in 2012, 2.6 percent in 2013 and 2014, 2.5 percent in 2015, and then to 2.4 percent each year from 2016 to 2018. Don’t know about you, but I’m depressed pondering such lackluster growth.
But let’s keep two things in mind. First, while elected officials, other policymakers, and the media treat such numbers quite seriously - after all, budget projections and legislation are based on these estimates - beyond a mere year or so in the future, they are worthless - nothing more than mere guesswork.
Second, policy matters to the economy. So, for example, if the 2001 and 2003 tax relief measures do expire as scheduled, and consumers, entrepreneurs, investors, and businesses get walloped with massive tax increases, then the economy will suffer accordingly. But if those tax measures are made permanent, and additional pro-growth tax cuts and regulatory relief are passed, for example, then economic growth will benefit.
The best policy climate keeps tax and regulatory burdens light, protects private property, restrains the growth of government, and maintains price stability. That lays a sound foundation for entrepreneurs, investors, and businesses to innovate, invent, invest, build, create jobs, and send the economy in unforeseen directions and to new heights - none of which can be captured by the CBO’s, or anyone else’s, economic models.
The current news and rather grim long-run economic projections from places like the CBO can get you down. But realize that our economic future is not pre-determined. Our elected officials can and do make a difference depending on the policy path they choose to take the nation. Of course, that fact of economic life could darken one’s economic mood even more.
Publication date: 02/04/2008