Federal budget’s fatal flaw: Unreal growth projections

The president’s budget had many attributes. It actually proposed balance in contrast to the Obama administration’s offered budgets that never bothered with it. The same is true of cuts. To the credit of this administration, they actually proposed real cuts. We can argue for or against some, but simply signaling a willingness to do so is important.

While I like these components of the president’s budget, it has a fatal flaw in assuming a rate of growth that is in no way realistic. I believe passionately in the American people and the American workforce, and it doesn’t make one a pessimist or less than patriotic to question numbers. And the numbers here simply don’t add up. The question is not can the economy grow at 3 percent but rather will it grow continuously at this higher number over the next 10 years?

Realism on this front is vital at three levels.

One, what the president lays out in growth rate is taken as a starting point by many in Washington. If we casually accept 3 percent as real, we do ourselves a disservice. The difference between 2 percent and 3 percent growth in our economy over the next 10 years means more than $2 trillion in spending. If the 3 percent doesn’t materialize — and instead the 1.9 percent that the Congressional Budget Office has projected does — each one of us as taxpayers would be left holding the bag on a more than $2 trillion budget hole.

Two, for Republicans and Democrats to have a worthwhile conversation here, we need to be debating from the basis of real numbers. If we build in a de facto $2 trillion fudge factor, be sure that the fudge will be spread around Washington, and the money will be spent — again leaving each of us as taxpayers on the hook.

Finally, a budget that allegedly balances at 3 percent — but really does not — perpetuates the myth that we can balance the budget without addressing entitlement spending. The sooner Washington deals with the myth, the more benign changes will be. If we wait, our problems intensify dramatically.

Let me give you a few more thoughts on the budget.

The financial cycle is not dead. We will have a recession again. I believe it will be sooner rather than later, given that we are now in the third-longest economic expansion in American history. The average economic expansion has been 54 months, and we are currently at 96 months.

What the president’s budget proposes is that we will have another 10 years of uninterrupted economic growth, which would mean 214 months of economic expansion. This has never happened in the history of our country. Recessions disappearing and breaking the history books with an uninterrupted economic expansion suggests the projections are probably a touch rosy.

It also assumes the stars perfectly align on economic drivers. There are a host of projections suggesting the economy will behave differently than it always has. For instance, sustained economic growth tends to raise interest rates over time, but this budget assumes it will be different ... though it’s never happened before in our 200 years.

Finally, on the ingredients of growth, they again project things that have never before happened in the American economy with regard to capital formation, labor growth, and productivity change.

For example, with labor force growth, we would have to see growth like we saw in the ’70s and ’80s when women were joining the workforce in record numbers. The tide is currently running in the opposite direction here, given 10,000 people are retiring every day.

The bottom line here is that what we would all like to see in growth — should not drive our budget projections. We should hope for the best, but make plans based on the same realism we use in the family budget where we have to get it mostly right. The same should be expected of Washington.

This story was originally published June 14, 2017 at 6:00 AM with the headline "Federal budget’s fatal flaw: Unreal growth projections."