Wednesday, June 20, 2018

Rapid Economic Growth Cures A Lot Of Sins

(first published in North State Journal 6/20/18)

‘We now estimate real GDP is expanding at a 4.0% annual rate in Q2, up from our prior estimate of 2.75% and almost twice the 2.2% growth rate experienced in Q1," JP Morgan chief U.S. economist Michael Ferol’—6/14/18

Are real GDP growth rates of 4%+ even remotely possible?

Of course they are. We experienced an extended period of real GDP growth over 4% annually from 1994-2000. Bill Clinton was President; Congress and the Senate were controlled by Republicans.

Before that, under President Ronald Reagan’s economic policies, we saw extended real annual economic growth rates over 4% from 1983-1988.

Economic booms are fueled primarily by productivity gains and pro-growth fiscal and monetary policies, not population growth as many assume. Most importantly, economic booms are fueled by abundant amounts of pure business optimism by owners and workers alike.

Business owners essentially ‘went on strike’ during the Obama years as they saw avalanches of federal regulation, taxes and control descend upon the American economic landscape. They reined in their hiring of new employees and capital investment for 8 long years and have only recently been ignited to invest and expand by the Trump and Republican tax and economic policies.

Besides the fact that there are more job openings today in America than there are people to fill them for the first time in recent history, what else does 4% annual real GDP portend for our future?

For one thing, if sustainable, 4% annual growth for the next 5 years will solve our exploding budget deficit and debt dilemma. Even though our elected leaders of all parties in Washington have been reckless and irresponsible since 2001 when it comes to federal spending.

CBO publishes regular updates of economic and budget projections, most recently April of 2018 (pictured above).

CBO makes pro-forma projections on a regular basis. Their predictions about what may happen is based solely on the most recent experience they can look backwards at and measure.

Annual economic growth under President Obama was 1.9% for 8 long years. Based solely on that precedent, CBO has made predictions about the next 10 years based on that same dismal rate of real growth.

Even though we now have a different President with a 180-degree different approach to business, capitalism, freedom and free enterprise.

In the attached spreadsheet, projections have been made based on 4% real GDP growth rates for the next 10 years, highlighted in yellow. 2% inflation is added on for nominal GDP growth of 6%.

Roughly 20% of GDP is captured by federal income, payroll, estate, and excise taxes each year so those numbers are extrapolated from the higher GDP projections to get the new revenue numbers, also highlighted in yellow.

If, and this is a humongous ‘IF’, we don’t spend any more money than projected under CBO current baseline assumptions, we will balance the budget by 2024 or certainly 2025 with real economic growth rates of 4% of more until then. (as indicated by green highlights above).

Virtually all economic forecasts were wrong in 1981 when President Reagan was in office or in 1993 before the Clinton Internet boom years. No one clearly predicted real GDP growth rates exploding under each Administration except the economic policy advisors in each Administration who privately hoped and prayed that things would turn out better than anyone had hoped or prayed.

The absolute key factor in all of this? Congress and President Trump can not increase spending over the current baselines for the next decade. Holding overall spending to 2% annual growth as was done from 1994-2001 would insure fiscal sanity.

If we experience 4% real GDP growth for any extended period of time, that sure will be a lot of ‘crumbs’ as Nancy Pelosi has called it.

It will be darn near a wedding cake for every American household.

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