The proposed federal budget for 2018 is catching a lot of heat. The Trump budget proposal seeks to spend $4.1 trillion, despite cuts to a slew of agencies. This hefty budget, which will be coupled with some substantial tax cuts, is betting on a wild overestimate of three percent growth to balance it out.
With this proposal, the Trump administration is hoping to slash taxes, throw cheddar at national defense, roll back burdensome regulations and cut back on safety net spending for the poor.
The Trump administration believes they can do all this while simultaneously balancing the budget in 10 years.
And then the waiter says: Three percent economic growth! Ba-dum…Budget Cuts
Corny, I know, but roll with me here for a sec. For the budget proposal to work, the United States would need to achieve an economic growth rate of three percent by 2021. And that’s a joke.
Then again, who am I to say? Or, for that matter, other economists. When making predictions, all we have are historical data and pattern trends.
Economic growth has been on a downward trend since the end of the 1960s, regardless of what the budget proposal claims. Don’t believe me? I did the math using data from the Federal Reserve.
Despite the rapid population growth of the `50s and `60s, economic growth per person shot through the roof. The economic landscape was slightly different then:
- Global competition was stagnant. After WW2, the rest of the world was at an economic standstill while the U.S. was able to establish long-term international arrangements that would increase capital investments.
- Tariffs and barriers to trade were substantially decreased, if not removed, due to these international arrangements.
- Women began to flood the workforce, thus increasing the productivity levels during this period.
- The Cold War got hot, thus increasing defense spending, spurring tech innovations.
- To top it all off, the craze of consumerism ramped up as well. People were buying stuff, lots of stuff.
It ain’t like it used to be
The same can’t be said of today’s economy. The most important factor that led to the growth was the fact that the United States had economic leverage.
Now, emerging economies like China and India, along with the added members to the Organization of Economic Cooperation and Development (OECD), have made the global competition slightly more than stiff.
This is a good thing if we think people outside the United States deserve an increased quality of life, (if you’re unsure, they certainly do). But the truth is, it isn’t as easy for the US to compete.
Even during the housing boom in the years prior to the financial crisis, we still didn’t see the three percent growth the Trump administration is predicting. Though the `90s saw a blip where we had high levels of growth, it quickly dwindled.
Growth versus Growth Rate
We may see the economy grow at three percent at some point in our lives. However, even if we see a percentage increase of 10 percent one month, that doesn’t mean that it’s sustainable. A short-lived shock can cause growth to rise for a second, but would have virtually no effect in the long-term.
Additionally, it’s hard to influence the long-term growth rate. When it does increase, it happens unpredictably. Or, as Nassim Taleb would call it: “black swans.”
Events like the invention of the cotton gin, the assembly line, the atomic bomb, the Internet or Google, and economic shocks like the ’08 financial crisis were all black swans that had substantial impacts on productivity and economic growth.
Not having high levels of economic growth is OK. We should become worried if we begin to experience sustained levels of negative economic growth, (also known as recessions).
What’s more, is that the rise in global economies contributes to our smaller growth rate. This means people are being lifted out of poverty, jobs are being created, and there isn’t as much global dependency on the United States.
If we don’t hit this predicted growth rate, we may very well see the opposite of a balanced budget—somewhere in the arena of a trillion dollars in deficit spending.
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