The most troubling feature of the Congressional Budget Office’s updated forecast was not about government spending or about trends in taxes, the deficit, or debt. Not a whole lot has changed on those fronts.
The most troubling part is that CBO is growing steadily gloomier about the U.S. economy’s capacity to grow, the potential growth rate of gross domestic product. If CBO is right, that means it would be harder to bring down the historically high ratio of government debt to GDP. And it means living standards in the U.S. will improve more slowly.
In August, CBO projected that the economy would grow an average of 2.7% a year from 2014 to 2018; now, it is anticipating 2.5% growth.
That doesn’t sound like much, but over time a few tenths of a percentage point add up to significant numbers.
So what caused CBO to mark down its numbers again? It is less upbeat about the pace of growth in productivity or output per hour of work. Productivity growth is often depressed during recessions, and CBO had figured that it would bounce back when the economy healed. It hasn’t. Now, CBO economists figure that something more persistent is going on –and they’re not sure what. It could be slower adoption of new skills and technologies during the past few years. Or maybe it’s because we’ve been spending less on R&D. Or perhaps there’s a slowdown in the pace of innovation in the information-technology sector, a subject of vigorous debate among academic economists.
This is getting to be something of a habit with CBO. Since 2007, it has lowered its projection of potential output in 2017 by about 9%, about half of that reflecting reassessment of economic trends that began before the Great Recession and half reflecting other effects of the Great Recession, the lousy recovery, and additional factors. Since its August report, CBO has revised down its projection for the size of the economy a decade from now by an additional 1%. Each percentage point of GDP works out to about $180 billion in today’s dollars, or an average of $1,500 per household.
Of course, these are just economists’ projections, and they’re bound to be wrong. Michael Mandell of the Progressive Policy Institute recalls that CBO– like a lot of economists–underestimated productivity growth in the 1990s and overestimated it in the 2000s.
But, in its understated fashion, CBO is sounding an alarm: Although the U.S. economy is finally recovering from the Great Recession, it seems to have lost some of its vigor.
And that means Congress and the president ought to focus intently, much more than they have so far, on forging policies to restore some of that lost vitality–be they spending on education or infrastructure, tax changes that encourage investment in physical and human capital, and more efficient regulation.