Revised Economic Outlook: Worse?

By Ron Knecht and Geoffrey Lawrence 

February 23, 2016

Each year, the Nevada controller’s financial reports have included an “economic outlook” section, as have reports by many government agencies and business, academic and journalistic entities. Nearly all such assessments are based on business-cycle analyses focused on economic sectors and geographic regions in the short and intermediate terms.

As we’ve previously written, business cycles are now dominated by national and international trends that swamp out most sectoral and regional variations. So, when we wrote our first outlook for the yearly controller reports recently, we emphasized four long-term important trends: growing government excess; demographics and workforce participation levels; increasing levels of debt in all sectors; and the effects of globalization and economic growth in other countries.

First, research shows that by 1960 government got so big relative to our economy that it has been retarding growth, yet getting ever larger and thus causing more drag each passing decade. The problem is driven by public spending that increases taxes and debt, but also just as much by regulation, monetary and credit allocation policy and other intervention. The human and social costs of the modern administrative state now well exceed the value it delivers, and its excesses oppress and impoverish people.

Second, until 2002, falling birth rates, plus Baby Boomers and women entering the workforce greatly mitigated this problem by hugely increasing the ratio of paid work to the total population. Sustained low birth rates leading to small post-Boomer working age cohorts, plus the somewhat falling rates since 2002 of participation by women and men ages 16-54 have lately decreased the fraction of the population working and the producer/dependent ratios that spurred earlier growth.

Third, increasing consumer, business and government debt levels relative to the economy, all driven mainly by public policy far into unsustainable territory, boosted growth for decades until the financial crash of 2008. Since then, slight growth of net savings has stopped excess growth of debt but not reduced it. With the end of rapid growth of non-government debt, economic growth will slow. But likely renewed growth of government debt may yield new financial chaos.

Finally, rapid growth of developing economies and of trade and foreign investment in America also helped greatly until 2009. Growth in most countries has slowed since then because the problems of government overreach, demographic and workforce participation, and debt are even worse in other major economies than here. And trade is now growing slower than the world economy. Low commodity and energy prices will depress growth in resource-producing developing nations.

So, three major factors previously offset the fact that government increasingly consumes our time, energy, other resources and productivity and crowds out private entrepreneurship and business spending and investment. Now all three factors have reversed course and are adding to the growing economic drag. So, for the foreseeable future, economic growth will be suppressed from the recent low two percent real annual rates (one percent per person), and economic uncertainty has increased greatly.

Since we issued our reports, Robert Gordon, a respected growth economist, has published The Rise and Fall of American Growth – The U.S. Standard of Living Since the Civil War. Although he misses the effect of government overreach and gives only rather small attention to the effect of debt and the role of the world economy, he strongly accents the demographic and workforce participation issues we cite.

He mostly expands on a thesis for which he’s well known: That productivity growth due to inventions, innovation and technological change is not steady over time, but is instead very episodic. He notes that U.S. economic growth was unprecedented in 1870-1970, especially in 1920-1970. It has been mostly tepid since 1970, with a significant bump during 1994-2004 for the effects of the electronic revolutions, and he predicts slow growth in the future.

We think he overstates the episodic nature of invention, innovation and technological change by overlooking the drag from government overreach and understating the effects of excess debt and world trade. However, he also raises the problem of slow income growth in the middle and lowest economic quintiles, which makes slow overall economic growth even worse for the majority of Americans.

Gordon’s insights suggest but don’t absolutely dictate slower future growth than we forecasted.

Ron Knecht is Nevada Controller.  Geoffrey Lawrence is Assistant Controller.