Small Bursts in Economy Pay Big in Long Run
One trillion dollars. As in $1,000,000,000,000.
No matter how you write it, it’s a powerful heap of money.
How is it that the Clinton administration has discovered that federal budget surpluses over the next 15 years will be $1 trillion greater than its previous estimate just five months ago?
The answer, in a sense, is simpler than might seem possible. A little more economic growth now not only generates more tax revenue now. It has the same effect over time--only more so.
“That is part of the miracle of compounding,” said Princeton economist Alan Blinder, a former vice chairman of the Federal Reserve Board. “Most of us who forecast are deeply cognizant that we’ve been forecasting too low for quite a while.”
Mostly responsible for driving up the estimated surpluses is an increase in economic growth this year from a projected 2% in February to 3.2% now. Even this could be low. The economy surged at a 4.3% rate in the first three months of the year.
The administration’s economic forecasts routinely have been on the gloomy side, economists said. Only now, more than eight years into the second-longest expansion in U.S. history, are government estimators catching up to the nation’s fiscal good fortune. The result is a whole lot of extra money to fuel fights between Congress and the White House.
Economists tend to base their views of the future on events from the past, “so you tend to miss these turns in the business cycle,” said Peter Merrill, director of national economic consulting for accounting firm Price Waterhouse Coopers.
Government economic forecasts are never free of politics. In times of huge budget deficits, Presidents Reagan and Bush predicted surpluses just around the corner--a stance that had the collateral benefit of allowing them to argue that a tax cut would give the economy a boost without undue damage to the government’s budget.
When Clinton campaigned for the White House in the early 1990s, by contrast, he used gloomy economic projections to magnify the size of pending deficits. That made it easier to focus Congress and the public on the need to cut spending and raise taxes on wealthy Americans.
As the deficit plummeted, it contributed to a range of other positive changes in the economy, including lower interest rates. A stronger economy in turn drove the deficit down by increasing tax revenue.
If there is a criticism of the administration’s latest economic forecast, Merrill said, it would be that it is still too conservative. Today’s consensus of Wall Street economists is slightly higher than Clinton’s projection and it is possible that the Congressional Budget Office will be somewhat more optimistic when it releases its estimates Thursday. The CBO estimates are the ones used by Congress.
It is hard to overstate the sea change that has occurred in the economy since the early days of the Clinton administration, when economic growth was relatively anemic and deficits stretched to the horizon.
Economic growth comes from two sources: more workers and greater productivity per worker. Productivity, which grew very slowly from 1973 to the mid-1990s, is surging, propelled by what many economists believe is the belated impact of the computer revolution.
For the 1999-2002 period, the administration raised its estimate of economic growth from 2.5% annually as of February to 2.8% now. Laura D’Andrea Tyson, who formerly chaired Clinton’s Council of Economic Advisors, said that, as recently as 1995, growth projections of 2.8% were viewed as hopelessly rosy and the debate inside the White House was whether even 2% was being too optimistic.
If there is a dark side to the bright economic news, it is that politicians are all but certain to make far-reaching decisions to spend money on new and expanded programs and to cut taxes based on the new estimates--a potentially risky proposition given that a fractional reduction in the economy’s growth could squeeze projected surpluses just as the small upward changes have produced the current anticipated windfall.
“A forecast is just a forecast and there is a real basic problem in using numbers like that to make public policy,” said Murray Weidenbaum, who chaired Reagan’s Council of Economic Advisors and now is the chairman of the Center for the Study of American Business at Washington University in St. Louis.
“The numbers are conjectural,” he said, “so it’s dangerous to use them for new Medicare benefits or to cut taxes, because that’s a binding commitment.”
