Apr 15, 2018 5 min read

”It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness …. it was the season of Light, it was the season of darkness, it was the spring of hope, it was the winter of despair…….”

- Charles Dickens, “A Tale of Two Cities”

Was Dickens really talking about our economy?

Over the past 17 years, this nation has traveled from the best of times to the worst of times and now, under President Trump, is leaving a season of darkness and returning to a spring of hope.

Swings in the economy are driven primarily by government policy and decisions as they relate to regulation, taxing and spending. Government decisions are often premised on forecasts and assumptions. Some turn out better than others, but all can have profound impact.

A great example of this reality is looking at the federal budget and tax policy in 2001 and what occurred in the intervening years.

To use Dickens’ words, 2001 might be regarded wistfully as “the best of times,” and why not? Things were good. The Dow Jones Index was near its all-time high of 15,000, G.W. Bush had just assumed the presidency and the U.S. government had a balanced budget. Yes, indeed, 17 years ago, this nation had a balanced budget because the president and Congress worked together to produce such a plan. This was possible because we had just experienced four years of 4.4 percent real Gross Domestic Product (the total value of everything produced by all the people and companies in the country) growth for a number of reasons.

My point is not to dissect the reasons for “the best of times,” but to point out our national propensity to assume conditions will continue forever, ignoring the causality.

Immediately after Bush was inaugurated in 2001, Federal Reserve Chairman Alan Greenspan testified before the Senate Budget Committee that if current policies remained in place, the budget surplus would reach $800 billion in fiscal year 2011. He also predicted paying off the national debt before 2010. Greenspan was actually worried about what to do with the surplus.

Events obviously did not occur as Greenspan forecast. September 11, 2001, the war on terror, Medicare Part D and various tax revisions changed the budget equation dramatically. Recession overtook the economy, employment declined and GDP growth dropped into negative numbers. The economy was changed not by mystical forces but by political process, as it usually is.

All economic models are based on assumptions that are, in turn, based on projections and in particular about how individuals will behave and how their actions will be perceived by the market and how the market will respond.

The “best of times” of 2001 quickly turned into the “worst of times.” The surplus evaporated, and we are now looking at a $2 trillion annual deficit. Why, and why so fast?

The short answer? Bad assumptions – as usual.

Had the assumptions used in 2001 continued, we would have a $15 trillion cumulative budget surplus in 2028. That now looks more like a $28 trillion cumulative deficit, a swing of $43 trillion.

Why did this swing occur? Higher than forecast government spending, lower than forecast tax revenues, worse than forecast economic growth. The biggest impact, by far, was the anemic GDP growth of 2 percent in the 10 years prior to 2010. The difference between a 2 percent and a 3 percent GDP growth rate is huge. Low growth shrinks revenue and it compounds over time. Low growth leads to low revenue which, lacking commensurately reduced spending, leads to increasing deficits.

All of which brings us to where we are today. The economy struggled for the last two decades with low GDP growth and rapidly rising deficits. The key to reducing the deficit is increasing GDP to the 3 percent range.

Trump’s tax cuts and deregulation are helping. In 2017 the GDP was near 3 percent for the last three quarters. This year, unemployment is at a historic low of 4.1 percent for the sixth consecutive month. Average hourly earnings have increased 7 percent. The consumer confidence index remains high, meaning people have a positive outlook on their economic future.

The economic forecast for 2018 remains positive with the GDP growth expected to be about 2.7 percent. Unemployment is expected to drop to 3.8 percent and inflation will remain a low 1.9 percent.

Manufacturing, a key economic indicator in this area, is expected to grow at 2.8 percent. The production of natural gas is forecast to increase by 10 percent, and the price is forecast to increase by 12 percent, which is great news for this region. This will mean a significant increase in employment in this important sector. All the counties in this area report declining unemployment in the past two years.

At the personal level, the stock markets are at or near all-time high levels, savings are up, 401k plans look good, companies are giving raises and paying bonuses.

To maintain this, the GDP must remain near the 3 percent growth rate. For that to happen, among other measures, taxes must remain low and government spending must be reduced. Budgets must be re-evaluated, health-care spending must be checked and public pension reform must occur. There are no magic silver bullets, just hard choices. The alternative, the typical Democratic tax and spend approach, will lead to ever larger deficits, inflation, higher taxes, reduced buying power and economic stagnation.

The choices is ours every time we vote.

Dave Ball is vice chairman of the Washington County Republican Party and a Peters Township councilman.