Will a New Congress Take the Economy Seriously?
In Tuesday's historic elections many based their decisions in the voting booth on the economic performance of Obama and the Democrat controlled Senate. Unfortunately for the president, the record has been bleak, and the long term U.S. economic outlook remains problematic. While some have touted the fact that deficits have shrunk, the real problem is the mounting long term debt, which continues to be worrisome, as does the anemic economic recovery and lingering unemployment. While the new Congress offers an opportunity for fresh thinking on economic problems, implementing solutions may be challenging, given a recalcitrant Obama administration and the temptations of short-run political expediency versus long run reforms.
President Obama's response to the Great Recession will be one of the things that future historians will evaluate when assessing his legacy. Yet Obama and the Democrats have done little to address the underlying long term economic problems facing the nation. Indeed, the administration and Democrat controlled Senate have focused almost exclusively on the short run, with cash injections through various stimulus programs. While this should not be surprising, given the short political time horizons that dominate decision making in Washington, D.C., it is nonetheless disconcerting when looking at long run economic trends.
In fact, as the CBO notes, while the deficit has declined, the long term debt outlook is not promising: "The persistent and growing deficits that CBO projects would result in increasing amounts of federal debt held by the public. In CBO's baseline projections, that debt rises from 74 percent of GDP this year to 77 percent of GDP in 2024. As recently as 2007, federal debt equaled 35 percent of GDP, but the very large deficits of the past several years caused debt to surge."
This is largely the result of entitlement spending-Social Security, Medicare, and Medicaid, where substantial spending increases are projected. Driven by the demographics of an aging population, spending on these programs is expected to surge. As CBO notes, "The three fastest-growing components of the budget-Social Security, the major health care programs, and net interest-account for 85 percent of the total increase in outlays over the coming decade." The study notes that by 2016 deficits begin to increase again, as outlays and revenues begin to diverge. Despite the fiscal hazards posed by these programs, neither the administration nor Congress has adopted economic reforms that address the looming increases in federal debt.
The administration and Harry Reid's Senate have been in lock-step on many questions of economic policy. The new Congress may provide an opportunity to provide fresh ideas with respect to economic policy; ideas that address fundamental long-term structural problems while promoting economic growth. This includes a serious effort to reform entitlement spending, as well as identifying opportunities to remove unnecessary government impediments to economic growth. The growth of regulation in the Obama administration has increased burdens on important sectors of the economy, including health care, financial services, energy, and technology, potentially impeding economic growth.
In fact, the Bureau of Economic Analysis most recent update reports an annual growth rate of 3.5 percent in the third quarter of 2014, down from the second quarter's rate of 4.6 percent. Overall, the recovery has been slow. In fact, the five year average for growth is only 2 percent, which economist Larry Summers suggests is rather slow, given the magnitude of the original collapse. Most economists thought the rebound from the Great Recession would be much quicker, with economic growth reverting to its longer term trend.
The CBO's projections also assume that the economy will return to its long-run trend as output and economic growth expand, closing the gap between potential and actual GDP. Yet, the economy's lackluster performance suggests other forces may be at work, and if the economy does not conform with CBOs projections, economic outcomes could be worse. Some economists suggest the economy is expierencing a secular stagnation characterized by a new, lower trend for economic output. Due to changes in labor force participation and reduced innovation, the economic trend line may have permanently shifted downward, making CBO's forecast overly optimistic. These concerns are amplified by an overall slowdown in economic activity globally, which exacerbates the problems with U.S. economic growth.
So as the new Congress convenes, the economy should rank high among priorities, especially the question of long term public debt. For too long, Washington has pushed the issue on to the next Congress, leaving entitlement spending on autopilot. But the problem is only going to get worse as more of the population shifts from the labor force to retirement. Congress is running out of opportunities for delay. Entitlement reform is a critical step for returning to a sound and sustainable fiscal position. The new Congress should not miss the opportunity to move this issue forward.