Ron Knecht and Geoffrey Lawrence guest col: Economic outlook dim due to government

Since 2010, mainstream optimistic economic forecasts each year have yielded to continued slow-growth reality, producing our worst recovery ever. Most economists still project economic activity as determined mainly by business cycles. We think such cycles are now dominated by long-term trends that will keep us bumping along the bottom until government at all levels makes significant reforms.

First, government itself long ago became so big relative to our economy that it has been retarding growth. And the problem is getting ever worse because government at all levels and in all areas continues to grow relative to everything else.

This problem includes taxes, public debt, regulation and intervention of all kinds, and monetary and credit-allocation policy. Its primary driver and best measure is public spending, which has exceeded optimal levels for 55 years and is now 50 percent higher than it should be to maximize human wellbeing. Not just at the federal level; state and local government has grown even faster.

Nevada is an exception only in the wrong way. We were a low-tax state, but now we’re right in the middle of the pack – before adding in the destructive taxes passed this year, which will move us far toward becoming a high-tax state.

Second, public policy has long fostered increased debt levels relative to economic output – borrowing by consumers, businesses and government itself – to pump up growth. Debt levels got so high that they were a major factor in the Great Recession. They remain so high that they will continue to be a serious drag on growth.

Total debt in our economy is four times levels of 20 years ago, but the economy itself is only 2.4 times as big. Although this problem has improved somewhat since the crash, we have far to go to get to sustainable levels and we’re making very slow progress.

Third, present demographic trends not only slow growth but also create huge social problems. Falling birth rates are both natural and policy-induced factors slowing long-term growth and creating social and economic imbalances as the fraction of the population in their working years producing value declines and the fraction not working but still consuming grows. Falling labor force participation rates among the prime working-age men exacerbate both problems. Increased legal immigration (with border control) would be very helpful.

Finally, strong economic growth elsewhere and increasing globalization (trade and investment) have helped feed US economic growth, but the long-term outlook for other major economies is now worse than ours. The key problems plaguing us burden them even worse. Government excess of all kinds is greater, debt has grown faster, and population aging and workforce participation decline are already well along in many places. China is too late and too little in changing its evil and destructive one-child policy to avoid catastrophe in coming decades.

So, we’ll remain the cleanest dirty shirt in the laundry basket.

Fortunately, Green dogma of The Population Bomb and The Limits to Growth was spectacularly wrong. The real population bomb is an implosion, not explosion, and that is a major part of our challenge going forward. And Malthusian projections of increasing resource scarcity have again been found wrong – witness the plentitude and thus falling costs of fossil fuels and other commodities and energy. So, despite government excess and policy mistakes, we’ve made great progress recent decades and can still see some economic growth going forward.

But those grim Green fantasies have now been replaced by the notion that man-made global warming will unavoidably result in terrifying disasters unless we completely trash human liberty, our society and economy by bending every effort to minimizing greenhouse gases. We can hope that before these statists are able to wreak their primitivist vision and destruction on the rest of us, this new sect of the Green religion will be debunked by events and knowledge as thoroughly as population bomb and resource scarcity arguments were.

Reasons for hope? Human creativity remains the scarce resource, but it has been plentiful enough to sustain Moore’s Law growth (at differing rates) throughout our economy. Although some people have claimed recently, as before in history, that progress is slowing, the invention, innovation and resulting productivity gains that drive growth continue to mitigate the metastasis and mistakes of government.

But unless we grow government significantly slower than the economy for many years and extensively reform it, we’ll continue real annual per-capita growth of one percent or less, not the historic normal 2.5 percent. That means our children will be one-third less well off, a reduction that will compound for future generations -- with less economic mobility and greater economic inequality, too.

Economists Ron Knecht and Geoffrey Lawrence are, respectively, Nevada’s State Controller and Assistant Controller.


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