The outlook wasn’t brilliant for the Mudville nine that day; The score stood two to four with but one inning more to play. …” begins Ernest Thayer’s famous baseball poem. Unfortunately, the outlook for US and Nevada economic growth and investment returns is also not brilliant this day, and the outcome may again be: “mighty Casey has struck out.” The reason is accumulation of negative trends and no salient positive ones.
Total public-sector spending (not deficit size) relative to the size of the economy has been found by numerous empirical studies over the last three decades to have great public policy impact on economic growth – and thus on aggregate human wellbeing. The range that maximizes US economic growth and fairness is 17-26 percent of GDP. But the US figure has exceeded this range since 1960, while increasing and now over 40 percent. This bipartisan excess (especially during the last four presidencies) has slowed growth ever more as it rose, but was offset until the 21st century by a number of positive growth factors that have now become growth retardants. Expected economic growth is also a key driver of expected investment returns, as discussed below.
Excessive regulation has been the other major policy factor retarding growth. It has gotten much worse in the Biden administration, despite US Supreme Court efforts to rein in to Constitutional limits 150 years of metastasis of the administrative state. This trend also diminished growth since at least the 1980s and will add to the effects of excess public spending in coming years. Examples include the Court’s recent veto of the federal Environmental Protection Agency’s (EPA) attempt to greatly take over regulation of electric power systems, for which EPA has no legal authority. Another example is EPA’s continuing efforts to regulate land use and development where there are no navigable waters of the US, contrary to federal law. The solution, to rigorously limit federal regulation to Constitutional parameters and to adopt strict social benefit-cost analysis for regulation at all levels, seems far off.
Debt relative to GDP has grown for all sectors of our economy since 1980. This includes total government debt, business (financial and non-financial), and households (mortgage, auto, student, credit card and consumer loans). Federal credit allocation policies have driven much growth in private sector debt, especially since the 1990s. A 2009 book, sardonically titled This Time Is Different, reviews centuries of excess debt accumulation, interest rate spikes, currency devaluations and other financial missteps leading to financial crises and extended crippling of economies. The US recently reached its highest ever publicly held debt relative to GDP (now 96 percent, higher than World War II) and its highest interest rates in 40 years. With recent slow and negative real economic growth, this stagflation seems almost certain to set off financial chaos and a long recession, especially as government interest payments soar. Combined with excess other debt, plus the other factors discussed here, this portends a grim outlook, especially because it’s a growth driver recently become a retardant.
US demographics, especially baby-boomers moving into their working years, male labor force participation growing, and women moving into the market labor force, were key factors tending to offset the public spending and regulation negative policy factors and boost growth until the 21st century. In the last two decades, retreat of working women and men from market employment, plus retirement of boomers, are major factors that turned demographic and labor-force factors from drivers to drags on economic growth. This problem has also been exacerbated by increasing real per-person subsidy for retirement and other labor-force participation absence. Also, the continuously declining birth rates of this century are starting to diminish the portion of the population available to do market work. And that will retard future growth.
Next month, the continuation of this column will review two more factors, plus equity returns and Nevada-specific factors.
Ron Knecht is Senior Policy Fellow at Nevada Policy Research Institute.
