The economy's best days are behind it, according to Congress' budget crunchers.
The Congressional Budget Office is now creating its budget projections using the assumption that the economy will never grow as fast as it did in the years before the recession.
The CBO updated its fiscal projections Wednesday, and they reflected its new gloomy view that the future of the U.S. economy is one of slower growth and lower productivity.
“They think that we will get back up to potential growth,” said Loren Adler, an analyst at the Committee for a Responsible Federal Budget, “but they make it clear that they think potential growth is lower than it used to be in the ‘80s and ‘90s.”
The CBO first reached the conclusion that future growth will be slower when it released its long-term budget projections in July, but only incorporated it into its official 10-year budget projections Wednesday.
In its new projections, the CBO sees the economy suffering from a scenario in which its potential is slightly lower than before — 1 percent lower in 2024 than previously expected.
As a result of weak economic growth this year and slightly slower potential growth over the next 10 years, the CBO sees $514 billion in lost revenue.
But those losses will be offset by the fact that interest rates will never rise to previous normal levels because of a lack of business demand.
“We’ve revised down our projection of interest rates paid by the government, interest rates in the economy in general,” CBO director Douglas Elmendorf said in a press conference following the budget update.
Elmendorf explained that CBO projects lower interest rates partly because it expects rising inequality, and higher earners save less. It also expects that productivity will slow down, making for fewer attractive lending opportunities.
And fear is also a factor: “People who hold Treasury securities are holding a safer asset than if they hold private investments,” driving down rates, Elmendorf said.
The result is that the real interest rate on a 10-year Treasury security will remain three-quarters of a percentage point below its historical average of just over 3 percent.
“It doesn’t sound that big but it adds up to a lot,” Loren Adler said. The lower interest rates paid by the Treasury would lower deficits by $465 billion over the next 10 years.
The bad news is that it “suggests that troubling long-term trends in our economy are getting worse,” the Center for American Progress’ Harry Stein wrote of the projection.
The CBO’s scenario — slower growth and permanently lower interest rates — is consistent with the “secular stagnation” scenario outlined by former Obama economic adviser and Harvard professor Larry Summers, who has argued that the U.S. economy may not be able to generate enough consumer demand for goods and services on its own without stimulus from the Federal Reserve or through federal spending.
The assumption that demand will return to normal “now seems problematic,” Stein told the Washington Examiner, noting that he wasn’t sure whether the CBO assumed secular stagnation in its model.