Government Finance

Politicians like to paint a rosy picture of the road ahead, and the current administration is no different. A recent release by the White House states that this administration believes the economy will continue to grow at 3%+ rate over the next few years. Granted, these are the economic assumptions that are being used to formulate the budget and it benefits their spending agendas if the economy continues to grow.

However, it must be noted that several leading economist and analyst are warning that the US economy is on the verge of another downturn. Chief among these factors are declining profits, stagnation in wage growth and the effect of an ever increasing Federal Funds rate. Some are also warning that the yield curve is in danger of inverting, one of the most reliable predictors of a coming recession.

As individuals there is little we can do to prevent a recession. At best we can prepare ourselves for the hardship and ride it out. In the face of such uncertainty, it would seem that spending with reckless abandon is a bad idea. The only problem is that this is exactly what our Federal Government is doing right now. In a way it's similar to the assumptions made in the late 90s that predicted budget surpluses well into the future. Granted that was before 9-11, and before the bubble bursts, but it was still a foolish belief that the good times would continue forever.

The other foolish notion is that our government can continue to run huge deficits without future ramifications. While most economists agree that deficits won't bankrupt our economy, many believe that it will have an effect in the form of higher interest rates. Put simply this means it's more expensive to borrow, and that growth will slow as it becomes harder to finance risky projects. The net effect will be less innovation, job creation, and growth for the US economy. That's just one of the many reasons that a rosy 3% growth rate is a bit optimistic.