The economy will grow substantially less in 2013 and 2014 than originally expected, according to Monday’s midyear update to White House projections. The Office of Management and Budget had originally predicted 2.3 percent GDP growth this year and 3.2 percent next year, but on Monday it cut those forecasts to 2 percent and 3.1 percent, respectively. The report also dropped its estimate of the year’s deficit by over $200 billion, in line with revised predictions from the Congressional Budget Office earlier this year.
The confluence of falling deficits and shrinking growth estimates reinforce the argument that it’s time for Washington to drop its focus on deficits and start paying better attention to investing in economic growth. As the Center for American Progress’ Michael Linden noted in June, present economic conditions both demand such investment and facilitate it. Unemployment is stubbornly high, medium-term debt stability and low interest rates make stimulative action possible and cheap, and austerity is ravaging the European countries that have committed to it.
The slackening GDP growth in Monday’s report is in line with revised forecasts from the International Monetary Fund last month. The IMF explicitly blamed sequestration, calling the pace of U.S. deficit reduction “excessively rapid” and saying growth could have cracked 3 percent without such aggressive and haphazard cuts.
Such growth could have begun to shrink the yawning gap between actual and potential growth, but the revised numbers signal that the country is continuing to fall far short of the level of productivity of which America is capable. That shortfall, which economists refer to as the “output gap,” has been massive ever since the financial collapse. Progressive economist Dean Baker flagged one effort to calculate just how much potential wealth has gone unrealized, a simple counter at LostOutputClock.com that reads about $4.6 trillion as of Tuesday morning.