Here's a pocketbook pointer for American voters to consider: As the presidential candidates make their closing arguments, both President Obama and rival Mitt Romney are offering visions of the economy that tilt heavily toward optimism – and that may not be a good thing when it comes to making good on their fiscal promises.
A case in point: Mr. Obama's budget proposal this year assumed an economy growing by 3 percent, adjusted for inflation, during the 2013 calendar year. The consensus among top private-sector forecasters calls for 2 percent growth, according to a monthly survey by Blue Chip Economic Indicators.
A single percentage point may not sound like much, but the difference amounts to one-third of the economic growth that the White House had planned for. If 2 percent proves to be correct, the change would mean about $165 billion less in gross domestic product (GDP) for the US, slowing the pace of everything from job creation to tax revenues.
The GOP's Mr. Romney has his own big expectations that could prove to be hard to realize. His campaign hasn't released formal economic forecasts. (Challengers don't tend to do that.) But the former Massachusetts governor has sketched a vision that counts on rapid economic growth.
Romney vows that after cutting income-tax rates by 20 percent, under his plan "we keep taking in the same [tax] money when you also account for growth." Independent analysts challenge his assertion that the tax cuts can be paid for (so they bring in the same amount of revenue) through Romney's recipe of faster GDP growth and reducing tax breaks such as deductions.
Politically, there's a strong reason for candidates to run on a platform of economic optimism. It helps Obama if voters believe that the economy is improving and will gain momentum. It helps Romney if voters believe that an economy with him in the White House will grow faster still.
The optimistic scenarios aren't necessarily impossible. But it's fair to attach some big asterisks to them.
Romney himself notes that the economy hasn't been growing very fast lately.
"How about the growth of the economy? It's growing more slowly this year than last year, and more slowly last year than the year before," he said this month in the second presidential debate.
What he didn't add is that next year's growth could be slower than this year's. That's what the Blue Chip survey currently projects. The average among forecasters calls for 2.1 percent GDP growth for 2012, and 2 percent next year. (If it pans out that way, Romney would prove to have been wrong on one count: Growth in 2012 would end up a bit stronger than in 2011. But Romney is correct that at present, this year has seen some cooling relative to last year.)
A major hurdle for the economy next year, seldom mentioned in campaign ads or speeches, is the "fiscal cliff" that's approaching at the end of the year. Come Jan. 1, a range of tax cuts are poised to expire, even as new restraints on federal spending kick in. To the degree that Congress and the White House fail to mitigate these changes, the result could be to suck several percentage points of GDP out of the economy.
Economists widely agree that going "over the cliff" is a recipe for recession. Both parties say it's important not to let that happen. But the political compromises needed to achieve a benign outcome shouldn't be taken for granted, budget experts say. Even under some best-case scenarios for the economy, fiscal policy changes could create some downward drag on GDP growth.
Europe is another danger area for the economy. The debt challenges of the euro zone's Mediterranean members could lead to more turbulence and economic weakness for the currency union in the year ahead.
It also appears that Washington's rosy-scenario issue extends beyond just next year. The latest Blue Chip survey, released Oct. 10, compares its consensus forecast for the US with that of the White House Office of Management and Budget (OMB) and of the Congressional Budget Office (CBO). The private-sector forecasters call for average growth of 2.9 percent from 2014 through 2018, versus 3.7 percent for the White House and 3.9 percent for the CBO.
Some economists worry that America's typical or "trend" growth rate has slowed toward the 2 percent level in recent years. That doesn't mean it's unreasonable to hope for some faster-than-normal growth on the economy's long path to recovery from a deep recession. And certainly it's right for politicians to seek ways to boost the nation back toward a stronger growth rate.
A challenge, however, is that some of the corrective steps may be ones that aren't easy for the economy in the short run.
Many economists say fiscal reform should reduce federal deficits and the national debt (as a share of GDP) without making the adjustments so fast that they suck wind out of the economy.
That's no easy task, however. It includes some risk of conflict between two goals: restoring full employment and averting a dangerous buildup of public debt. Navigating between this proverbial rock and hard place is difficult, today in particular, because virtually all advanced economies are facing pressure to contain public debt levels at the same time.
If the next president bases his policy around economic assumptions that prove unrealistic, the nation's fiscal position could worsen. Under a President Romney, this scenario could unfold if his tax-reform plan fails to provide a major boost to economic growth, or if he doesn't win cuts to federal spending (still not detailed by his campaign) on the promised scale.
"Voters need to see the specifics," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan group that supports fiscal sustainability. Without more details from Romney, it's hard for voters to judge if they find his plans credible and appealing.
Similarly, Obama's fiscal leadership has been wanting, Ms. MacGuineas said in a recent interview. So if the economy were to underperform, Obama's plan might fail to curb high deficits. She describes his plans to date as "Simpson-Bowles lite," with some spending cuts and revenue hikes, but not enough to put the public debt on a downward path.
Obama's bipartisan fiscal commission, chaired by Alan Simpson (R) and Erskine Bowles (D), offered a plan that could serve as a template for eventual reforms – in its spirit of compromise if not in all its details. Such reform is backed by a growing list of corporate CEOs. They have signed on to a "Fix the Debt" campaign, designed to put pressure on both political parties for a grand bargain on fiscal policy.
If the next president wants GDP growth to come in strong, it may hinge on a policy course that includes tax reform, deficit reduction, and broader steps to improve US competitiveness.