Thursday, February 17, 2011

Obama's Budget Smoke and Mirrors?

I read this editorial in the Washington Examiner on my way to work today. I do not consider myself anything resembling an expert in this field, but I do think that the GDP growth Obama is expecting is very unrealistic (if the numbers the Examiner uses are correct). Judging from the article, it appears that Obama's budget will be extremely detrimental to the economy, and I am amazed anybody would predict that that kind of growth (about 4% annually according to the article) could possibly be achieved over the next four years when such growth has only ever occured in four years in our history, let alone four consecutive years.


Patrick_Landers said...

I don't want to bias the debate, so for now I'll limit myself to just a few comments:

a) it's important to give context to any article, so I'll note that the Washington Examiner is a conservative Washington D.C. paper. This obviously doesn't mean the editorial is going to be one-sided or wrong- it's just important to understand the ideology of the commentators.

b) this editorial overall in its argument is sort of right and sort of wrong- I'll expand on this point later tonight, but I’d note that many private-sector, Wall street economists have made comparable growth projections for 2012 and 2013- Mark Zandi from Moody's Analytics (an economic adviser to the McCain campaign and a VERY respected economist) for instance projects growth between 4 and 5 percent in 2012 and 2013.

The Examiner is correct that Obama’s projections are higher than some economists (including probably the CBO once they release their analysis) would expect. The President could prove to be wrong, and those projections are important to explaining the amount of deficit reduction Obama’s projecting (mostly on the revenue side- revenues are strongly tied to economic growth).

The White House could very well be wrong- there is greater uncertainty around all economists' projections then there is between economists on this issues (a fancy way of saying no one knows for sure or can be confident what growth rates we'll see- it’s really a coin toss about who will prove to be right. Once we know who proves to be right, then we’ll know which economic story was the more appropriate explanation. But for now, all the arguments are valid and well within the mainstream of economics). The White House and other economists' projections are based on a technical economic assumption which differs from what the CBO and other economists are thinking.

Patrick_Landers said...

c) an "interesting" quote:

"To grasp the unreality of that projection, recall that in only four years of the past 30 has the economy grown four percent or more. Two of those years, 1983 (4.52 percent) and 1984 (7.19 percent), were at the outset of the economic boom sparked by President Reagan’s tax cuts."

Uhm... most economists would say that statement is misleading- at the very least it needs a lot more qualifiers and additional reasons. The Reagan tax cuts are not THE reason for the strong economic growth seen then, or even probably the most important reason. However, they certainly were a contributing factor to the economic growth.

d) another "interesting" quote:

"The other two years, 1997 (4.46 percent) and 1999 (4.83 percent), both followed on compromises between President Clinton and Republican congressional majorities that restrained federal spending and debt, and cut taxes."

Once again, this statement implies a false causality. While the bipartisan budget balancing of the time probably had some positive impact on economic growth (though I'd suspect not that much- government fiscal conditions were much different then so markets had less reason to be concerned- so less reason to improve when the government sort of addresses its problems), probably the more important causality to note here is that strong economic growth enabled the bipartisan budget balancing at the end of the 1990's. The Washington Examiner is largely reversing the causality.

Patrick_Landers said...

Like most Republicans I've listened to at numerous hearings in the past few weeks, the Examiner is convinced that the inflation rate projections of the CBO, the Fed, the Treasury, and MOST economists are far too optimistic. I would just note that while their fears could prove accurate, economists who support them are a distinct minority.

The Examiner is correct that our dependence on foreign oil does increase our risk of having volatile inflation rates related to Middle East problems. And the Examiner is correct that environmental regulations being proposed by the EPA could have a detrimental effect on economic growth and job-creation in the short-term (it would be wrong or minimally useful to make a net long-term estimation of their impact)

TJE said...

More from Slate:

Patrick_Landers said...

Here's Austan Goolsbee's explanation (Chair of the President's Council of Economic Advisers):

"Four short points: The first is that the forecast that we use has to be locked in for planning purposes as of mid-November of last year, so it predates the tax deal. As you know, many of the private forecasters upped their forecast based on what was in the tax deal, and most of that is not in the forecast.

Number two, real GDP growth on a year-over-year basis, the administration is forecasting 2.7 percent in 2011, 3.6 percent in 2012, 4.4 percent in 2013. So our growth rate for 2011 is a fair bit lower than the consensus of private forecasters surveyed by the blue chip or by the Survey of Professional Forecasters.

The longer run we anticipate catching back up, that the potential GDP of the United States has not been severely damaged by this recession. So our medium-run forecast is a bit faster. It’s within the so-called central tendency that comes out of the Fed FOMC forecast of last November, which is a -- the reasonable range in which they drop off the highest and lowest. It is rather in the center of that central tendency.

So over a five-year period -- the typical recession since World War II has been followed by a growth rate of a little less than 4.2 percent over five years. Our forecast is about 3.8 percent over five years. So it’s slower than the typical recovery and we assume that because it’s harder to get out of a financial recession.

The third point I’d raise is that the unemployment rate in our projection is that at the end of 2011 it would be 9.1 percent; by the fourth quarter of 2012, it would be 8.2 percent. That was obviously made in mid-November. The unemployment rate currently stands at 9.0 percent. Unemployment is likely to fluctuate through the year, but any revisions that we have will come out at the mid-session review.

Finally, for inflation we’re projecting that in 2011 the CPI inflation will be 1.3 percent -- so actually decline from where it is now. It’s very much in line with other professional forecasters, and that in 2012, 2013 and beyond we’d go back to something like the Fed’s and others’ 2 percent inflation level."

Megan said...

Shhh. Save this for tonight!

TJE said...

I can't to see you as Henry Fonda in Twelve Angry Men winning over a hostile group!

Patrick_Landers said...

Sorry Megan :(

Every time someone posts an article related to the budget, I try to control myself and not say anything related to the debate, but it's sooooooo hard.

TJE said...

The devil makes Patty do it!