And what we can do about it
From Macroeconomic Advisers and e-forecasting, some recent reads on the macroeconomy:
Figure 1: GDP (blue bars), monthly GDP from e-forecasting (red line), and from Macroeconomic Advisers (green line), all SAAR, in billions of Ch.2005$. NBER defined recession dates shaded gray. Source: BEA, 2011Q3 advance release, e-forecasting, Macroeconomic Advisers, and NBER.
Macroeconomic Advisers monthly release for September has GDP flat, while e-forecasting (as of a week ago) has GDP essentially flat for October. As of this morning, MA’s tracking forecast has Q4 growth at 3.2%. Short term, it may be growth will continue. But see also Berge, Elias, and Jordà (2011).
Given my bias as an open economy macroeconomist, I look to the rest of the world to think about what is going to happen, given the trajectory of external sources of demand. Here, the indicators are not altogether promising.
Figure 2: from OECD (14 November 2011). Notes: The above graphs show country specific composite leading indicators (CLIs). Turning points of CLIs tend to precede turning points in economic activity relative to long-term trend by approximately six months. The horizontal line at 100 represents the long-term trend of economic activity. Shaded triangles mark confirmed turning-points of the CLI. Blank triangles mark provisional turning-points that may be reversed.
Compared to last month’s assessment, the CLIs point more strongly to slowdowns in all major economies. In Japan, Russia and the United States the CLIs point to slowdowns in growth towards long term trends. In Canada, France, Germany, Italy, the United Kingdom, Brazil, China, India and the Euro area, the CLIs point to economic activity falling below long term trend.
What can be done? I know there is a tendency, given the policy paralysis we are seeing in Washington, DC (and elsewhere), to just throw up one’s hands. But those in policymaking positions can’t do that. And in fact I think there are many things that can and should be done. CBO Director Elmendorf outlined many options in testimony before Congress, “Policies for Increasing Economic Growth and Employment in 2012 and 2013”. He succinctly stated what was needed thusly:
If policymakers wanted to boost the economy in the near term while seeking to achieve long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade.
This graph conveys concisely the impact of several options for boosting employment.
Figure from CBO.
In particular, I think this is noteworthy (from pages 2-4):
- Policies that would have the largest effects on output and employment per dollar of
budgetary cost in 2012 and 2013 are ones that would reduce the marginal cost to
businesses of adding employees or that would be targeted toward people who
would be most likely to spend the additional income. Such policies include reducing
employers’ payroll taxes (especially if limited to firms that increase their payroll),
increasing aid to the unemployed, and providing additional refundable tax
credits in 2012 for lower- and middle-income households.
- Policies that would primarily affect businesses’ cash flow but would have little
impact on their marginal incentives to hire or invest would have only small effects.
Such policies include reducing business income taxes and reducing tax rates on
repatriated foreign earnings.
Despite the near-term economic benefits that would arise from reductions in taxes
and increases in government spending, such actions would add to the already large
projected budget deficits, either immediately or over time. Unless offsetting actions
were taken to reverse the accumulation of additional government debt, the nation’s
capital stock, its future output, and people’s future incomes would tend to be lower
than they otherwise would have been. If policymakers wanted to boost the economy
in the near term while seeking to achieve long-term fiscal sustainability, a combination
of policies would be required: changes in taxes and spending that would widen
the deficit now but reduce it later in the decade. Such an approach would work best if
the future policy changes were sufficiently specific and widely supported so that
households, businesses, state and local governments, and participants in financial
markets believed that the future fiscal restraint would truly take effect.
The entire document is here.