Is the Administration’s GDP Forecast Too Rosy?

There’s been a lot of discussion of whether the Administration’s forecast is too rosy. [1], [2], [3], [4], [5], [6] I thought it useful to examine this issue a bit more deeply.


Figure 1: Real GDP q/q y/y growth rate from Administration (teal), CBO without stimulus (red), February Blue Chip (blue), WSJ mean forecast from February survey (pink), and WSJ trimmed high and log (dark red). WSJ trimmed values delete the top five and bottom five (out of 52) respondents. Source: OMB, CBO (March 2, 2009), and WSJ.

Note that while the Administration’s forecast is slightly above the Blue Chip, it is slightly below the mean WSJ forecast (February) at least for 2009. And the Administration forecast is well within the 10% trimmed range of forecasts from the WSJ (that is, I’ve cut off the top 5 and bottom 5 forecasts from the 52 respondents for the February survey regarding 2009 y/y growth). In other words, this graph confirms the WaPo conclusion:

…while upbeat, the administration’s forecasts are within the range of reasonable possibilities, according to economists we consulted.

Some discussion of where the Administration’s forecast relates to CBO’s is here. Dr. Romer provides additional insight here. I reproduce a graph from that discussion below:


Figure 1 from “Economic Projections and the Budget Outlook, February 28, 2009.

CBO has presented their assessment of the stimulus bill in this report released today. The key graph regarding the impact on the output gap is below.


Figure 1 from CBO, Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009, March 2, 2009.

Notice that CBO has presented the impact based upon a range of estimated multipliers. Hence, the calculations are transparent.

I will observe an interesting correlation: a good number of those who critique the Obama Administration’s forecasts the most vociferously are also typically the ones who had no criticisms of the previous Administration’s tendency to place off-budgeting process expenditures for Iraq and Afghanistan, as well as emergency expenditures [7]. For additional discussion, see Jeff Frankel‘s comprehensive assessment.

61 thoughts on “Is the Administration’s GDP Forecast Too Rosy?

  1. Fat Man

    Rosy? No they are not rosy. They are stoned. They have been smoking dope. Getting high.
    We are in a ditch, and we are not getting out any time soon. Consumers have no reserves, they have no home equity, and their stocks are not worth jack. It will take years of savings before they can spend again. How many years, I wish I knew, but two is not enough.

  2. GK

    Has Dueker updated his forecasts, from what he was projecting in December? To my knowledge, he has not yet.
    If he does, I may consider revising my own projection.

  3. GK

    Virtually all the forecasts say that GDP growth from 2010-2013 will be rocketing, just to get back to potential GDP.
    So either 2010-13 averages 5% growth a year, or we never get back to potential GDP in the next decade.

  4. Vladimir

    So either 2010-13 averages 5% growth a year, or we never get back to potential GDP in the next decade.
    GK this the type of technological regress that strikes an aging nation.
    However in all seriousness my wouldn’t it be reasonable to assume that potential output will be lowered by the crisis in the banking sector.

  5. Steve van Emmerik

    Good summary graph.
    To me it shows that the administrations forecasts are the same as mainstream economists.
    They seems to be based on the implicit assumptions that:
    – we can go back to spending more than we earn and borrowing the difference
    – there’s no signifcant inflation (with much higher interest rates) or
    – deflation (with continuing decreases in asset prices bancruptcies etc).
    Surely fairly hefty assumptions.

  6. calmo

    It could be a typo, but I like Obaman Administration…the sound of it: we are all Obamans now…not rebels without a cause but hopefuls without a reason…and that consensus view of emergence at the end of this year (depicted by Fig 1…I cannot pass up a referential gag) proof that the percussion section in the parade is pretty tight, does little to provide those reasons for hope. Chiming in behind the Fat Man and Steve…who could still be Obamans.

  7. Movie Guy

    Menzie – “Note that while the Administration’s forecast is slightly above the Blue Chip…”
    Slightly above?
    GDP Growth Predictions
    Obama Administration vs Blue Chip
    2009 – (1.2%) vs (1.9%)
    2010 – 3.2% vs 2.1%
    2011 – 4.0% vs 2.9%
    2012 – 4.6% vs 2.9%
    2013 – 4.2% vs 2.8%
    Translated into GDP dollars, the predictions are significantly different.

  8. GK

    Obama apparently thinks he is entitled to the GDP growth rates of the late 1990s, as those were the Clinton years.

  9. Chris

    Having lived through the recessions of the late 70s and early 80s, I can say that a sharp recovery after a sharp recession is possible, nay, dare I say likely. This presumes that we are able to fix the financial mess (per the analysis of Bernanke).

  10. calmo

    GK, isn’t the data presented here a little wider than what “Obama thinks he’s entitled to”?
    Furthermore, the 1st graph, (also the 1st of 3 graphs entitled “Fig 1” on my screen…unlike yours which shows Obama’s diary I suppose) shows that the GDP q/q turn has already occurred.
    It is so hard to keep up these days, yes?
    Ok, I retreat from my efforts to change the enumeration of the Figures since they pretty much say the same thing (Obama is entitled to whateva Mr Entitler, GK says): unless the dates have shifted on my screen (obliterating Obama’s Entitlement Wish List prolly) we are already 2 months into the GDP recovery.
    Chris, I hate to spoil your day…so I won’t. But it’s night time now an the devil has her grip on me: do you figure that our productive capacity has been weakened by transnationals like GM, GE, MSFT…unlike the 70s, 80s and that a speedy recovery is about as likely as the 2nd coming? Do you feel that those formerly employed in the RE industry, the brunt of the bunch facing job dislocations, are suitably equipped with all that former training to…make anything whatsoever? Do you feel that retiring boomers will continue to make life as burdensome as possible?
    I see some (Roubini, Kasriel…) have suggested a different shape from this “V” pictured above. It’s the “L” (Ok, for Kasriel, a “W”), but there are other characters in other scripts –this one might fit: “\”…and in a couple of months we can see if that bottom which has been discovered to have struck 2 months ago was a little premature.

  11. Thomas

    Considering the downright apocalyptic mood prevailing in the US these days, I find it very hard to believe that the US economy actually grew 1.1 % in 2008, to be followed by a similar decline (1.2 %) in 2009. In essence, the US economy would be the same size in 2009 that it was in 2007. That’s hardly a “hopefully-this-won’t-turn-into-a-really-nasty-depression” scenario, and it is very much at odds with anecdotal evidence as to how the US economy appears to be doing on a micro-level.

  12. Jim Glass

    “It appears that no-one is saying that 2010 will have negative GDP. ”
    Obama’s people says 3.2% growth, the second highest rate of the last 10 years, and CBO says about 2% even with no stimulus.
    It sort of makes one wonder somewhat about the urgent necessity of running a $1.1 trillion deficit in as a stimulus for what they think will be a solid positive growth year. And this is being passed off as “new fiscal discipline”? Wow.
    If Bush had run a trillion dollar deficit in a 3% growth year, say coming out of the 2001 recession, I wonder what people would have said about the fiscal discipline involved?
    Let’s see, Mankiw notes that with 5% unemployment Bush’s awful, irresponsible deficits ran at an average of 2% of GDP for three straight years — while Obama’s tough budgeting assumes when they get back to 5% unemployment they’ll have a defict of >3% of GDP … which seems to be 50% more.
    And that budgeting may indeed be optimistic not just in the presumed growth rate that reduces the deficit “only” that big, but in lots of ways. Auerbach & Gale (not exactly right-wing “tea party” folk) look at the numbers, do their own analysis and write…

    What is more troubling is that, under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment

    On the other hand, we have Clinton budget office alumnus Matt Miller providing an entirely different point of view, saying the Obama budget isn’t fundamentally about either stimulus or fiscal responsibility at all, over its full scope, but instead — and he says this a praise — about being the mirror image of “starve the beast”, which he calls “feed the beauty”. Get all our good new programs into the budget now during the crisis, (Rahm Emanuel’s “never let a good crisis go to waste”) and taxes will have to go up to pay for them later.

    With President Obama’s first budget we are therefore embarking on an epic new paradigm which deserves its own metaphor. Though it’s a little clunky, for symmetry’s sake we may as well call it “Feed the Beauty.”
    In fiscal terms, the failed wager of “Starve the Beast” was that spending would eventually shrink to come in line with lower taxes. The tacit wager of “Feed the Beauty” is that taxes will eventually rise to come in line with higher spending…
    The paradox of this revolution in governing philosophy is that its success relies on the same underlying political dynamic. Instead of fiscal sanity depending on pols doing something the American people won’t like (cutting popular programs), it will now depend on pols doing something the American people won’t like (raising taxes).
    Now, to be sure, beyond the expiration of the Bush tax cuts for the top, and some controversial new levies on those making more than $250,000 a year, Obama isn’t coming clean on this yet. But this higher-tax blueprint is plain enough…
    My own sense is that, unlike “Starve the Beast,” “Feed the Beauty” will actually work. (If it doesn’t, we’re pretty much out of options)….

    I dunno, we can call that many things, but “fiscally stringent and responsible” doesn’t seem one of them. Yet how else do we explain a $1.1 trillion deficit planned for a 3.2% growth year?

  13. lzl

    The administration forecast is inline with the others for 2009 and maybe 2010. For the 4 following years it is at least 1% point above Blue chip forecast. Even by this crude measure it is well off. At least that is what I see from the graphs.
    Prof. Chinn, why do I get the feeling that you just wanted to post the last paragraph and the rest was supposed to be some random reasoning for it?
    I don’t live in the US and don’t care about US politics.

  14. Bob

    Rather than increase gdp, the Obama ‘stiumulas’ bill seems better designed to lower potential gdp to actual gdp.
    Of course, Menzie will then cheer Obama again.

  15. MM

    “I will observe an interesting correlation: a good number of those who critique the Obama Administration’s forecasts the most vociferously are also typically ….”
    I’d agree with the poster above, you seem increasingly keen on exposing a bias where none need be exposed. You could play the “I will observe … typical blah blah” game all day for both sides, yet you won’t – so why do it at all? Stick to the numbers.

  16. MikeR

    Do you think the Blue Chip, WSJ and Admin forecasts are too rosy?
    I think they all are and the stock market sell off seems to confirm.

  17. Terry

    Corporate and government economists have consistently underestimated the negativity in the economy and the markets since the current Great Recession began.
    In this case, I think estimates that estimates of a mild decline in the US economy this year and a substantial rebound next year are just way off base.
    I don’t think we’ll see an economic turnaround until, at the minimum, the financial system is restored to some degree of sanity and solvency and the US housing market reaches bottom. I don’t think either of these will occur until 2011 at the earliest, more likely 2012.
    Added to this is my concern that these economists have not properly accounted for a secular (or cultural) shift in consumer saving. While the January 2009 6% number is a blip, I am almost certain that last year’s number (1.8% per BEA) will rise to its historic average (7.5%) within the next two years as uncertainty about income and wealth remain. That alone will tamp down PCE by some $600B through next year, more than 2-3% of GDP, largely offsetting the intended effect of the ARRA stimulus law.
    With that cultural shift, moreover, the longer term effort to return to pre-collapse levels will be, well, very long term, maybe even a decade (a la Japan).

  18. Steve

    LOL! There will be no recovery until “we the people” stand up and say enough of throwing money from helicopters and start sincere, logical investment of natural resources, capital and labor into our energy and manufacturing sectors.
    I’m thinking maybe after the House is reclaimed by a conservative coalition of Dems/Reps in 2010, followed by the elimination of our experiment with outright socialism. Until then, you may as well try to recoup some of your tax dollars back via new companies meant to maximize the take of the money being dropped from the helicopters. LOOK! Here comes one now! Hand me that muskie net will ya! LOL!

  19. tyaresun

    The green line is where they need to be for Obama to be relected in 2012. Seems more like a goal than a forecast.

  20. Steve Kopits

    So do I understand this correctly? The difference between the Administration (with stimulus, I presume) and the CBO, without stimulus, is about 1% per year for the next 3 years or so. Cumulatively, that’s about 8% of GDP difference.
    If GDP is $14 trillion, then 8% of that is about $1.0-1.2 trillion.
    So we gain something like $1 trn of benefits in 3-4 years for $3-4 trn in incremental debt?

  21. Menzie Chinn

    General note of caution: These growth numbers are year-on-year growth rates. I would’ve preferred comparing q4/q4 growth rates, as those define more clearly what is happening over time, but this is what we have. So annual growth rates of the sort reported here can hide sharp drops.

    lzl: The last paragraph is an observation which I believe is accurate; do you dispute it? And the answer to your question is no, the first graphs are not random. But I have a question for you — if you do live in an economy which is interlinked with the US economy, don’t you think it might behoove you to be interested in US policy?

    MovieGuy: “Slight” is in the eye of the beholder. I’ll grant you that in economic terms it might be bigger than “slight”, but I bet if I could get the underlying distribution of annual growth forecasts from WSJ (they only provide the q4/q4 and q/q), I’d find that the gap is “slight” in statistical terms.

    Terry: I suspect that the new trendline in consumption growth is incorporated into these forecasts — perhaps not as much as you might project, but in some form. I only say that because investment bank reports seem to replete with articles discussing the demise of the American consumer (something which I believe is true [0]).

    MM: Thank you for your advice to self-censor. By the way, feel free to skip my posts if they offend you so.

  22. Keith

    I think most economists and especially ones attached to the current administration are operating off of models that are now defunct. This is not a generic excess inventory recession that can be whisked away with a wave of the interest rate wand. We have reached the endpoint of that world where those models were valid.
    Along the simple, common sense arguments I have seen from several people around here: more debt is not the solution. Forcing americans with no savings to continue to spend as the driver for the world economy is not the solution. Similarly, Regan’s tax rate drop was a one trick pony.
    I think the true source of the problem exists at a level beneath where all of the debate is occuring. I think it rests with the fundamental nature of money itself as a store of value.
    That is a debate Keynesians refuse to participate in, despite the fact that their methods were supposed to prevent the very scenario we are now in, and that is most unfortunate. Guess what, the real world called. Your models are crap. Your theories and fancy math, are all smoke and mirrors.

  23. calmo

    Jim Glass, (the same Jim from Angry Bear years ago?…as calmo dons his hob nail boots) finishes up with:
    I dunno, we [Jim and his 1 man company so far..if I can help it] can call that many things, but “fiscally stringent and responsible” doesn’t seem one of them. Yet how else do we explain a $1.1 trillion deficit planned for a 3.2% growth year? [Crisis Management: spend your heart out or face the music…a lesson adapted from Paulson’s spending in support of the banks, yes?]
    And you need to remember that you weren’t born yesterday –that present conditions were incubated by 8 years and mo of “wealth creation” for a few (at the expense of many…esp future tax payers and workers –even future generations, just starting to unravel I make it).
    Steve, you are just too sensible for this thread.

  24. Jolly Rancher

    Why would you remove the top and bottom 5% of WSJ economists? History shows that one of those two groups is correct. Take your pick or flip a coin.

  25. MarkS

    The financial contagion continues… There is no hope for the economy to recover, until the losses from over-securitization and shadow banking’s derivative contracts are realized. We are experiencing a global banking crisis. Until the BIS and the various international Central Banks and governments formulate a plan to effectively regulate banking and financial contracts as well as dispose of and clear the accumulated detritus, real economic recovery is impossible.
    I say that we have to experience considerably more pain before the political will emerges to perform the requisite amputation. The world is still in denial. “Reputable” economists continue to offer sound-bites about how we can “jump-start” the economy, or re-start the securitization process.

  26. pat toche

    On the Bush government’s fiscal responsibility, see for yourselves (copy the full link below into your browser)

  27. Menzie Chinn

    Jolley Rancher: Take a look at the forecasts at WSJ (they’re available at the link provided). The same three or four forecasters consistently provide some crazily optimistic forecasts, and have for years. The bottom few are not as wildly off. So I am pulling down the top of the WSJ range, and thereby making the Administration forecast look a little rosier. And you can see that still, the Administration’s forecast is not that out of line.

  28. don

    I agree with the conclusions of Terry and MarkS. I wonder, what is assumed about the current account balance in these forecasts?
    Menzie, your penultimate sentence is quite awkward. Is ‘process’ a noun or an adjective?

  29. lzl

    Prof Chinn, I am interested in US economic policy, and yes, one of the reasons is that it affects the rest of the world. That is why I browse blogs such as yours. I am not interested in US politics – bashing/praising Bush/Obama/local politicians and pundits I have never heard of, especially as an end in itself. This post seems to me to be more of the latter.

  30. Menzie Chinn

    lzl: Jeff Frankel is a pundit? He’ll be surprised to hear it. He’s 56 in RepEc rankings, former CEA member, and professor at the Kennedy School/Harvard. I thought it worthwhile to mention his views…

  31. Barkley Rosser

    I am presuming that all these forecasts were made when the September IMF projection for this year was still operative, a gloomy one half percent growth for world GDP, lowest since WW II. But on 2/27 Brad Setser linked to the Chief Economist of BNP-Paribas, who has altered the IMF forecast and now says that world GDP will decline this year by one half percent. To the extent that this is all too rosy, all of these forecasts, it is probably because they do not fully account for the global nature of this plunge we are in now and how it is accelerating.

  32. lzl

    Prof Chinn, I do not know why you suppose I am inferring what you suppose. I was talking in general of course.
    Anyway, I think the following is important in understanding the gap between the estimates:
    “Many observers have failed to appreciate a crucial footnote to the OMB table comparing the Administrations forecast to the other forecasts (Table S-8).4 For the Blue Chip Consensus forecast, the table gives forecasted growth rates for real GDP for 2009 and 2010 from the February 10 release, but forecasts for 2011 and beyond from the October 2008 survey (because the Blue Chip only surveys longer run forecasts twice a year).”
    This doesn’t mean that the administration farecast is not “rosy”. We can not conclude, however, that it is rosy by comparing it to a forecast from Oct 2008.

  33. GK

    Barkley Rosser,
    Good point on IMF revisions. However, the fact that 2009 has been revised downward so much does not mean that revisions to 2010 now are any more valid than the 2009 forecasts from last year.
    2010 might get over-revised to the downside just as easily, and outperform.

  34. Menzie Chinn

    lzl: Apologies for misinterpreting. It was this line: “Prof. Chinn, why do I get the feeling that you just wanted to post the last paragraph and the rest was supposed to be some random reasoning for it?” which made me suppose you were referring to the last paragraph. The only person quoted in that paragraph is Frankel.

  35. MDueker

    To GK:

    I have updated my estimates since early December and generally poor consumption data have led to a revised forecast trough date of November 2009. A jobless recovery is projected until May 2010.

    You can e-mail me for charts: duekerm at gmail

  36. oops

    are afghanistan and iraq off-budget in president obama’s budget?
    i’ve never been able to come to a viewpoint on that. the pentagon likes things like afgh & iraq to be seaprate from their budget and funded separately. it makes sense in a way but when the numbers add up over time it seems like any administration (and congress as well since spending bills actually start in the house per u.s. constitution) should start adding them to the “conversation”.

  37. jed

    whats wrong with you people, how can you stand there and just watch obama and formerly bush give trillions of dollars we don’t have away to corrupt failed bankers, cronies and special interests, and do so with calm objective analysis of non-central points. please for the first time in your lives take your partisan blinders off and start making them accountable. you guys call yourself intelligent ? its all right in your face. they are lying and taking your money.

  38. echeno

    Menzie – you are becoming more partisan every day. It’s almost laughable. Your “interesting correlation” comment is typical of someone who appears to be jettisoning all analytical capabilities (and you are obviously quite capable on that front, so please don’t take this the wrong way) in favor of unsubstantiated partisan allegations. Who are all the people that make up your correlation analysis? This is precisely the type of imprecise, hack comment you used to rail against. I would encourage you to take a few weeks off and get some fresh air.

  39. SvN

    Would it perhaps be useful to show the differences between the various projections (e.g. adminstration, CBO, etc.) vs. some estimate of the forecast accuracy at various horizons?
    I’ve been working with the SPF data of late and they don’t seem to be any use at horizons of more than 2Q. I’m therefore wondering whether the differences between different forecasts at 2-5 horizons are meaningful.

  40. mp

    Professor Chinn:
    I see nothing on the White House web site page you referred to that suggests this downturn is viewed by Obama’s advisers as anything more than a typical recession and that it can be handled in the time-tested and typical way. Sorry, but the “analysis” I see there looks more like a justification and hedging of political bets to me.
    In short, I think you’re allowing *them* define the discussion. They’re comparing this downturn to previous recessions, using “average” durations, and “average” recovery times, where the economy returned to equilibrium of its own accord. They’re using those averages as a basis for their forecast.
    Isn’t this downturn exceptional? Isn’t the problem that the economy *can’t* return to equilibrium of its own accord? Doesn’t the research of people such as Reinhart and Rogoff (“The Aftermath of Financial Crises”) matter in discussions such as this one?

  41. Menzie Chinn

    echeno: Thank you for your advice. I wonder, do you dispute the correlation? I suspect a couple hours viewing FOXNews would convince you that the correlation exists. Nonetheless, I do apologize for the degree of informalism, and will attempt to be more quantitative, and look forward to an equally higher level of quantitative analysis in your comments. (I could further note that the use of “hack comment” could be leveled ideologically-based concerns about the “collection of ‘climate revenues'” cloaked in the guise of macro stabilization objectives. But I’ll prefer to think that as a reflection of the commenter’s truly felt convictions.)

  42. MikeR

    Goldman just lowered their Q1 GDP forecast to -7% (Q209 at -3% with Q3 and Q4 at +1%).
    Seems everyone’s forecast is too rosy.
    Menzie, don’t get distracted by the comments about politics and pundits. Your economic analysis is too valuable.

  43. Menzie Chinn

    MikeR: Thanks. I concur with your view that these forecasts are now too optimistic, in light of new information that’s come out since the original forecasts were made (the WSJ forecasts were from early February. Presumably the Administration’s forecasts were based on data from around the same time. A similar observation applies for the Survey of Professional Forecasters, and Blue Chip, I suspect.

    For me, I think the key “news” has been continued revelations about the financial sector losses, and further deceleration in rest-of-world output growth.

  44. DickF

    I have made the comment that Bush was a Hoover to Obama’s FDR but that is only partially true. One of the worst policies instituted by Hoover was his tax increase right in the teeth of the growing Depression. Many people over the past have referred to Hoover tax hikes when attempting to chastise those in our government who wish to raise taxes, but here we have the most clear parallel that I have seen in my short life-time. What we must remember is that Bush did not give us a Hoover tax hike, but Obama will.
    March 2nd, 2009 5:17 PM Eastern
    Obamas Scary Hoover-Style Tax Hikes
    By Phil Kerpen
    Director of Policy, Americans for Prosperity
    The composition of the tax hikes in the 2010 budget is frighteningly similar to the Revenue Act of 1932, the much-maligned Hoover tax hikes that put the Great in Great Depression by putting an enormous tax burden on millions of Americans, largely through excise taxes. These taxes, raised even further by FDR, were justified by the promise that the funds would be returned in the form of relief programs, which is to say that some portion of the tax revenue, after administrative costs in Washington, would go back to the states with strings attached, often to further political rather than economic objectives.
    As the table below shows, the Obama budget blueprint, like the 1932 act, is split mainly between broad excise taxes and income tax hikes on high income earners.
    To see the comparison table please go to the site reference above.

  45. Menzie Chinn

    DickF: Is this the same group that suggested individual retirement accounts — so people could invest in the stock market (that has since declined XX%) — to replace the current social security system?

  46. calmo

    You go isl…I have no use for the consensus opinion here about your Crazy post…those in favor of arresting your development (and our education) [and our inspirations, so damn scarce at the moment…surveyin that consensus (not my own navel)] have lost it completely…owners of digital extremities mounting little depressables on their keyboards hopin to bust out with some real intelligence…and not those woeful Estimates…or worse, those scripts from better known figures with reputations to defend…from defenders who just want to secure the same agents and be able to get their nails done too.
    I await your next post…or I can travel to your other electronic locations and survey the damage you are doing to the consensus.

  47. John Thacker

    Note that while the Administration’s forecast is slightly above the Blue Chip, it is slightly below the mean WSJ forecast (February) at least for 2009.

    I’m sorry, this seems like a straw man argument to me. Look at those links that you posted. I don’t think that many people are disputing the numbers for 2009. It’s the numbers for 2010-2013 that are the source of the dispute.
    Greg Mankiw, for example, didn’t even include 2009 on his post.
    To me, I look at that chart and I definitely do see a pretty significant difference between the Blue Chip forecasts and the Obama budget document for 2009 to 2013. Especially from 2010 to 2013, where there’s over a percentage point (and sometimes over 1.5%) difference between the consensus estimate and the Administration’s. It adds up to about a 6% difference in GDP in 2013 between the Obama Administration and the Blue Chip average.
    I’m not objecting to the idea of the short-term effects of stimulus or the short-term GDP projections.
    I’m objecting that in 2013, when we should be well into recovery according to the Administration, the projected deficits are still expected to be at 3.0% of GDP. And that number would certainly be quite a bit worse under the Blue Chip panel’s assumptions. A 6% smaller GDP definitely adds up. As a quick rule of thumb, suppose that the Blue Chip panelists are right, and the GDP in 2013 is 6% smaller than the Administration projects. That’s an extra .2% of GDP deficit from the smaller denominator, plus another 1.2% of GDP deficit from the revenues being smaller, assuming roughly 20% of GDP as revenue.
    So, under the consensus projections, the deficit in 2013 would be closer to 4.5% of GDP than 3.0% of GDP. That’s as bad as Bush ever had, but in a time of full recovery.
    Menzie criticized the Bush deficits during, e.g., 2004 for being so large in a relatively good point in the business cycle. It seems to me that the Obama Administration is promising to make the same mistake as Bush. Even worse, as at least the deficits under Bush were smaller in 2005, 2006, and 2007.
    But the Obama Administration is promising rapid growth that brings up back to our baseline by 2013 (and thus promising that economic growth in the past decade was essentially real and not a misallocation or bubble), but still have a deficit of 3.0% of GDP. The Administration has been praised for going out ten years, but they project ten years of uninterrupted growth from 2010 to 2019– and still have a 3.0% of GDP budget deficit in 2019.
    It seems to me like that budget proposals in the medium-term (not short-term, we’ll excuse those) are not only rosy but promise large deficits even if those rosy projections come true.
    Every Administration uses rosy projections, but most at least find a way to show the deficit closing at the end of the period as a result. Heck, even the Bush Administration had relatively small deficits in 2005, 2006, and 2007. But the Obama Administration adopts projections that should shave off 1.5% of GDP from the deficit by 2013, and still has large deficits.

  48. Menzie Chinn

    John Thacker: Well, it seemed to me a lot of people were taking issue with 2009 and 2010. But in response to your main point, apparently the CBO must be looking at the medium/long term “rosily” as well. Now, you might say you “trust the Blue Chip survey” more, which would certainly be your perogative. But you might want to read this study first.

  49. DickF

    Menzie wrote:
    DickF: Is this the same group that suggested individual retirement accounts — so people could invest in the stock market (that has since declined XX%) — to replace the current social security system?
    First let’s recognize that Obama’s Hooverite tax plan has nothing to do with Social Security. Now that we have the red herring caught and in the frying pan let’s continue.
    I certainly hope they have made this recommendation. If the Social Security slush fund was invested in profitable businesses rather than being raided to fund bailouts, the economy would not be in such sad shape.
    Your question seems to imply that our current economic downturn has nothing to do with the disastrous policies of government. Am I reading you correctly?

  50. Donald Last

    Isn’t it curious that all the curves in general have the same profile. Suggests they all use the same models but feeding in similar but not precisely the same data. Well, go to Willem Buiter’s article today in the FT on the poverty of macroeconomic mathematical modelling, and come back and see if you still have faith in the above projections.

  51. John Thacker

    Now, you might say you “trust the Blue Chip survey” more, which would certainly be your perogative[sic]. But you might want to read this study first.

    So, that study by the CBO suggests that the two methods have similar errors and similar track records. So perhaps that should lead us to expect that the truth will lie in between the two?
    Ordinarily, this would not make much of a difference, and I would have no objection to choosing either. After all, we note from the study that in none of the years from 1983 to 2006, when the data is available, did the CBO forecast differ from the Blue Chip forecast by more than 0.4% of GNP, then GDP starting in 1993. However, according to your graph, the CBO forecast predicts a GDP growth rate over 1% higher than that of Blue Chip in each of 2011 to 2013.
    With such a difference between the two estimates, it is to my mind more important to state that our best guess probably lies between the two, given prior track records. (It is of course too easy for observers to cry “Bias!” in situations like this; in fairness, changes in the business cycle are the hardest times to predict future output.)
    If we use an average as our best guess, then the Administration guess is still significantly “rosier” than our best expected guess.
    Even ignoring the Blue Chip forecast entirely,
    the Administration still predicts a GDP roughly 1.5% higher than the CBO in 2010. This itself, combined with estimates of growth somewhat above 4% in 2011 to 2013 would lead to a GDP 2013 1.7% higher than the CBO estimates. A GDP 1.7% higher than the CBO estimates makes the deficit look smaller (holding spending constant, assuming that revenues are 20% of GDP, affecting the denominator for GDP) by around 0.4% of GDP.
    So, it is my opinion that, going by CBO estimates, the Administration’s budget underestimates the budget deficit by 0.4% in 2013, and by similar margins in the outyears.
    I think that, judging by the CBO study, it is also reasonable to split the difference between the Blue Chip and CBO predictions for forecasts, in which case the Administration’s budget overpredicts GDP by 3.8% in 2013, and thus underestimates the budget deficit by around 0.85% of GDP in 2013.

  52. Menzie Chinn

    John Thacker: Significance is in the eye of the beholder…my guess eyeballing the histograms from the WSJ 2009 and 2010 y/y forecasts is that the difference is not statistically significant at even the 50% msl. But feel free to keypunch the numbers in (as I mentioned, the WSJ only provides in Excel the q4/q4 forecasts) and cross-check my guess…

  53. echeno

    Thanks Menzie. You misinterpreted the “climate revenues” comment. I was actually asking you whether you thought the positive impacts of stimulative fiscal policy would be offset by a large gas/electricity tax increase d/b/a “climate revenues” – whether in essence we were pursuing the same ineffective policy mix that plagued depression era policies. The comment had nothing to do with my personal views about the best way to reverse climate change – a different question entirely.

  54. DickF

    DickF: Are you trolling this site or are you really that thick?!
    As a businessman and economist I come here to read well though out economic argument by people how are no afraid to take credit for their statements.

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