Back in February, some observers were characterizing the Administration’s forecast as too rosy. Now, the Administration forecast is looking positively pessimistic by comparison to private sector forecasters, at least over 2010.
First, consider the February 2010 forecasts from the Administration (teal squares) against the April 2010 mean forecast from the Wall Street Journal survey (red line).
Figure 1: Real GDP (09Q4 3rd release) (blue), and WSJ mean forecast (red), and trimmed hi/low (gray), and Administration (teal squares) and CBO forecasts (scarlet triangles) (February 2010). Source: BEA, WSJ April survey, CEA and CBO.
Not only have expectations regarding the path (in levels) of GDP risen, the Administration’s forecast is now at the low end of the range of forecasts (I’ve trimmed the top 10% and bottom 10% of forecasts off).
Of course, just because conditions are exceeding expectations back in February (actually, December, since the Administration forecasts were locked down way in advance of the budget’s release) doesn’t mean all is well. One wants to know how much slack there is in the economy. This is shown in Figure 2:
Figure 2: Log output gap; and forecast output gap using WSJ April mean forecast, and trimmed high. Source: BEA, CBO, WSJ April survey.
What this demonstrates is that, taking the CBO’s estimate as given, even now the output gap is on the order of 6 ppts of GDP (in log terms), and will be only slightly under 5 ppts by year-end (4 ppts, using the trimmed high forecast).
We should’ve passed a bigger stimulus package…
It’s hard to see a succesful second half of the year without strong export growth. The IMF has just forecasted 1% growth in the Eurozone for 2010;does this bode poorly for second half US GDP growth?
“We should’ve passed a bigger stimulus package…”
Or, maybe the Fed should’ve gone to a less than zero interest rate policy {tongue in cheek}.
The logical disconnect, that I see at least, is that we’ve got a combination of a moderately strong recovery coupled with an “emergency” policy, near zero interest rate, that has continued long after the apparent emergenct has passed. The Government can only talk out of both sides of its mouth for so long.
Gentlemen (and gentle ladies…?), adjust the real GDP for gov’t spending and personal transfers and what kind of “recovery” or “expansion” is there? The answer is that the US private economy is still contracting.
Bank charge-offs and delinquencies total 10-11% of loans, which not coincidentally is equivalent to 8-9% of private GDP or the incremental amount the federal gov’t is borrowing and spending. Banks’ net interest margin is roughly the rate of charge-offs (well below the margin-charge-off differential during the early ’90s Kuznets Cycle bust), which combined with delinquencies means banks aren’t going to be expanding lending for the foreseeable future.
And then what happens if or when the gov’t is no longer borrowing and spending at 8-9% of private GDP and the Fed is no longer printing at 12-13% of private GDP? Again, the answer is that they cannot stop borrowing and spending, and the Fed is not going to execute a QE “exit strategy”. If the gov’t stopped borrowing and spending at 8-9% of private GDP, the natural tendency of the private economy would be to decelerate further, i.e., “multiple dips” for years to come.
Further, adjust GDP for growth of household debt service and gov’t spending, and the private sector of the US economy has not grown in 30 years!!!
Then adjust the private GDP further for the growth of net fossil fuel import costs, and the US private sector has not grown since the early to mid-1970s!!!
What we have referred to as “growth” for 30-40 years is growth of private sector debt and gov’t spending, as well as borrowing increasingly from fossil fuel energy stores from cheap labor product abroad in exchange for purchasing imported goods with credit.
But soaring private and public debt to incomes and private GDP combine for a MASSIVE claim on future after-tax incomes, consumer spending, business revenues and profits, business investment, and employment.
And the drawdown of energy stores from abroad with China’s oil consumption on track to match US oil imports by the late ’10s to early ’20s virtually ensures structural constraints to global economic growth from rising energy import costs (falling net energy), increasing the risk of trade and diplomatic tensions and escalating war. And war in the current context of Peak Oil and fiscal constraints raises the risk of sovereign defaults and a complete breakdown of global trade.
Finally, if one has the personal or intellectual courage, I challenge anyone reading this to compare the current US situation to that of Japan after ’97-’98, the point at which the peak Japanese Boomer demographic drag effects and price-deflationary effects took hold. Japanese bank loans fell 40% over 6-7 years; stock prices fell peak to trough 65-70%; the implicit deflator contracted; nominal GDP went nowhere; real GDP post-’90 trend decelerated from 2.1% in ’96 and 1.6% in ’00 to less than 1% to date; and despite the BOJ expanding the monetary base at a double-digit rate, M1 following the monetary base, and free reserves exploding, M2 barely grew at an average 2%, with the net incremental amount attributable mostly to the Japanese gov’t running deficts/GDP of 5-6% and from ongoing liquidation of financial assets to cash.
The overwhelming consensus among the majority Keynesian economists is that we’re not Japan, and “it can’t happen here”; however, “it” is happening, and remarkably closely to the progression in Japan, with the US now aligned in time with Japan in ’99-’00, and during Long-Wave debt-deflationary eras of the 1830s, 1890s, and late 1930s.
But the global economy during the previous debt-deflationary regimes of the various stages of capitalism’s history did not face the global structural constraints posed by population overshoot and Peak Oil (peak drawdown or extraction of petroleum). The economics textbooks do not contain accurate description of today’s systemic effects and related causes; nor do any of the conventional economic prescriptions offer any viable solutions.
And now with China maniacally on a suicidal course of unprecedented growth of consumption and resource drawdown, we face an increasing scale of intractable structural constraints to economic growth the world over.
Yet the vast majority of economists are virtually uninformed, if not woefully misinformed, about economy history; the inherent, self-contradictory flaws of capitalism; the reliance of socialism on capitalism’s perpetual growth; the flawed colonial/imperial nature of Anglo-American “globalization” and the prohibitive costs of war to sustain it; the ecological limitations on perpetual growth; and the diminishing returns to increasing complexity and the growing risk of disorganization, disintegration, collapse, and unpredictable self-organization.
Yet, economists continue to espouse more gov’t borrowing and spending (and larger claims on future private growth), more complex tax schemes, more redistribution and loopholes, more debt, more deindustrialization and financialization of the economy, etc.
Economics has become hardly more than a means for intellectual rationalization of militarist-imperialist oil empire and running cover for the rapacious rentier parasites on Wall St.
The best investments every economist could make today for the rest of us would be (1) a large mirror and (2) a new occupation.
And for any economics undergraduate or graduate students reading this, especially those toiling in post-doc purgatory, do us all a favor and quit. Do something worthwhile with your intellect and life, PLEASE!!!
Hi Menzie, nice post as usual. I do have a bone of contention with the manner in which forecasts are reported in general (whether the administration, professional forecasters, etc.). Without a measure of forecast uncertainty, it is difficult to evaluate when a forecast is “rosier” or “gloomier” than another. I will readily concede that confidence bands, specially for long-range horizons, would probably reinforce Nemesis’ argument that we all (economists) try our hand at a different profession (nuclear physics, neurosurgery?). Surely the error bands are very wide. But then, perhaps we would be less quick to condemn the Council of Economic Advisors for predicting a year in advance that current unemployment would be around 8-8.5% rather than the current 9.7%. A quick and conservative back of the envelope calculation suggests that the “awful” forecast of 8.5% unemployment, easily contained any range between 6% and 10.5% with 95% confidence.
Nemesis is right for today in playing both roles including Cassandra s role.
There will be opportunities for economists once the Augeas stables will be cleaned and the hubris of the financial world will be given a Prometheus fate for setting fire to the economies.The futures and derivatives have provided a world of cyclopes where economists had little room to see.
The Danaids will need extended support not only to water down the debts but to monitor them,projects financing will come back at the front seat of the economies and they will rely upon macro and micro forecasts.
Sysiphus may not triumph in spite of Thales help.
PS Was the sale of psychoactive drugs legalized in the antic Greece?
In December there was not a massive difference between the administration and private forecast — both essentially reflected the reluctance of economist to forecast anything but a weak recovery. Part of this is due to no one being willing to buy a strong recovery forecast.
But in the case of the Japanese lost decade or in the US long depression of the late 1800s neither economy experienced the type of deep recession we just went through. In both cases the economies experienced a series of mini-cycles around an essentially flat trend. But because we have had a deep recession it is possible to experience a year or two of relatively strong recovery and still be in a type of Japanese long run stagnation and/or deflation.
Nemsis could be right in the long run, but wrong in the short run.
Menzie wrote:
We should’ve passed a bigger stimulus package…
What an outstanding idea! Just imagine, if the government confiscated all savings and taxed all asset values at 100% then spent that on building roads to nowhere and government skyscrapers named after politicians our GDP would go through the roof!!
It’s sad the credit for the turnaround in the economy goes to the stimuLOL package instead of the resilience of the US Economy and US workers.
Obama says we’re going to Mars!
Something to spend money on there. At least critics can’t say Mars is nowhere. It’s a bonafide planet and we can even point to where it is!
I’ll bet Menzi is working up a GDP multiplier for the MarsStim package, even as we speak.
It would be a disaster if we didn’t learn from the Mistake of ’37.
Now going to Mars is all that it takes to make me happy, but I do sometimes wonder how the unwashed masses feel about it. Like would the Tea Party be for or against, or maybe they are still conflicted about what position to take? It is now a Kennedy-Obama idea, but historically Reagan-Bush(s) tried to make it their idea. Does anyone here know what the Tea Party position is on this issue?
I don’t want anyone(especially Nemesis) to under appreciate how BIG this going to Mars thing can be.
I toured the Kennedy Space Center a few years back and they had one of the first space suits on display and noted that it cost $300,000. That was in 1960 something dollars, so I was hoping that maybe one of the economists hanging around here with not much to do could use one of those deflator things and update space suit prices to, say, 2005 dollars.
Then, since we are borrowing the money for space suits, maybe do a 20 year projection and show us how space suits actually get cheaper as a percent of GDP? In the out years, of course.
Now they always like to remind us of the commercial spinoff opportunities from the Space Program, and I think we could get Gucci or Calvin Klein interested in the selling price, and they would probably be a little more imaginative with the colors, and pick out something a little racier than the boring white that NASA choose. So licensing opportunities here, I think.
They also had a very, very large building with a Saturn 5 suspended horizontally from the ceiling. Very impressive looking, but they didn’t say how much one of those costs.
The space program is always worth its money because of all the spin-off innovations and products that result. We wouldn’t have ‘memory foam’ matresses today if it wasn’t for the Apollo program and heaven knows where we’d be today without that. How would the TV stations ever fill those late night infomercial spots?
John,
True. I feel like a billionaire whenever I sleep on my memory foam mattress.
As far as infomercials go, could I interest anyone in Low G Toilets?
Dan,
I remain perplexed as to how most economists miss glaring, fundamental imbalances. Perhaps they have more to study once it blows up. In the mean time, let’s ramp up aggregate debt to GDP to 400% and see what happens!
Oscar Jorda: Thanks for the compliment. I agree completely, that in terms of statistical significance, there was probably not a difference between the CEA, CBO and private forecasters in terms of statistical significance at the conventional levels.
Zeus: Regarding PS, I don’t know for sure, but there seems to have been some use of psychotropic fumes at Delphi.
Allen C: You should really read more widely; there were many economists who warned about imbalances (like I did).
Mars?! How appropriate for Anglo-American oil empire, increasingly overstretched and spending 10-11% of private GDP to fight endless wars for oil (and opium) and maintain 1,000 military facilities around the world, to be possessed of such self-delusion and hubris to set sights on a planet named for the god of war!!! That is just too much, gents!
You have got to be bloody kidding, yes?!
We are unquestionably on the road to eventual fiscal insolvency from Boomer elder transfer programs and imperial war spending, and we implement an additional Medicare drug transfer program under “Dumbya”, and now under “Yomamma” pass another “sick care” entitlement and “cap-and-tax” anchor to hang securely from our necks.
If I were a bit more cynical I might conclude that the politicos and rentier Power Elite want the current gov’t structure insolvent, and the sooner the better, so they can rationalize draconian cuts to social transfer programs, impose sick care rationing, etc., and demand a sovereign debt-for-equity swap resulting in the top 0.1-1% owning all current public and private assets.
Then the logical socio-political evolutionary extension of rentier capitalism could occur, ushering in the glorious private “state-less society”. The rentier oligarchs don’t need egalitarian, representative political institutions, “the economy”, and growth; rather, what they really did is the uncontested control of all valuable resources and the means to keep it. The remaining 80-90%+ of us proles are just a bunch of envious, worthless bread gobblers whining about being losers and wanting something for nothing.
Nah, ya think?
And talk about “imbalances”! Is anyone aware that we now spend a record 4-5% of private GDP on net fossil fuel imports. And consider that net fossil fuel imports, total gov’t spending, and household financial debt obligations per disposable income amount to an equivalent of 75% of private GDP!!!
Moreover, combined household debt service, total gov’t, fossil fuel imports, and sick care spending total and equivalent of more than two-thirds of GDP and 105% of private GDP!!!
Growth? Only if gov’t, debt, and sick care grow in aggregate faster than rising fossil fuel imports and deflating assets/debts.
And we now face Peak Oil or global peak extraction or drawdown of petroleum reserves with US supranational firms running as fast as they can to invest in China-Asia and encourage consumer markets so that the Asians can “be like us”: dependent upon shrinking oil supplies, hopelessly in debt, and unable to sustain living standards.
How in the name of bloody Hades can anyone one with a brain stem think that the US economy (or eventually the global economy) can grow, let alone fund endless wars for empire in perpetuity and go to a bleeping inhospitable planet 33 million miles away?!
Quem deus vult perdere, dementat prius.
Nemesis
All we need is a VAT on fossil carbon.
The pump and dump incentive short term capital gains tax cuts caused lots of malinvestment in pursuit of tax avoidance profits from innovation.
Heavily tax burning fossil fuels and that same tax avoidance incentive will drive innovation and what lots of Reaganomics economists call malinvestment in labor intensive low return green capital investment as Wall Street seeks profits.
With a decade of such investment with high employment growth and the resulting economic growth, fossil fuel prices will fall dramatically and the conservatives will be shouting “malinvestment in green capital investment” and promise that if elected they will restore America to a fossil economy by cutting the carbon VAT and put ten million Americans on the unemployment line.
mulp: Nuance. The USA could benefit from a big VAT (value-added taxes on all goods & services) but you what you want are excise taxes on fossil fuels. Whether the excise taxes are proportional to energy intensity, weight, volume or estimated carbon emissions is in the larger picture, a detail. Mind you, for political marketing purposes, it may be an important detail.
Another option would be to tax dirty fossil fuels based on their contribution to the growing obesity epidemic. I suspect that would less politically popular.
“You have got to be bloody kidding, yes?!”
Funny, that’s what I say every time I read one of your ranting posts. I really wish the comments section was more sincerely policed. Lately it’s dominated by this sort of thing, little more than a thin ‘economics’ disguise for blog advertisements and political rants.
MPO: In the interest in the open exchange of ideas, we do not police except for profanity and the odd racist comment. If I policed for comments, I might excise such ranting comments such as: “Menzie, why is it that you rarely if ever seem to be so confused by left-wing “analysis”?”
MPO, denial is a powerful coping mechanism for us human animals, and I don’t begrudge anyone’s use of it in an attempt to cope with what we as a species face in the decades ahead.
I have no political or ideological axes to grind, so to speak, as I am apolitical and areligious.
GNP, as for taxes, why do we tax labor, production, savings, and capital accumulation while subsidizing debt, rentier speculation (and the capturing of surplus value from land and labor for years to come), war, oil imports, waste and pollution, traffic jams, and so on?
Why are workers, the self-employment, capital accumulation, and production punitively taxed and rentier speculation and war so preferentially treated in the English-speaking world?
Thanks, Menzie, for your forbearance.