President Obama’s budget released last week naturally has lots of people agog. Its plan, outrageous on its face, is to take spending past $4 trillion and as much as double the income tax on high-earners, while supervising strong real-sector growth and a deficit cut down by two-thirds.
How could you possibly say that a state-sector expansion of that magnitude, with taxes on the capital pool to boot, will carry the economy forward to a promised land of growth and solvency? By having an in-house economic forecast that lets you, that’s how.
On Friday afternoon at 4pm – a great time for a news dump you don’t want analysts to see – the President’s Council of Economic Advisers released its annual report including the growth forecast behind the budget. Guess what? After 3% growth – nearly double the actual pace at present, mind you – this year and next, we’re going to have over 4% growth for two years after that, and then settle to 3.9% and 3.8% for still two further years.
3.6% annual growth for the next six years? That’s the kind of long-term number you see in golden ages like the 1980s and 1990s. They’re coming back!
Only it’ll be better this time. Inflation, you see, will do something it has never done before. It will oscillate in the low band between 1.9% and 2.1% – and this for fully eleven years.
As it happens, the Federal Reserve recently announced that its long-term target is a 2% yearly increase in the consumer price index. To the West Wing forecasters, the Fed, whatever its flair for the dramatic these past few years, stands to nail this number – and not merely on average, but at all moments through 2022.
We could go on. Unemployment down to the Reagan-era low of 5.4%. Interest rates up to levels that don’t give the impression that the economy is in intensive care. On the latter point, the administration forecast has the 10-year Treasury rate going up to 5.3%, about a doubling from current levels.
You’ve got to wonder how the most consistent monetary policy in history (that which will give us the 2% inflation) would cause that t-note rate to jump so. But it must be remembered that people have been complaining that they don’t earn anything at the bank anymore. So the Obama administration gives you that too: you’re going to get good return on your money if you just decide to keep it safe.
To say the forecast is a political document, giving everything to everyone, is to pull a punch. This forecast calls one of the greatest eras of growth, stability, and returns of the entire macroeconomic era. Good thing to have in your pocket for an election year.
The internal inconsistencies drip off the page. How a nation pushing a 75% debt-to-GDP load can see its debt instruments’ interest rates double as the deficit plummets is anyone’s guess, given that interest costs are a prime driver of the debt ratio to begin with. And dare this forecast say that unemployment will shrink, burned as administration forecasters have been in the past on this issue? It will do more: it will brag that it’s too conservative.
No kidding: “The Budget forecast does not reflect the improvement in the job market since the forecast was finalized.”
It’s been said that no presidential economist has ever forecast a recession – though it should be noted that the initial Ronald Reagan scenario of 1981 did, even if it was squelched at the last minute. It’s well understood that these documents exist on the fringes of legitimate economics, however much the fat names in the field contribute to them.
Two years ago, when the Obama forecast saw long-term growth at – you guessed it, 3.6% (including 4.3% in 2011) – the Chairman of the Council, Christina Romer, took the opportunity in the report’s introduction to say that “This past year, the Council has been blessed with staff of a caliber not seen since the glory days of the CEA in the 1960s.”
If these are akin to the glory days, happy talk might be the only thing we’ll have to hang onto over the next several years, as an explosive federal sector threatens the very operating room of a real economy yearning to breathe free.