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The Economy in 2011

After the passage of the tax cut deal, many economic forecasters raised their projections for 2011. Recent economic indicators, including a reduction in weekly initial unemployment claims, an increase in industrial production, factory orders and consumer sentiment, as well as the best holiday shopping season since 2007 have appeared to confirm those forecasts, at least in a preliminary sense. The New York Times quoted several economists predicting a strong 2011 a couple days ago.

Phillip L. Swagel, who was the Treasury Department’s chief economist during the administration of George W. Bush and teaches at the University of Maryland, said, “The recovery in 2011 will be strong enough for us to see sustained job creation that will finally give Americans a tangible sense of an improving economy.”

A prominent forecaster, Mark Zandi of Moody’s Economy.com, predicted that the economy would be “off and running” next year. “The policy response, in its totality, has been very aggressive,” he said, “and I think ensures that the recovery will evolve into a self-sustaining expansion early in 2011.” […]

Jan Hatzius, the chief United States economist at Goldman Sachs, said the economy was likely to grow at an annualized rate of around 3 percent this quarter. Goldman projected last week that the growth rate would be 4 percent for most of 2011. Morgan Stanley, which raised its growth forecast for 2011 to 4 percent, is even more optimistic, forecasting a rate of 4.5 percent this quarter.

I certainly want to believe this. I want there to be a robust recovery to reduce the pain and suffering on our less fortunate citizens. But I think these economists are picking and choosing what to highlight. You can just as easily pick and choose in the other direction and wonder where growth will come from.

For example, for all the ballyhoo of the tax cut deal, for the most part it extends current law into 2011 (and in some cases, 2012). The income tax rates stay the same. Estate taxes are a net increase from their elimination in 2010. Unemployment insurance basically remains in place for those who already get it, and is not granted to the 99ers. The same for the refundable tax credits and most of the business tax extenders. Several safety net measures which were in place for at least part of 2010 go away in 2011, such as increases to Head Start, food stamps and child care programs, the TANF emergency contingency job subsidy, COBRA subsidies and that extra $25 a week for unemployment checks.

The payroll tax cut provides twice as much stimulus as the Making Work Pay tax credit, but importantly, it’s worse stimulus, as more of it goes to people at the high end of the income scale, who are more likely to save it. The bonus depreciation for new investment does increase over current law, and while it’s hard to give that a number, let’s call it $30 billion. Add that to the $60 billion extra from the payroll tax credit, and you’ve got $90 billion in total real stimulus from current law. Now, the National Conference of State Legislatures are predicting $110 billion in state and local budget gaps in 2011, which will have to get offset by spending cuts or tax increases. That’s actually better than 2010. But what it means is that BEFORE YOU EVEN GET TO THE REST OF THE FISCAL YEAR 2011 BUDGET, you’re at a net negative for government stimulus. And of course, there are several opportunities for Republicans to force near-term spending cuts throughout the year.

If government isn’t going to drive a recovery, where will the improvement come from? Businesses are generating big profits, but so far they have not translated those into the kind of hiring that would bring down the unemployment rate. Housing, which traditionally leads the way to recovery, remains a mess. There’s still a yawning gap between existing home sales and new home sales, and with a large shadow inventory I don’t see much home construction getting done in 2011. The impact of the foreclosure fraud crisis depends on where you live, but either the banks are able to fast-track foreclosures, which is terribly destructive to local economies, or the foreclosure market has basically shut down. Without an actual resolution, the latter just creates mass confusion in the market and hurts the economy as well. Banks are resisting the kind of solution which would break the logjam in housing, stabilize prices and lead the way out. As a result their balance sheets remain shaky, their risk remains high, and lending suffers as a result.

Perhaps people are tired enough of austerity that consumer spending will just zoom the nation to recovery. Perhaps some manufacturing miracle will turn the trade imbalance on its end and lead to job growth in America rather than abroad. Perhaps quantitative easing is getting money off the sidelines without the negative effects of inflation (although that will probably end by the middle of next year).

But I haven’t seen one forecast that shows the unemployment rate under 9% at this time next year. I don’t know how you can be optimistic about the economy over the long term when you concede almost three years of unemployment over 9% (and of course, that’s just the topline number; the real number is much higher). I see no energy or fervor at any level of government to bring that number down. And I see no willingness among the private sector to generate the kind of growth necessary to reduce that number.

Really hoping I’m wrong here.

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David Dayen

David Dayen

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