Automatic Economic Growth for the Next President? Not So Fast.
Throughout this election cycle, we’ve heard a good deal of happy talk regarding the state of the economy. Bloomberg comes out and says it today – the economy will improve, regardless of the occupant of the White House.
No matter who wins the election tomorrow, the economy is on course to enjoy faster growth in the next four years as the headwinds that have held it back turn into tailwinds. Consumers are spending more and saving less after reducing household debt to the lowest since 2003. Home prices are rebounding after falling more than 30 percent from their 2006 highs. And banks are increasing lending after boosting equity capital by more than $300 billion since 2009.
“The die is cast for a much stronger recovery,” said Mark Zandi, chief economist in West Chester, Pennsylvania, for Moody’s Analytics Inc. He sees growth this year and next at about 2 percent before doubling to around 4 percent in both 2014 and 2015 as consumption, construction and hiring all pick up.
The big proviso, according to Zandi and Yale University professor Ray Fair, is how the president-elect tackles the task of shrinking the $1.1 trillion federal-budget deficit. The Congressional Budget Office has warned that the U.S. will suffer a recession if more than $600 billion in scheduled government- spending reductions and tax increases — the so-called fiscal cliff — take effect next year.
I hope you can spot the forced assumptions here. The budget deficit has kept growth afloat over the past couple years; without them we would probably be mired in a double-dip recession. When this claim that the economy’s health depends on how shrinking the budget deficit gets managed, what a legitimate economist means by that would be how LITTLE deficit reduction gets done in the near term. This makes it sound like the deficit’s size matters for growth, but in the opposite direction.
This confusion sits at the heart of our political debate. Nobody understands, or more precisely nobody wants the public to understand, that the deficit is not a contributing factor to a poor economy, but an outgrowth of it. Nor to they want the public to understand that there are a finite amount of inputs for the economy, and when consumer spending and trade and investment lag, government purchases are the last resort for any growth to occur.
Now it could be that consumer spending has reached or will reach an escape velocity, and an improving housing market (thanks to the artificial constraints on supply and propping up of demand by institutional investor cash purchases of single-family homes that they intend to rent) will lead a recovery to the extent that cutbacks on government purchases won’t torpedo growth. But that’s just not likely in the immediate term, especially with the amount of deficit reduction proposed.
I think there are substantial ways in which Congress can bungle a recovery that is in no way predetermined. Moreover, even if the economy rebounds by, say, 2014, by that point there will have been five straight years upward in the business cycle, and the trend would be for another downturn shortly thereafter. I don’t have confidence in the upside case for automatic growth in the next President’s term. Especially if they don’t sell out with all the resources at their disposal to encourage it.
I do think it’s a close call as to whether a Republican in the White House would be more positive for short-term growth relative to a Democrat. It depends on how much you think they would tolerate higher deficits. I don’t think the Tea Party has been tested on this front, regardless of the historically accurate take that Republicans have produced higher deficits.