|FLOYD NORRIS, Floyd Norris comments on finance and the economy at nytimes.com/economix.|
The part of the past that you deem most relevant can be critical in determining your outlook for the future. And nowhere is that clearer than in the changing economic forecasts that come out of the
This year's short-term and long-term economic forecasts are substantially worse than last year's, even though the economy performed better than expected in 2013. What changed was that the C.B.O. economists essentially decided that they would no longer treat the recent years of poor economic performance as a sort of outlier. They have seen enough of a slow economy to begin to think that we should get used to sluggishness.
They think that Americans will earn less than they previously expected, that fewer of them will want jobs and that fewer will get them. They think companies will invest less and earn less. The economy, as measured by growth in real gross domestic product, will settle into a prolonged period in which it grows at an average rate of just 2.1 percent. From 2019 through 2024, job growth will average less than 70,000 a month.
Not only do they forecast an economy with less growth than in any comparable period since the Great Depression, they think interest rates will rise substantially, to the great discomfort of the federal government, which will have to pay ever-rising amounts of interest to service the rising national debt.
It is a dreary, depressing prospect.
It is also almost certainly wrong.
Why is it wrong? It is highly unlikely that we will have both an anemic economy and high long-term interest rates. Both are required to achieve the dire budget consequences forecast by the C.B.O. One would not be enough.
''If we are bound to settle into a world of limited growth and low inflation,'' said
Of course, forecasts are often wrong, and economists, like the rest of us, can have different views. But the C.B.O. forecast has an official nonpartisan imprimatur. Its views are likely to shape congressional debate and action.
This is reminiscent of one of the great errors committed by the C.B.O., back in 2001.
The late 1990s were a boom time in which tax receipts came in well above forecasts year after year. The C.B.O., to the annoyance of many in
Then, in its outlook issued at the beginning of 2001, the C.B.O. gave in. It decided that the increase in tax receipts was permanent and forecast that it would continue. ''Most of the improvement in C.B.O.'s budget outlook,'' it said at the time, ''results from changes in economic projections.'' It said growth would be greater, interest rates lower and revenue higher than it previously expected. By 2006, budget surpluses would have paid off all the outstanding Treasury securities.
That forecast was among the worst in history — and not just because the newly inaugurated president,
The reason was the unusual nature of the technology stock bull market. It had to do with all the stock options that were being issued and cashed in, making lucky insiders fabulously rich. They paid taxes on those profits at ordinary income tax rates.
In normal times, such increased individual tax receipts would be offset by lower corporate tax payments because companies can deduct every dollar of option profit as an expense. But much — perhaps most — of the options profits in the late 1990s and 2000 went to executives from companies that were not paying taxes. Many of the companies had never earned a penny; some never would. They had no use for an additional tax deduction.
When the bull market collapsed, options profits stopped arriving. Tax receipts would have plunged even if there had been no Bush tax cuts.
What that error has in common with this year's report is that in each case the C.B.O. decided to change its assumptions to bring its forecasts more in line with recent history.
''Most of the increase in projected deficits results from lower projections for the growth of real G.D.P. and for inflation, which have reduced projected revenues between 2014 and 2023 by
One change the office has made is to assume that the labor force — the pool of people available to accept jobs — is going to continue to decline as it has during the recession and its aftermath. Part of the decline is the result of demographics, with a larger part of the population past normal retirement age, but much of the rest has until now been viewed as most likely temporary.
In a speech this week to the
One reason for that predicted decline is the Affordable Care Act, or Obamacare. The C.B.O. estimates that a significant number of workers have continued to work primarily because they need health insurance at a reasonable cost. With such insurance available, they will choose to retire.
That hardly sounds like a problem for the economy. Those who do choose to retire presumably will be happier and can afford to do so. Others will be promoted into their jobs and will in turn be succeeded by others. Eventually, that will help some unemployed people obtain jobs.
But the C.B.O. does not see that as good news, at least in the long term. The assumption is that the number of jobs filled is a proportion of the number of people seeking work, and that if fewer people are looking for work, fewer people will be getting work. As a result, there will be less national income and thus less tax revenue.
There is one economic theory that would justify a forecast of higher interest rates when the economy is weak. That is a crisis of confidence, as illustrated by some peripheral economies in the euro zone. The more they needed to borrow, the more fearful of possible default the lenders became and the higher the interest rate they demanded.
There is no sign that is happening to
That is what has happened in
The C.B.O. assumes that productivity growth will be much lower than it had expected and far below what it was in previous cycles. It assumes that as budget deficits pile up, private borrowers will be crowded out of the market and that as a result there will be less business investment and even less growth, causing tax revenue to fall further.
There is a risk that those who fear deficits will seize on this forecast to argue that much more austerity is needed now — a move that would only serve to slow the economy and make dire forecasts more likely to be accurate.
I have no reason to doubt that the economists at C.B.O. are sincere in their pessimism. But it would be good if there were an alternative forecast out there — one that assumes the sky is not going to fall, and that the fact the economy has been weak does not indicate that it will always be so, any more than the strong economy of the 1990s was proof that the strength would endure indefinitely. Perhaps a group of economists, possibly including some C.B.O. alumni, will take on that task.
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