More at the link.
By PHIL IZZO | Updated February 7, 2013, 2:07 p.m. ET
Economists are forecasting the same steady, if unspectacular, growth this year that they were expecting in 2012. Last year’s predictions proved too optimistic, but they say this year the economic fundamentals are sturdier.
At the start of last year, economists surveyed by The Wall Street Journal were on average predicting 2.4% year-over-year growth in gross domestic product for 2012. The Commerce Department last week said the expansion was a more tepid 1.5%. It was the second year in a row that actual GDP came in below economists’ forecasts.
For 2013, the economists again expect the economy to grow 2.4%, but they see more underlying strength this year.
“We’re definitely in a better place now than at this time last year,” said Arun Raha of Eaton Corp. who was the most accurate individual forecaster for 2012, achieving a near-perfect score under the Journal’s methodology, which was developed by economists at the Federal Reserve Bank of Atlanta.
The economists said that, if there were to be a surprise, it would more probably be a positive rather than a negative one.
Well, perhaps. Economic forecasting is an inexact science, to say the least, and it has been said before that if you ask five economists a question, you’ll get six different answers. We squandered over $800 billion on President Obama’s 2009 stimulus bill, and the results achieved were nowhere close to the promises made to sell the bill. The economists surveyed got the unemployment rate wrong as well: they were anticipating an 8.3% unemployment rate at the end of 2012, when the official number came in at 7.8%, half a percent lower. Your Editor is certain that these economists are all highly educated people, well-trained and well-respected in their field, but they simply missed, and by fairly significant margins. Perhaps one might ask just how much we ought to rely on economic projections by the experts in setting policy.
According to the JOURNAL story, the economists assumed that the impending sequester occurs on time on March first, and that it has a 0.6 percentage point drag on the economy. The editors of the JOURNAL are less worried:
Washington is in a fit of collective terror over the “sequester,” aka the impending across-the-board spending cuts. Trying to explain the zero economic growth at the end of 2012, White House spokesman Jay Carney blamed Republicans for “talk about letting the sequester kick in as though that were an acceptable thing.” He left out that President Obama proposed the sequester in 2011.
Then on Tuesday Mr. Obama warned about “the threat of massive automatic cuts that have already started to affect business decisions.” He proposed tax increases and “smaller” spending cuts to replace the sequester until Congress and he can agree to another not-so-grand-bargain. It’s nice to see Mr. Obama worry about “business decisions” for a change, but listening to his cries of “massive” cuts is like watching “Scary Movie” for the 10th time. You know it’s a joke.
The sequester that nobody seems to love would cut an estimated $85 billion from the budget this fiscal year starting in March. Half of the savings would come from defense and half from domestic discretionary programs. Medicare providers would take a 2% cut. This “doomsday mechanism,” as some in the Administration call it, was the fallback when the White House and Republicans couldn’t agree during the 2011 debt-ceiling negotiations.
More at the link.
The editors were helpful enough to include a table of just what would be cut by the sequester, and it shows demonstrates one thing: spending was increased far too much during the first part of President Obama’s term, and the sequester doesn’t cut spending back far enough.
The problem is that discretionary spending was increased by 87.5% over just three years, and even that number has been held artificially low due to the fact that Defense spending grew by only a modest amount.1 When you look at the other areas, they all had well over 100% increases.
President Obama wants to avoid the sequester, because he is in no way serious about reducing government spending.
The most disingenuous White House claim is that the sequester will hurt the economy. Reality check: The cuts amount to about 0.5% of GDP. The theory that any and all government spending is “stimulus” has been put to the test over the last five years, and the result has been the weakest recovery in 75 years and trillion-dollar annual deficits.
Your Editor disagrees: the theory that any and all government spending is “stimulus” has been put to the test over the past 224 years! However, my definition is somewhat different: I would argue that deficit spending, not all government spending, constitutes stimulus, because it involves spending more than it removes from the economy in taxes. Money borrowed internally can be thought of as a rearrangement of investment, in that the money loaned to the government through the purchase of Treasury Bills would (mostly) have been invested in other things had the government not been selling T-Bills, but money borrowed from foreign lenders constitutes what is essentially the importation of money, and that is all direct stimulus.
It is also a direct drag on the future. Interest payments and bond redemptions made to Americans keeps the money, keeps the liquid return on our production, in our economy, but payments to foreign debt holders is the direct removal of the fruits of the production of the American taxpayers from our economy, and slows down the velocity of money.
I support allowing the sequester to proceed as planned: spending has to be cut. I would cut spending in areas different from what the sequester will do, taking less from Defense and more from domestic spending,2 but I would rather see the sequester go ahead, in its current form, than to see the amount of the cuts reduced.
- There would have been a significant reduction in spending, regardless of who was President, as the expenditures for the war in Iraq ended. ↩
- This would actually have the effect of lowering spending in the out-years. Defense spending needs will be coming down anyway as the war in Afghanistan draws down, and lowering domestic spending now will mean a lower baseline for future domestic spending. ↩