They say that the essence of futility is to keep doing the same thing while expecting a different result. But is that what key government forecasters are doing in determining their outlook for the economy?
Throughout the halting economic recovery that began in 2009, the formal economic projections released by the Congressional Budget Office, White House Council of Economic Advisers, and Federal Reserve have displayed quite a consistent pattern: This year may be one of sluggish growth, they acknowledge. But stronger growth, of perhaps 3.5 percent, is just around the corner, and will arrive next year.
Consider, for example, the Fed’s projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012.
What’s amazing is that the Fed’s newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015.
This isn’t meant to pick on the Fed; the same is true of other forecasters both in the government and the private sector. The Economic Policy Institute captured the CBO’s proclivity for projecting growth just around the corner in the chart below, from a briefing paper released last week. Essentially, this shows how as the years have passed, the CBO just keeps pushing back the timing of a genuine recovery—the time when the U.S. economy’s output has returned to the agency’s estimate of its potential—further and further. In early 2009, the CBO thought we would be back to full employment right about now; in their outlook released earlier this month, that was more like 2016 or 2017.
The overly optimistic forecasts have rested on one crucial assumption: That if we can just get through this rough patch, the natural forces of economic regeneration will assert themselves, and growth will snap back into place.
One explanation would be that these forecasts have only been undone by bad luck: Everything from the Japanese tsunami in 2011 to the Eurozone debt crisis to America’s confidence-rattling fiscal policy brinksmanship. If only we didn’t have such bad luck, we would have had the 3+ percent growth those forecasts called for, as this logic goes.
Maybe. Here’s the thing, though. Advocates of the bad luck theory don’t want to grapple with the fact that there has been some good luck over the last three years as well. Natural gas prices have been falling, a positive supply shock from the U.S. energy sector. Global oil prices have been fairly stable, bouncing around in a range between $70 and $110 a barrel since the start of 2010, well below levels in the summer of 2008 (current price: $95.84). Europe has been a disaster, but many emerging nations, including China and Brazil, have remained global growth juggernauts. China, a major U.S. trading partner, has allowed its currency to rise 8.5 percent against the dollar, making American companies comparatively more competitive. It’s hard to measure whether the negative shocks or positive shocks are, on net, more powerful; but it’s hard to argue that this has been a period of overwhelmingly negative luck for the U.S. economy.
More persuasive is the case that there are things about a financial crisis that make it hard for the economy to regenerate. Breakdowns in the financial system mean that low-interest rate policies from the Fed don’t have their usual punch. An overhang of household debt means that consumers hold their wallets more than usual. Federal fiscal stimulus to offset those effects is now long-over, the political system too paralyzed to do more, and state governments have been pulling back over the last three years.
There’s an important broader point here, however. Economic forecasters tend to look at past experience and extrapolate; in the past, when there has been a recession, the very forces that caused the recession become unwound, sowing the seeds for expansion. People stop buying cars and houses during a recession, and then when times improve, there is a burst of activity.
But the financial-crisis-induced recession of 2008-2009 was so deep that it had deep-seated effects that go beyond those explained by those traditional relationships. It messed up the workings of the financial system, and banks are still trying to figure out what the new one looks like. It may have sparked a permanent (or semi-permanent) shift in how consumers and businesses think about their desired levels of savings. Its toll was so great that it made political dysfunction worse; recall in early 2008, the Bush administration and a Democratic Congress came together to pass a modest stimulus package; it is hard to imagine such a thing happening now.
Eventually the forecasters will be right, and the U.S. economy will grow at 3 or 4 or 5 percent and return to its full potential. Unfortunately, we don’t know how long “eventually” might be.