CBO: largest growth shortfall since the Great Depression

 The Congressional Budget Office's new director, Douglas W. Elmendorf, testified on the state of the US economy before the House Budget Committee today. It makes sober reading.

An accompanying blog post summarises his three key points:

1. The economy is currently weathering a recession that started more than a year ago, and absent a change in fiscal policy, CBO projects that the shortfall in the nation’s output relative to potential levels will be the largest– in duration and depth– since the Depression of the 1930s.
   
2. Most economists agree that both significant fiscal stimulus and additional financial and monetary policy approaches are needed.
3. H.R. 1, the American Recovery and Reinvestment Act of 2009, would, in CBO’s judgment, provide a substantial boost to economic activity over the next several years relative to what would occur without the legislation.

Somehow the low key style makes these conclusions seem all the more compelling.

Comments

[Arthur Eckart]

Doses of reality:

The link below of key economic indicators shows the current recession is milder than the 1981-82 recession. This is the first severe recession since 1981-82 (which people forgotten or didn't live through) and there's no comparison to the Great Depression:

http://1.bp.blogspot.com/_otfwl2zc6Qc/SXJpb7gtIdI/AAAAAAAAI2o/TfwWkMoez4A/s1600-h/indicators.bmp

The second link shows the growth in world per-capita real GDP between 2002 and 2008 is one of the greatest periods of economic growth:

http://2.bp.blogspot.com/_otfwl2zc6Qc/STCkwME3I2I/AAAAAAAAH3c/ee8RtszfDt4/s1600-h/world.bmp

The real U.S. economy of the 2000s has generally been ignored, including the overabundance of real assets and goods, that raised household living standards at a steeper rate, substantially greater efficiencies of firms, in producing more output with fewer inputs, and the government borrowing almost for free. It's amazing there were enormous real improvements in the U.S. economy, that were greater than the 1990s, during a structural bear market that began in 2000, after the spectacular structural bull market from 1982-00.

Obamanomics: Creating a Suboptimal Economy

In the 2000s, it was wonderful to see uneducated Third World immigrants, who would have earned a few dollars a day in their home countries, if they could get a job, living in big houses, driving in almost new minivans or trucks, able to buy goods cheaply, etc. in the U.S., while 20% of U.S. households earned over $100,000 a year, e.g. in the high-tech industry. The U.S. created enormous capital (e.g. a record 20 consecutive quarters of double-digit U.S. corporate earnings growth) and there were massive foreign capital inflows. The U.S. had a virtuous cycle of consumption and investment. Cheaper goods and cheaper capital induced demand. Currently, Americans are stocked-up with real assets and goods to weather this recession better than any other country.

However, big change is coming. The new adminstration wants China to trade its goods for U.S. goods rather than for worth less paper. Also, the cost of domestic production will rise, because of hostile anti-business policies, which will raise prices and create less capital, resulting in less real output. Moreover, government will become a larger proportion of the U.S. economy, e.g. through the creation of "green-collar" jobs, and many other high-cost jobs. So, Americans will work harder and longer for fewer and smaller real assets and goods. The cost of living will rise in many ways, including through disincentives for productive workers and incentives for less productive workers and the unproductive. The government is now micromanaging the economy, since the free market has been a complete failure.

U.S. Economy Expanded 1.3% in 2008

To prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009):

1. Obama should change his stimulus plan to a $2,000 tax cut per worker (in the form of a tax holiday), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.

2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

[pbr]

It would be logical to look back and suggest that America is what has become by the innovation of a few, the wealth of a few, the commitment of a few - to its ongoing prosperity for all, but that would be disingenuous, to say the least.

For all of the commercial fame-enveloped grand promotions of marketing, America got where it is by the hard work and commitment of millions doing what Americans do every day - invest in itself. Every great country shares the panorama of such paragigms.

What took decades and centuries to develop, however, can be torn down in seconds by the wrong ideals, the wrong methods, and the wrong vision for America, as it can for any nation.

Being true to itself means understanding itself and trying not to be something it isn't, no matter how much glitz and glamour lie in wait for the few self-aggrandized among us who would destroy America for increasing their own self worth.

Many think this might be viewed as underestimating the economic climate and what it can produce; others imagine it as long term vision and common sense.

Economic policies that reward the few and disregard the many, and their aspirations, have always been doomed to failure throughout history, and offer the pleasures of short term glory at best. When can mankind get it right?

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