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Posted at 4:35 PM ET, 02/14/2011

Is the administration being too optimistic, cont'd

By Ezra Klein

I mentioned earlier that the budget includes more optimistic economic predictions than what the Congressional Budget Office is using. This in turn makes the projected budget deficit smaller. In a briefing today, Austen Goolsbee explained where his numbers were coming from, and notes that the administration's projections are more pessimistic than the consensus projections of private-sector forecasters:

Four short points: The first is that the forecast that we use has to be locked in for planning purposes as of mid-November of last year, so it predates the tax deal. As you know, many of the private forecasters upped their forecast based on what was in the tax deal, and most of that is not in the forecast.

Number two, real GDP growth on a year-over-year basis, the administration is forecasting 2.7 percent in 2011, 3.6 percent in 2012, 4.4 percent in 2013. So our growth rate for 2011 is a fair bit lower than the consensus of private forecasters surveyed by the blue chip or by the Survey of Professional Forecasters.

The longer run we anticipate catching back up, that the potential GDP of the United States has not been severely damaged by this recession. So our medium-run forecast is a bit faster. It’s within the so-called central tendency that comes out of the Fed FOMC forecast of last November, which is a -- the reasonable range in which they drop off the highest and lowest. It is rather in the center of that central tendency.

So over a five-year period -- the typical recession since World War II has been followed by a growth rate of a little less than 4.2 percent over five years. Our forecast is about 3.8 percent over five years. So it’s slower than the typical recovery and we assume that because it’s harder to get out of a financial recession.

The third point I’d raise is that the unemployment rate in our projection is that at the end of 2011 it would be 9.1 percent; by the fourth quarter of 2012, it would be 8.2 percent. That was obviously made in mid-November. The unemployment rate currently stands at 9.0 percent. Unemployment is likely to fluctuate through the year, but any revisions that we have will come out at the mid-session review.

Finally, for inflation we’re projecting that in 2011 the CPI inflation will be 1.3 percent -- so actually decline from where it is now. It’s very much in line with other professional forecasters, and that in 2012, 2013 and beyond we’d go back to something like the Fed’s and others’ 2 percent inflation level.

As I said in the original post, this one is too technical for me to judge.

By Ezra Klein  | February 14, 2011; 4:35 PM ET
Categories:  Budget  
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Comments

"So over a five-year period -- the typical recession since World War II has been followed by a growth rate of a little less than 4.2 percent over five years. Our forecast is about 3.8 percent over five years."

The last prior two recessions didn't see anything like that much catch-up growth.

In the 1990s, the first five years averaged 3.32%. In the 2000s, the first five years averaged 2.74%.

It was a deeper recession than normal, but the first year of recovery was also a lot weaker than traditional deep recessions.

Deep recession recoveries (first year):
1948 had 4.4% growth
1959 had 7.2% growth
1976 had 5.4% growth
1983 had 4.5% growth

Mild recession recoveries (first year):
1971 had 3.4% growth
1992 had 3.4% growth
2002 had 1.8% growth

2010 had only 2.9% growth, in the ballpark with the recent mild recoveries

Posted by: justin84 | February 14, 2011 5:15 PM | Report abuse

"So our growth rate for 2011 is a fair bit lower than the consensus of private forecasters surveyed by the blue chip or by the Survey of Professional Forecasters."

A fair point, but the professional forecasters have no idea how quick the economy is going to grow either.

Peter Orzag would know:

The blue chip forecast for 2008 GDP was 1.6% and for 2009 was 2.8% back in February 2008 (e.g. several months into recession). The blue chip forecast for unemployment was 5.2% in 2008 and 5.3% in 2009.

http://www.cbo.gov/ftpdocs/89xx/doc8979/02-15-EconForecast_ConradLetter.pdf

Posted by: justin84 | February 14, 2011 5:38 PM | Report abuse

Oh yeah, tax cuts focused on the rich should be helping the economy any day now. We've been doing this for 30 years, with lousy results! Who is keeping track of the results?

Those 30 years have been terrible for workers. Why would economists think that a bad policy will suddenly work this time?

What is the definition of insanity again?

Posted by: rat-raceparent | February 15, 2011 5:16 PM | Report abuse

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