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Home Publications Blogs Beat the Press Optimistic Economists Have Incredibly Low Expectations

Optimistic Economists Have Incredibly Low Expectations

Monday, 15 April 2013 05:04

Nelson Schwartz struggled to make sense of the economy in a NYT column today. After all, we see signs of economic weakness everywhere, yet the stock market is soaring. (This may be less of a mystery to folks who know that stock prices are ostensibly a measure of corporate profits, not the health of the economy.) 

After going through the bad news, Schwartz gives us the case for optimism about the economy:

"'The current slowdown will be the last for a while,' said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. He estimates that after growing by annual rates of only 1.3 percent in the second quarter and 1.5 percent in the third quarter, the economy will expand by 2.5 percent in the final months of the year and maintain that pace in 2014.

'We’re getting closer to the end of chronically disappointing growth,' Mr. Harris added. 'It’s not like we’re going to have a huge boom but something that feels sustainable.'"

The economy has a trend growth rate of between 2.2 percent and 2.4 percent. If we sustain a 2.5 percent growth rate then we will be exceeding the trend growth rate by between 0.1-0.3 percentage points. According to the Congressional Budget Office the economy is still 6.0 percentage points below its potential level of output. This means that in the optimistic scenario described here we will return to potential GDP in somewhere between 20 and 60 years.

Comments (8)Add Comment
written by Ellis, April 15, 2013 10:33
For 4 years, economists have been making the same prediction, that growth will pick up in 6 months. Doesn't anyone notice?
growth will not be strong...., Low-rated comment [Show]
Are those my only options?
written by David, April 15, 2013 2:22
Pete: so you what you are saying that the 1% are bribing the unemployed and unemployable so that the 1% no longer have to get off their lazy butts, stop sucking the productivity gains out of the economy, and actually provide the leadership in innovation for which they are ostensibly being paid these inequitably high salaries? The 1% are out of ideas, but they have enough cash to bribe the ones left behind in the mad scramble during the reign of trickle down. For now.
written by Keith Johnson, April 15, 2013 3:35
Krugman's proposed inflation isn't designed to drive down real wages. The point is to make it possible for the real interest rate to go down far enough to get to full employment. Higher wagesHELPS stimulus if it increases spending--if wages went down that would REDUCE demand.
David, Keith
written by pete, April 16, 2013 10:04
David, Since our low income folks either working or not make 10X what low income folks make in say Cambodia, then there is absolutely no "fairness" argument to having a progressive tax within the U.S. Instead, as Keynes points out, it is simply bribery, or worst case, extortion.

Keith...wages are sticky downwards...when there is a recession capital bears the brunt (look at 2009 earnings) while waiting for the labor market to adjust. During a recession, the Austrians would say let them adjust downward nominally, an obviously painful process. Keynesianism says workers can be fooled with inflation lowering their real wages, a much quicker solution. Why is this news?
Why is bad advice so much news?
written by Philip F., April 17, 2013 4:58
The concepts of Keynesian economics (and perhaps central banking) are relatively technical, by comparison. This seems to make it difficult to explain the timing and heuristic issues that go into the theories. Arguments against Keynesian ideas have built a much simpler message -- being in debt is essentially a moral delinquency. This message is much easier to sell at the ballot box, but it's really wrong. To start with, an understanding of the relational timing of policy goals would help explain the models, and maybe this should be emphasized more for the public.
written by DV, April 17, 2013 4:12
Dean: This is my first time commenting on your blog. You are my top blogger/columnist just ahead of Krugman and Munchau. Thanks for many informative and well reasoned posts.

You wrote: "This may be less of a mystery to folks who know that stock prices are ostensibly a measure of corporate profits, not the health of the economy." I have a strong suspicion that covertly and tacitly coordinated share buy-backs are probably among the factors behind the rise in stock prices. Share buy-back, combined with executives selling their own stock, seems like a great way to transfer the $1.5 trillion cash in corporate America into the pockets of executives. Do you think that is right?

Another factor could be tacitly coordinated trading between the banks. I am impressed by the large profits being made by BoA, Goldman Sachs and others right now. Do you think there is any merit in this thought?
written by Calgacus, April 17, 2013 10:19
Pete, what you are calling "the Keynesian solution" is NOT the Keynesian solution, but what Keynes argued against. Keith is more right; you are very wrong. You do not understand Keynes at all. (He only thought real wage decreases might be a necessary consequence of his solutions for a short time).

Growth through inflation is not what Keynes argued for. What he contended - and what is perfectly obvious to anyone with eyes - is that it is perfectly possible for there to be a quasi-equilibrium state with high, maybe very high, unemployment. The solution is to spend more, in a targetted way, but this has nothing intrinsically to do with price-inflation and driving down real wages - which is a pre-Keynesian view and misrepresentation of Keynes.

AFAIK, Keynes never opposed his own (mature) views by calling those who would be set to work by them recipients of bribery or perpetrators of extortion, and he specifically opposed the idea that "fooling" was involved, which again, is a pre-Keynesian view, resurrected in the neoclassical synthesis and the rest of the zombie crap that eventually buried Keynes's economics.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.