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Home Publications Blogs Beat the Press When It Comes to Recoveries, "Rip-Roaring" Ain't What It Used to Be at the Washington Post

When It Comes to Recoveries, "Rip-Roaring" Ain't What It Used to Be at the Washington Post

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Sunday, 30 December 2012 11:21

The Post had a major business section article promising that 2013 could be the year of a "rip-roaring" recovery, if nothing bad gets in the way. While there are reasons to think that 2013 could be better than the prior two years, it's not clear that "rip-roaring" would be the right term to apply.

The high-end of growth forecasts is around 3.0 percent. This assumes that the budget standoff is resolved relatively quickly on terms that do little damage to the recovery. According to the Congressional Budget Office (CBO) the economy is currently operating about 6 percent below potential GDP. CBO puts potential growth at 2.4 percent, which means that if the economy does grow at a 3.0 percent rate we would be reducing the output gap by 0.6 percentage points.

At this pace it would take us 10 years to get back to potential GDP. When the economy has suffered severe downturns in the past, for example in 1974-75 and 1981-82, the economy had stretches of growth in the range of 7-8 percent. That sort of growth could reasonably be described as "rip-roaring," 3.0 percent doesn't really fit the bill.

There are a few other items that are not exactly right in this piece. It rightly notes the improvement in the housing sector, which is likely to continue into 2013, but neglects to mention the vacancy rate. While there has been a considerable decline in the vacancy rate from the record levels reached in 2010, the vacancy rate is still far above its pre-bubble level. This will be a drag on construction as many people forming their own household can turn to units that are currently vacant rather than newly constructed units.

hmm-2012-10

The piece also holds out the hope that consumer spending will rebound based on the fact that consumers have paid down much of their debt from the bubble years. This claim is bizarre for two reasons. First, it is not just debt that affects spending. It is also wealth. A debt of $1 million would leave most of us struggling to meet our payments. By contrast, if Bill Gates had $1 million in debt it would not affect his consumption at all, because he also has $50 billion in assets. The story of the downturn in consumption is that households have lost close to $8 trillion in housing equity. This explains the downturn in consumption from its bubble peaks. The role of debt is very much secondary.

The other reason why the prediction of an upswing in consumption is bizarre is that consumption is already at an unusually high level relative to disposable income. If anything, it should be surprising that consumption is so high, given the loss of so much housing wealth.

consump-disp-09-2012

Source: Bureau of Economic Analysis. 

Finally, the piece seems to have reversed the relative impact on growth and unemployment associated with the ending of the payroll tax cut, telling readers:

"The CBO estimates that the end of the payroll tax holiday, combined with an extension of unemployment benefits, could cost the economy 0.7 percentage points of growth and increase the jobless rate by 0.8 percentage points over what it otherwise would have been."       

Usually the impact on growth is roughly twice the size of the impact on the unemployment rate. While it is plausible that CBO projected that the end of the payroll tax cut would slow growth by 0.7 percentage points, it is not plausible that this would be associated with a 0.8 percentage point rise in the unemployment rate.

Comments (3)Add Comment
...
written by PeonInChief, December 30, 2012 2:24
One of the reasons for the silliness on vacancy rates is that the powers-what-be like to explain increasing rents as a result of falling vacancy rates. But it's just not true. Vacancy rates have a limited effect on rents, and no effect until vacancy rates reach 10-15% (and in some communities, 20%). This allows the government to evade the problem of unaffordable rental housing, and the importance of things like rent control, just cause eviction, and other tenants' rights.
WaPo Screws Up CBO Report
written by robertsalzberg, December 30, 2012 5:50
WaPo:

"The CBO estimates that the end of the payroll tax holiday, combined with an extension of unemployment benefits, could cost the economy 0.7 percentage points of growth and increase the jobless rate by 0.8 percentage points over what it otherwise would have been."

The CBO did no such thing. The CBO didn't "estimate that the end of the payroll tax holiday, combined with an extension of unemployment benefits" did anything. The CBO looked at extending both policies, not ending one and extending the other.

The CBO estimated what would happen if we:

"Extend the Reduction in Employees’ Portion of the Payroll Tax and Extend Emergency Unemployment Benefits"

The CBO also didn't say that those two policies "could cost the economy 0.7 percentage points of growth and increase the jobless rate by 0.8 percentage points over what it otherwise would have been."

In fact, the CBO said just the opposite on page II of it's report:


"If the cut in the payroll tax and eligibility to receive emergency unemployment benefits were extended through 2014, revenues would be lower and benefit payments higher by a combined $108 billion in fiscal year 2013 and $150 billion in fiscal year 2014.15 Those changes in law would increase real GDP by 0.7 percent (by 0.2 per- cent to 1.2 percent under CBO’s full range of assumptions) and increase full-time-equivalent employment by 0.8 million (with a range from 0.3 million to 1.3 million) in the fourth quarter of 2013, CBO estimates."

It just doesn't make sense that the CBO would estimate how the negative effects of one policy combine with the positive effects of another policy unless specifically asked to.

Since it looks like we're getting an unemployment extension and losing the payroll tax cut, we'll actually see the result.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf
WaPo indeed in error
written by Brian Dell, December 31, 2012 10:10
Yes, re unemployment the CBO said 0.8 million and WaPo read it as 0.8 percent.

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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.

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