Too Much Optimistic = Damned Lies!

Are we beginning to see the omnipresent reification of the Obama hope/change theme recognized for what it is? All of the memes on superior judgment have been an abstract campaign mantra with no basis in reality. Who but a few among us have recognized this? Are we seeing the first signs of a satori from the all too real realm of the economy and Americans who are losing everything because they have no job? All I can say is it is about damned time and I’m praying that it isn’t too late to get fooled again.

Today’s Pit Boss (Jeanne Cummings) at Politico brings the perspective to inside the beltway where grasping reality has always been a Herculean task. The blog piece is called “Some economists warn Barack Obama’s economic predictions too optimistic.” This economist just calls their prediction lies, lies and more damn lies.

This time, however, the new forecasts — if they are anything like what many outside economists expect — could send a jolt through Capitol Hill, where even the administration’s current debt projections already are prompting deep concerns on political and substantive grounds.

Higher deficit figures also would arrive at a critical moment in the health care debate, as lawmakers are already struggling to find a way to pay for the president’s nearly $1 trillion reform package.

Alternately, if Obama clings to current optimistic forecasts for long-term growth, he risks accusations that he is basing his fiscal plans on fictitious assumptions — precisely the sort of charge he once leveled against the Bush administration.

White House officials rebuff such suggestions, saying the midyear correction is precisely intended to keep their economic program reality based.

But a series of POLITICO interviews in recent days with independent economists of varied political stripes found widespread disdain for Obama’s first round of assumptions, with some experts invoking such phrases as “rosy” and “fantasy.”

Obama’s current forecasts envision 3.2 percent growth next year, 4 percent growth in 2011, 4.6 percent growth in 2012 and 4.2 percent growth in 2013.

Let me continue with the translation of “experts invoking such phrases as “rosy” and “fantasy” and just call them lies, lies, and more damned lies! Clear enough? Following my theme yesterday, I offer what we economists call the stylized facts to offset the varnished untruths wafting through Big Brother’s media screed.

But first, a word from one hopelessly captured, once great student of the Great Depression.

White House officials note that at the time of their forecasting, the depth of the crisis was less clear. For instance, the global reach of the downturn wasn’t fully apparent late last fall.

Another challenge was that the slowdown “was going from a relatively normal recession into something much worse, and we were at a pivot point, if not a turning point,” Romer said.

“There was just inherently a lot of uncertainty. None of us has a crystal ball, especially at a time when there is a lot of new information coming in. That’s when you have to be ready to update. That’s certainly what a lot of forecasters have done and what we will do, as well,” she added.

Lies, lies, and more damned lies! I was saying two years ago something is coming that is going to be completely out of the box. All you had to do was watch the insanity in the Financial Markets and the incredible unfolding of the long, slow jobless recovery. There were certainly not a lack of voices over a year ago. But six months ago when these folks took office? How could you even think this was a “relatively normal” recession less than SIX MONTHS AGO? As for six months from now, 1 year from now, even 2 years from now, here’s an economist with the REAL question of the moment.

“The question is, what will drive the growth? It’s not likely to be the housing market or another tech bubble. We don’t know what it is going to be, but it doesn’t make sense to assume it won’t be anything,” said James Horney, an economist with the Center on Budget and Policy Priorities.

Yes, yes, yes! (With apologies to Harry and Sally.) We don’t know what it will be but what could it be given we want a probability of say, more than 10% of occurrence? Green jobs? Green shoots? Buying more Chinese junk sitting on the shelves of Walmart? And with what income? We’ve lost 10 years of growth, 10 years of job creation, 10 years of asset valuation PLUS compounding. We have to simply get back to square one and I have no idea where that will come from if it does not come from Federal Government. Neither do other reality-based economists. There are no signs of life in any of the components of GDP and I just heard POTUS, last night, tell AC that the trajectory is going the right way. The trajectory may not be straight down like it was 3 months ago, but believe me, it is still down. How could any one say this with a straight face? Even Anderson Cooper asked a follow-up question that demonstrated his incredulity. This, from a reporter of the Obanality News Network that’s been more focused on Michael Jackson’s demise than the demise of the 20th century superpower most of us call home.

… Peter Morici, a University of Maryland economist, said the White House should set aside major domestic initiatives and focus on stabilizing the economy by attacking the trade deficit.

“The spending required for health care, the tax on business with a [climate change] cap-and-trade system, and the wasteful spending inside the stimulus will finish the job that the Chinese mercantilism began,” he said. “We’re headed for a disaster here.”

Okay, so let me give you a warning. This is from the WSJ editorial page. (If you like pre-digested and spun information and sources turn your virgin eyes away.) Mortimer Zuckerman (editor of U.S. News & World Report) says The Economy is Even Worse than You Think and I agree. He has given 10 really succinct points of economic data (not right wing memes) that should throw a cold bucket of water on any one with a reasoning mind. His article succinctly explains why the current 9.5% unemployment rate is worse than it looks.

Here’s one point that directly hits our big question of what will drive growth? This one addresses job growth specifically. Remember, 70% of our economy’s spending is driven by households and nearly the same amount (around 67%) depend on job wages and salaries for that spending.

The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance.

Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period.

Zuckerman also talks about something we brought up yesterday. The current stimulus has thrown money into state and local coffers which has MAXIMALLY maintained the status quo in states. Maintaining and supporting the status quo is NOT stimulus.

Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011.

So there are the numbers to back up the conversation yesterday. That’s 15% of the economy. Also, if you dive into the job statistics the public sector and health care sectors are the two rare areas that have had slight, positive job creation. What will happen when these funds disappear? I don’t think you need a PhD in Economics to figure that one out.

We also discussed the fundamental changing nature of the relationship between households and their debt and savings. Here’s more numbers to flesh out that discussion yesterday.

Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy’s main driver, we are going to have a weak consumer sector and many businesses simply won’t have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won’t be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending.

So, again, WHAT will drive growth? Our shrinking and disappearing major industries? Our panicked, jobless, households that are saving like crazy and drown in historic levels of debt and have lost at least 10 years of compounded asset value? Our governments who have lost tax dollars and are seeing incredible demand for things like unemployment insurance, folks returning to school for training, or the increase in the need for law enforcement and justice that always comes with the crime wave that accompanies a bad economy? A few start up firms promoting a green economy?

I just don’t see a realistic answer to that. Do you?

Note: (Charts from Martin Wolfs Charts of the week at http://blogs.ft.com/economistsforum/).

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