Congressional Budget Office’s Budget and Economic Outlook: Fiscal Years 2013 to 2023 The long term cost of not stimulating the economy to its “Goldilocks” growth rate of 3.25% per year
Fulton Wilcox February 11, 2013
Congressional Budget Office (CBO) Forecast • •
The CBO provides a bipartisan view of the economy as well as of Federal budgets and revenues, updated on February 6, 2013 The projection is descriptive rather than prescriptive – Integrates known and projected economic indicators and condition with existing Federal budgetary, taxation and other going-in policies and laws – Does not prescribe meeting a defined economic growth objective – Severs as a baseline for others to propose objectives and innovations –
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Although “full employment” is exceeding important, it is left to the Congressional consumers to decide how to accelerate employment
Although we have experienced two disastrous “asset bubbles,” the CBO report contains no quantification or forecast of America’s asset values – We obviously want America’s assets and net worth to grow, but not later collapse
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The CBO projects weak growth through 2023 – an annual average of 2.7% – Even the 1970’s mistakenly remembered for stagflation grew 3.2% per year – Goldilocks growth should center at 3.25% (plus or minus some small increment) – Lack of steady, not too hot, not too cold Goldilocks GDP growth create risk of turbulence
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Congress needs precise tools to stimulate a lagging economy – “Bad years” and even “bad quarters” can add up to an ugly decade – The 113th Congress (2013-2014) may preside over two “bad years” unless precise stimulus is applied
The CBO Forecast and “Goldilocks” •
The U.S. economy has for decades evidenced a “not too hot, not too cold” Goldilocks pattern of annual growth – GDP real growth of between 3.0-3.5% real annual growth, or to be “precise” – 3.25% CAGR – GDP nominal growth of about 5%-6% growth, a combination of real growth plus inflation, which typically has been in the 2%-3% range – Goldilocks growth has typically kept unemployment in the “full employment” range of 3%-4% – Exceeding Goldilocks growth has been a harbinger of bubbles, inflation, etc., while slower growth creates deficits, political turbulence etc.
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A top down CEO and Board “enterprise” prescriptive goals for the American economy therefore should be: – Steady growth in the 3.0%-3.5% band, tending to a center of 3.25% – An objective of few to no “bad years” where bad is outside the target band
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The CBO unfortunately forecasts inadequate long term growth (2.74%) and all “bad years” – four years “too hot” and the rest “too cold.” Present-day Congressional tool kits lack the precision needed to put the economy on track The following charts quantify the problem and the opportunities of implementing “precision” stimulus to make the bad years ‘good”
Goldilocks annual growth goal @ 3.25% (Green dotted line) versus CBO projection averaging 2.74% (blue solid line) – billions of 2012$ $23,000
Shortfall = $1.1 trillon by 2023 $21,000
$19,000
$17,000
$15,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: the CBO projects “real” (non-inflationary) growth in 2005 “chained” dollars. In this study for the readers’ convenience I converted 2005 “real” $ into 2013 “real” $ (at a conversion rate of $1.16)
CBO forecast of annual real growth % versus the Goldilocks level of 3.25% (2013-2014 and 2019-2023 are “too cold” while 2015-2023 “too hot’) 4.0%
3.5%
Goldilocks growth @ 3.25%
3.0% 2.5%
2.0% 1.5% 1.0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
The CBO forecast may be correct as a fatalistic “weather prediction,” but Congress needs to take perspective actions to stimulate the “too cold” years
The CBO year-by-year GDP shortfall in 2012 $ billon compared to steady 3.25% growth (negative numbers indicate CBO excessively “hot years” with growth above 3.5%) $350 $300 $250 $200 $150 $100 $50 $0 -$50 -$100
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
GDP money “left on the table” in the too cold years wastes capacity and sacrifices employment, while the too hot years risk overrunning capacity and creating inflation
Total employment in thousands: CBO projection (solid blue line) versus Goldilocks growth at steady 3.25% per year 165,000 160,000 155,000 150,000 145,000 140,000
135,000 130,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
CBO employment shortfall compared to a Goldilocks 3.25% steady growth scenario 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000
4,000,000 3,000,000 2,000,000 1,000,000 0 2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
The CBO’s forecasted “too hot” hiring growth in 2015-2018 cannot make up for a slow start in 2013-2014 nor for mediocre employment growth in 2019-2023
“America’s Asset Values and Net Worth: Shortfall of the CBO projection (blue lines) compared to the Goldilocks growth @ 3.25% per year (green dotted lines) $120,000
Asset shortfall = $6.3 trillion $110,000 $100,000
America’s assets $90,000
$80,000 Net Worth shortfall $70,000
America’s net worth $60,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2012 data obtained from the Federal Reserve bZ.1 balance sheet for America’s households and non-profit entities. Projections assume that assets, debt and net worth grow in line with projected GDP growth
Improvement in Federal tax revenue because of higher, steadier “Goldilocks” annual growth of 3.25% compared to the CBO’s projections (billions of 2012 $) $250 $200
$150 $100 $50 $0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Marginal Federal tax revenue growth = 19% of GDP improvement. States and localities would also experience enhanced tax revenues.
Summary • •
The CBO projected U.S. economic growth through 2023 of 2.7% CAGR, a level short of the U.S. long term “Goldilocks” growth level of 3.25% This shortfall from Goldilocks level growth imposes many long term costs: – – – – –
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The CBO forecasts a GDP in 2023 that would be $2.1 trillion lower Employment in 2023 would be 8 million workers lower America’s aggregate household (and non-profit) assets would be about $6.3 trillion lower America’s net worth (assets – liabilities) would be $5.1 trillion lower The run rate for Federal tax revenues in 2023 would be about $235 billion lower
Much of this shortfall is “front loaded” into CBO projections for 2013 and 2014 – In its projections, the CBO is in effect predicting the weather, not making it – On the other hand, Congress and the Executive Branch can inject stimulus into the shortfall years
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The Plan for America targeted stimulus proposal aims at making the “bad years” of 2013 and 2014 into Goldilocks “just right” years The 113th Congress’s “watch” is 2013-2014, so it should take action to fix economic performance now rather than dwelling on the out years See http://www.economicplanforamerica.com/