Wednesday, May 24, 2017

The Trump budget and economic projections

Trump's budget is out, for what that's worth, and of course, it makes optimistic assumptions about economic growth, but hey, does anyone remember when Bernie Sanders put out a plan that only made the numbers add up by assuming that it would create 5.3% economic growth?  So, yeah, who is the real con artist?  (Oh, I still hate Bernie Sanders...)

Anyway, Trump's budget makes optimistic assumptions about economic growth to make the numbers add up with the magic of "dynamic scoring."  Tax cuts create economic growth, which produces more revenue, blah blah blah, and Trump's people factored that into their numbers.  I won't get into the economics of that.  Rather, I'd like to get into the problem of projecting the state of the economy.  First, some basic data.  Here's GDP growth, in a few graphs.  The problem is that you need to pick a time frame.  You'll see why.  Below, you'll see one from the 70's to the present, 80's to the present, and 2000 to the present.  All data come from our good friend, Fred.  (Federal Reserve Economic Data).







The reason the time frame is important is that it matters how high up that y-axis goes.  From 2000 to the present, economic growth has never been very good.  In the 1970s, growth had that big spike over 15% (the economy in the 1970s was complicated...), which makes everything else look smaller by comparison.  However, even factoring that in, there were sustained periods of higher growth than what we have seen since 2000.

Why?  That's... a really hard question, and that's kind of today's point.  Forecasting when a recession will hit as exceedingly difficult, and that makes predicting growth in the short-to-medium term damn-near impossible.  Then there's the question of whether or not we really are facing secular stagnation, which is also hard to test.  Empirically, it is the case that we saw relatively lower growth both before and after the "great recession," but there isn't, to my mind, a clear explanation of why.  That third graph, though, looks a little symmetric, though...

Finally, of course, there is the problem of what we call the "exogenous shock," which is the fancy, social science buzzword for "shit happening."  I reference Philip Tetlock's Expert Political Judgment a lot, but it is relevant for economics too.  Not to push radical skepticism too far, but unpredictable exogenous shocks can affect an economy, in either direction, and our inability to predict what the shock might be means we have trouble predicting where the economy will be at any given point in time.

For budgeting, that means if your goal is reducing the deficit, you don't make optimistic projections.  That's why the CBO has historically not used "dynamic scoring."  Yes, fiscal policy affects the economy.  John Maynard Keynes would agree.  But, if your goal is to reduce the deficit, be a pessimist about the economy because predicting this stuff is absurdly difficult.  Obviously, that isn't Trump's goal or the GOP's goal, but we knew that.

Who knew budgeting could be so complicated?

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