[For a discussion of the problems of economic forecasting see our Principles discussion.]
We see no change to public policy that would lead to a substantive recovery. No direct employment programs are on the horizon. The federal government has abandoned states and municipalities to fend for themselves. There will be no meaningful infrastructure spending. (A recent trial balloon for $50 billion in infrastructure would cover about one-fifth of what is needed for simple maintenance.) The climate cliff has happened without arousing any particular interest, and we await the moments of impact -- violent weather, lost resource capacity and permanently damaged natural systems. There will be no meaningful reparations to the middle class, nor a restoration of the egalitarian society which worked so well in decades before the 1980s.
Absent positive contribution from government and caught in its own negative feedback loops, the private sector is destined to drift lower. Investment will be lower. Asset prices will be lower, except as markets are juiced by bubble financing from the Fed. Consumer prices will be lower, again to the extent they escape the Fed's liquidity injections. Personal incomes will be lower. This is the bottom sloped downward.
The combination of easy money for financial players, the tremendous debt overhang in the private sector, and declining real incomes will expose fragile financing structures and lead to further threats of financial crises. Those threats will be met by straightforward debt adjustments or by prolonging the debt squeeze and shifting the pain from the financial sector to taxpayers. Debt adjustments would clear the economy for growth, but are the definition of systemic crisis. Shifting the pain in a way that preserves the current financial architecture exacerbates the inequality, injustice and potential for social disruption. These are the downside risks.
The labor market will deteriorate along with public and private investment. Huge private debt burdens will continue to take their toll. The failure to meet climate change with action will multiply the cost in human, environmental and economic terms. Capture of the political process by entrenched corporate elites ensures that change is not coming from pragmatism or reason, and must first come from power.
An unprecedented public involvement and a disruption of the current power structure is required, but prospects for change are not completely absent. The recent elections revealed a rising opposition to free market fundamentalism. Election financing reform seems to be a priority at the grass roots. The movement to address climate change is mobilizing millions in a direct challenge to corporate power, specifically that of the Energy Complex, and this movement is largely outside the traditional political machinery. Evidence that forward motion is possible may come soon, if the new Congress is able to break through obstructionism. Most importantly, the evidence of failure of current practices will continue to grow. Financial markets must sooner or later acknowledge the real economy. Crises are not behind us. And in the context of a stagnant economy and failure to deliver on past promises, there will likely be little interest in more corporate bailouts. At a minimum, confrontation will draw key issues and players into the light of more general public understanding.
On the other hand, the entrenched interests now in control are extremely powerful and have effective control of the political and judicial branches of government. Historical examples of economic stagnation combined with popular disenfranchisement have resulted more often to chaos and destruction than to positive transformation.
One last positive, however. The old people. In times prior to the Modern Era and even up through the late part of the last century, elders were leaders who were respected. For good reason. They had seen enough to know and survived enough to have demonstrated intelligence or values. In this early part of the 21st Century, with the retirement of baby boomers, we have an immense number of people with experience, and people with a stake in a working government. It once was said that you were liberal in your twenties and conservative in your fifties, but that was more a description of being co-opted than of aging. Now the boomers find the promises of seven percent gains in stocks year after year as ephemeral as their 401(k)s. Older people will have the time (if not energy) to get involved. And they have at least the opportunity of perspective. To the degree they support the broader interest with their time and talent, and do not become strictly an interest group for social insurance and health care, the power base for reform is set.
What is the forecast?
In terms of common metrics:
GDP and Net GDP
GDP to sub-zero Employment in its current stagnant, deteriorating pattern Investment lower, both private and public Prices lower in real terms Easy money creating instability in financial markets
To engage with traditional forecasts, we need to translate our outlook into common economic parlance, which begin with the measurement of GDP.
GDP is an object lesson in Keynes' dictum, "Better to be approximately right than precisely wrong."
Briefly, most forecasters are bad at predicting GDP more than a quarter or two away, and this includes "blue chip" forecasters, forecasters at the Fed, and for the most part all those who use the Neoclassical paradigm. In addition, the data itself often bounces around from advance to preliminary to final to baseline revision. In combination with the very short-term focus of most forecasters, this means the score often changes some months after the game is over but nobody notices. Even were the forecasts accurate, the metric itself is flawed. GDP has an importance in conventional thinking far greater than its value. GDP excludes much of what is important, includes bads at the same price as goods, and fails to use comparable accounting for comparable activity -- in particular, private v. public investment.
That said, real GDP growth is the score by which forecasters are measured. To it we add our exclusive measurement "Net Real GDP." This is a particularly Demand Side concept, as it seeks to expose the proportion of growth that is due directly to federal deficits, and we include in "deficit" borrowing (or paying back) to social insurance trust funds. Trust funds are completely analogous to private insurance, the spending from benefits is spending into the private economy, and there is no reason to characterize them in the same was as defense spending, education, roads or other activities of government, which deal primarily in public goods.
Our forecast is condensed to the chart below:
The 2013 Forecasts predicts things on a shorter term, which is the reason for its variability. A flat line extension of both GDP and Net GDP from the 2008 Forecast would be an acceptable alternative. Net Real GDP is lower in our prediction than actual numbers because we anticipated greater interest in infrastructure spending.
But again, remember, even the flat line overstates the health of the economy going forward. Much of the nominal growth is coming in health care, where bad accounting confuses inputs with outputs. And a great deal of economic deterioration is masked by resource depletion, environmental degradation and workforce decay.
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