Thursday, January 26, 2017

CBO shows slower economy, shows WisGOPs shouldn't rely on big revenues

With this week's release of the Congressional Budget Office's new economic and fiscal forecasts, we got a better picture of what the Trump Administration has walked into economically. A lot of the talk in media came from the CBO's projection of a slight shrinking of the US budget deficit from $587 million in 2016 to $559 billion in Fiscal 2017, but then growing in future years and reaching $1 trillion by 2024.

I also wanted to see what the CBO predicted for the country's economy, and compare it to the strong economic outlook that was a main reason behind the Legislative Fiscal Bureau's surprisingly positive budget projections. I expressed skepticism of the LFB's higher levels of growth, and indeed, the CBO predicted relatively lower growth and slightly higher unemployment over the next 2 years.

Real GDP projections
LFB 2.3%
CBO 2.3%

LFB 2.6%
CBO 1.9%

Nominal GDP
LFB 4.7%
CBO 4.1%

LFB 4.8%
CBO 3.8%

LFB 2.5%
CBO 2.3%

LFB 2.1%
CBO 2.3%

Average unemployment rate
LFB 4.6%
CBO 4.6%

LFB 4.3%
CBO 4.4%

In addition, the LFB estimates say that employment continuing will grow near its 2016 pace for the next 3 years, with 5.4 million jobs added between now and the end of 2019 (around 150,000 jobs a month). Compare that to this prediction from the CBO.
Over the next five years, the monthly increase in nonfarm payroll employment, which is estimated to average 160,000 jobs in the first half of 2017, is projected to settle down to an average of 64,000 jobs. That slower pace of job growth primarily reflects relatively slow growth in the labor force, which is affected by the ongoing retirement of the baby boomers. In CBO’s projections, the unemployment rate averages 4.9 percent over the later part of the [5-year] projection period.

Now why so different? One reason may be due to this paragraph in the CBO report
CBO’s budget and economic projections are predicated on the assumption that current laws generally remain in place. Budgetary and economic outcomes are difficult to project, however, and thus rather uncertain—even if there are no changes to the laws that govern federal taxes and spending. The agency strives to construct 10-year budget and economic projections that fall in the middle of the distribution of possible outcomes, given both the fiscal policy embodied in current law and the availabilityof economic and other data.
Compare that to what the LFB (actually, an economic forecaster named IHS Markit) based their economic predictions on.
The 2017 forecast is based on the following key assumptions. First, the forecast assumes that the new Trump administration and Congress will lower the average effective personal income tax rate from 21.0% to 19.5% and lower the statutory corporate tax rate from 35% to 20% (partially offset by reducing tax deductions and credits). Second, the forecast also assumes a $250 billion increase in federal infrastructure spending over the next ten years. Third, the 2017 forecast assumes that the Federal Reserve will increase the federal funds rate by 75 basis points in each of the next three years to 1.50% by the end of 2017, 2.25% by the end of 2018, and 3.00% by the end of 2019. Fourth, the Brent spot crude oil price is projected to average $54 per barrel in2017 and $57 per barrel in 2018. Fifth, the inflation-adjusted, trade-weighted value of the dollar for the broad index of U.S. trading partnersis expected to increase 3.3% between fourth-quarter 2016 and fourth-quarter 2017, where it will reach its peak value at 5.5% above the 2016 average, followed by a steady decline. Finally, real GDP growth of major and other important U.S. trading partners is assumed to average 1.7% annually and 3.5% annually, respectively.
Now that’s quite a lot of “ifs” for the LFB to base their figures on. Sure, all of these things might happen, but does it seem wise to base a tax cut or alleged “surplus” on a number of assumptions of events that have yet to happen? This is especially true when the IHS Markit assumptions didn’t seem to take into account the lack of economy stability that might occur for large numbers of Wisconsinites if Trump and/or the GOP Congress really do repeal Obamacare (especially with no replacement plan to follow) or if they cut Medicaid, Medicare, or Social Security. And apparently IHS Markit feels there won't be any negative economic consequences from a potential trade war or other Trumpian idiocy.

Somehow, IHS Markit feels they can follow some of the words of Trump and the GOP Congress, but other parts are conveniently forgotten or disregarded. So yes, as more of this data rolls in and we have other analyses to compare, I find myself skeptical of the rosy assumptions for the US economy under the Trump presidency, and the high revenue estimates that the Legislative Fiscal Bureau put out as a result of that. I also don’t count on posers like Walker and WisGOP legislators to do the responsible thing in light of all of this uncertainty, which would be pass a budget with plenty of cushion, enabling it to react to whether or not there actually is a Trump Bubble Boom, and waiting to see what the effects of new Federal legislation and funding would be in late 2017-early 2018.

No, they’ll try to score nice headlines to trick the rubes who have continued to vote for these guys despite the state’s lagging results. Which gives me a sinking suspicion how this plays out.

1.Wisconsin GOP and Governor Walker blow some of the extra revenues on some stupid tax cut for the rich.

2.They throw in a little extra state money for the next budget to K-12 education, local roads and other places so they can claim they are nice guys.

3.The rosy revenues fail to materialize, but there’s just enough money carried over time before the 2018 November elections to avoid having to take formal action to fix the problem, leading to a massive looming hole in early 2019 and the 2019-2021 (in other words, a repeat of 2014, which led to all the cuts and screw-ups of the 2015 budget).

The scathing LAB audit which showed overspending at the Wisconsin DOT and deteriorating state roads may start to put that reality into people's minds. Combine that with the likelihood that Wisconsin’s economy isn’t going to boom over the next 2 years (given that we're a stagnant-population state that’s graying, allegedly at full employment, but still repressing wages), and it's going to take bombs like the LAB audit are needed to force the WisGOPs into something resembling responsibility in the 2017-19 budget.

So I don’t want to be put in a position to do this, but I have little choice. We may need the economy to stagnate and tank sooner than later, so we don’t have a 2017-19 budget based on pie-in-sky bullshit that is extremely unlikely to materialize. Because you know the posers in WisGOP Bubble Land can't help themselves otherwise.

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