John Kerry said today that he feared a possible double-dip recession. Economist Dean Baker allayed those fears somewhat in talking about yesterday’s big stock market sell-off. But, he said that Japanification is not much of a better alternative to recession:
First, the stock market is not the economy. As Paul Samuelson famously quipped, the market has predicted 9 of the last 5 recessions. The people who invest in the market are the same geniuses who thought Countrywide and Pets.com had great business models. There is no reason to think that the markets are any wiser today than they were when they thought everything was just great in 2007.
Second, the double-dip recession folks seem to have forgotten how we usually get recessions. The standard recession is associated with a collapse in house and car sales. The good news is that both sectors are still so badly depressed that they don’t have too far down to go. In other words, it is unlikely that we will see the negative growth associated with a recession.
On the other hand, many quarters of very slow positive growth is really no better. This is most likely what the economy faces barring some serious change in policy in Washington. So the double-dippers might be too pessimistic, but not by much.
The amusing, though confounding, by-product here is that even zero growth would have the effect of increasing the deficit in the near-term, perhaps enough so that the debt limit deal does not actually get the country through the 2012 elections, forcing a need to increase in… September 2012? October?
Consider that the debt deal increases the federal government’s borrowing authority by $2.1 trillion from the previous limit of $14.294 trillion. There is the possibility that an additional $300 billion could be tacked onto that if the Super Committee drafts and Congress subsequently passes legislation that reduces the deficit by $1.5 trillion, rather than settling for the $1.2 trillion in deficit reduction that is automatically generated through the trigger mechanism. That is hardly guaranteed, though, so the operating assumption has to be that the government will be able to borrow up to $16.394 trillion before it has to request another debt ceiling hike.
Yet the OMB estimated in its Fiscal Year 2012 budget proposal that the federal debt subject to the statuary limit will be $16.638 trillion at the end of 2012 (Excel). That is $244 billion greater than the borrowing authority guaranteed to the federal government under the debt deal. It’s possible that the OMB’s debt projection has since been revised downward, but the change isn’t likely to be large enough to give the government much breathing room if its financial circumstances change.
Which gets to the most discomforting possibility — that a double-dip recession could drastically reduce GDP growth relative to the OMB’s projections. The agency offers a “rule of thumb” for what to expect in such circumstances. If GDP growth underperforms by 1 percent in 2011 but then catches up to expected growth in 2012, it will increase the deficit by $51.3 billion during those two years. If GDP fails to rebound to projected levels in 2012, then the budget deficit would rise by $61.2 billion. If GDP growth remained 1 percent below projections for both 2011 and 2012, however, it would drive up the deficit by $63.1 billion — and that last figure is obtained while holding unemployment constant, meaning that increased outlays on food stamps, unemployment insurance and other safety net programs aren’t taken into account.
I’m thinking that you’ll hear from some Democratic circles about the need to get the Catfood Commission II recommendations through because otherwise, $300 billion in debt limit increase gets sacrificed and there would be another fight during the Presidential election. I’m not sure Democrats should even fear that – Congress, and particularly Congressional Republicans, clearly got the worst of public opinion coming out of that fight, and if they want to have a job in the 113th Congress they might think twice about a similar hostage taking event in full view of the voters. But remember, the entire debt limit debate is a giant fiction, and so some very creative justifications could be spun from it.
The other thing this shows is that, regardless of budget-cutting, there’s no deficit reducer like job growth.