Up tomorrow morning is the initial reading of GDP for Q4 2008. Most of the estimates are centering around contraction at an annual rate of 5.5% or a little more.
The long-term growth trendline over the last several decades has been about 2%, with the better periods running closer to 3%. This is a little better than the demographic increase. If you still believe anything Alan Greenspan says (I do), we benefited from a multi-year period of above-trend productivity improvements in the Nineties, and from globalization in this decade.
I think it's somewhat more likely that the GDP reading (which will be revised twice over the next two months) will surprise on the upside. I think a reading of minus-3% isn't out of reach. It's less likely that we'll see a surprise on the downside.
In any case, if the reading surprises, it will almost certainly change the color of the policy debate. Devotees of Macroeconomics-101, including Nobel Laureate Paul Krugman and recent convert Christina Romer, are using negative-growth expectations to scale the amount of deficit spending they think we should enact.
To spare you a lot of arithmetic and questionable assumptions, the idea is to take the expected contraction in the economy, divide by a multiplier (typically about 1.5), deficit-spend that much on anything other than tax cuts, and subsequently expect a decline in unemployment rates predicted by Okun's Law.
Some orthodox economists are calling for fiscal-deficit package of about 8% of GDP, about twice the size that Obama has proposed.
If tomorrow's GDP reading is significantly different from minus-5.5%, look for some people to revise their numerology.
The long-term growth trendline over the last several decades has been about 2%, with the better periods running closer to 3%. This is a little better than the demographic increase. If you still believe anything Alan Greenspan says (I do), we benefited from a multi-year period of above-trend productivity improvements in the Nineties, and from globalization in this decade.
I think it's somewhat more likely that the GDP reading (which will be revised twice over the next two months) will surprise on the upside. I think a reading of minus-3% isn't out of reach. It's less likely that we'll see a surprise on the downside.
In any case, if the reading surprises, it will almost certainly change the color of the policy debate. Devotees of Macroeconomics-101, including Nobel Laureate Paul Krugman and recent convert Christina Romer, are using negative-growth expectations to scale the amount of deficit spending they think we should enact.
To spare you a lot of arithmetic and questionable assumptions, the idea is to take the expected contraction in the economy, divide by a multiplier (typically about 1.5), deficit-spend that much on anything other than tax cuts, and subsequently expect a decline in unemployment rates predicted by Okun's Law.
Some orthodox economists are calling for fiscal-deficit package of about 8% of GDP, about twice the size that Obama has proposed.
If tomorrow's GDP reading is significantly different from minus-5.5%, look for some people to revise their numerology.
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