It’s that time of year when journalists let their creativity run rampant to produce 10-Best and 10-Worst lists, revisit the year’s biggest whoppers (look no further than the Oval Office), and offer prognostications for the coming year. With that in mind, I’ve gleaned the five most important lessons from 2013, which are all but guaranteed to be forgotten next year.
No. 1. Beware political pronouncements posing as economic forecasts.
Before, during and after the federal government shutdown in October, President Barack Obama warned us about all the terrible things we should expect. The Earth would go dark, the oceans would recede and droughts would devastate the nation’s farmland. OK, not that bad, but he did imply we could get food poisoning from eating tainted beef (no food inspectors) and risk getting killed in a plane crash (no air-traffic controllers). As it turned out, essential workers weren’t furloughed.
As Obama was beating Republicans into submission ― you didn’t think he was serious, did you? ― I was reminded of a column I wrote in 2011 that began: “What if the U.S. government shut down and no one noticed?”
That seems to have been the case. The U.S. economy expanded at a real annualized rate of 4.1 percent in the third quarter amid all the “uncertainty” over the shutdown and the government’s borrowing authority. The increase in real gross domestic product, the biggest in almost two years, featured a 2 percent increase in consumer spending driven by a 7.9 percent jump in purchases of big-ticket durable goods. Shutdown effect? Get me rewrite.
No. 2. Take that multiplier and shove it.
The Obama administration and its acolytes were equally pessimistic about the impact of sequestration, or the automatic cuts of $85 billion to discretionary spending. It was the second consecutive annual decline in discretionary outlays and the first back-to-back reductions in at least 50 years.
Economists rely on something called the multiplier to determine the effect of every dollar increase, or decrease, in government spending on GDP. The multiplier can be anything you want it to be. Start with the desired result, and work backward.
You think I’m kidding? Economists Veronique de Rugy and Matthew Mitchell of George Mason University’s Mercatus Center surveyed the academic literature and found that estimates of the multiplier range from +3.7 to ―2.9.
Almost everyone ― from the Federal Reserve to the Congressional Budget Office to the International Monetary Fund ― predicted the budget cuts would reduce growth. And who can tell? In economics, there is no way to determine what would have been. What’s more, this “model” assumes there are no offsets elsewhere, that the private sector doesn’t use the dollar the government doesn’t spend ― and use it more efficiently.
I suspect the 2013 spending cuts had about the same effect as the 2009 fiscal stimulus.
No. 3. The law of the land is subject to executive action.
House Republicans spent the better part of the last two years trying to repeal, defund or dismantle Obamacare: 46 votes in all. Obama showed them who wears the pants in the family. The president has made nine changes to the Patient Protection and Affordable Care Act, eight of them in the last five weeks. The last two weren’t even announced. The decision to allow people whose plans were canceled to buy cheaper, catastrophic plans came in a Dec. 19 letter from Health and Human Services Secretary Kathleen Sebelius to six Democratic senators. The latest change ― to extend by 24 hours the deadline for enrolling in a plan that goes into effect Jan. 1 ― was leaked to the Washington Post and then confirmed by the administration.
And for those who experienced technical difficulties due to heavy website traffic on Christmas Eve, HealthCare.gov offered another special extension.
The U.S. Constitution vests all legislative powers in Congress, but the president is demonstrating he can achieve by diktat what Congress couldn’t with a show of hands.
No. 4. “Unsustainable” is meaningless without an end date.
A grand bargain on taxes and spending wasn’t even on the table this year. Congress aimed low and did the bare minimum to be able to claim victory on passing a budget. The federal deficit fell to $680 billion in fiscal 2013, the first sub-$1 trillion deficit since 2008. The deficit as a share of GDP fell from 6.8 percent in 2012 to 4.1 percent. Obama continues to take credit for the biggest decline in the deficit in 60 years. What he doesn’t say is that the 2009-2012 deficits were the biggest as a share of GDP since the end of World War II.
Any honest budget expert will tell you that the U.S.’s fiscal position is unsustainable. Two lines ― outlays and revenues ― growing further apart in perpetuity. Economist Herb Stein famously said that if something can’t go on forever, it will stop. He didn’t say when.
No. 5. When in doubt, cue uncertainty.
Uncertainty has become a catchall to explain why businesses aren’t investing, why consumers aren’t spending and why the economy is limping. Policy makers have latched onto it as well. There’s more uncertainty in a given set of Fed minutes than in an entire Las Vegas casino.
If uncertainty were the reason the recovery from the 2007-2009 recession has been so unspectacular, then we have little hope for the future. Workers in their prime have no idea if the government’s safety net will be intact when they retire in 20 years. (The Social Security Trust Funds will be depleted in 2033.) Farmers don’t know if this year’s crop will be devastated by a tornado, flood or drought. Investors have no idea what the stock market will do next week.
I’d like to think uncertainty is a figure of speech, a euphemism for pessimism. Small-business sentiment is still at recession levels because of the increased costs and regulations imposed by Obamacare. Small businesses are certain ― that it’s not good.
When was the last time you heard uncertainty mentioned during a rip-roaring bull market or asset bubble? Uncertainty, it seems, only cuts one way. Here’s wishing all of you much positive uncertainty in 2014.
By Caroline Baum
Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. ― Ed.