My talisman, once more

No prognosticator is a prophet.  As the economic news has gone from bad to worse over the past 3-4 months, however, I find myself periodically grasping at the reed of a February 2011 forecast by Goldman Sachs economist Alec Phillips (I've noted this once before). At the time, the shutdown loomed and the House GOP was demanding $61 billion in cuts to FY 2011.  Phillips wrote:

Federal spending cuts deserve the most attention. They are the most likely of these issues to occur, and could have the largest magnitude. The assumption we incorporated into our recently revised budget estimates—discretionary spending cuts of $25bn and $50bn below the CBO baseline for FY2011 and FY2012 respectively—would shave nearly one percentage point off of the annualized rate of real GDP growth in Q2, but would fade quickly with a negligible effect on growth by year-end.

If Phillips was right, we may be at the nadir now. And none too soon, with Obama's approval rating hitting an all-time low of 40% today.

Half a good prediction?

As the economic recovery continues to sputter in this second quarter, my thoughts have strayed from time to time to a February 2011 forecast by Goldman Sachs economist Alec Phillips. At the time, the shutdown loomed and the House GOP was demanding $61 billion in cuts to FY 2011:

Federal spending cuts deserve the most attention. They are the most likely of these issues to occur, and could have the largest magnitude. The assumption we incorporated into our recently revised budget estimates—discretionary spending cuts of $25bn and $50bn below the CBO baseline for FY2011 and FY2012 respectively—would shave nearly one percentage point off of the annualized rate of real GDP growth in Q2, but would fade quickly with a negligible effect on growth by year-end.

2010 tax cuts vs. 2011 budget cuts

As it looks all but certain that Republicans will extract at least a $30 billion pound of flesh from the 2011 budget, endangering the recovery and thus likely boosting their own political fortunes, I thought I would re-pose a question I asked earlier this month: Which is likely to be stronger, the stimulative effect of the tax cut deal Obama cut with the GOP at the end of last year, or the destimulative drag of reduced short-term government spending?

Who won the lame duck?

The late great lame duck session of Congress in Nov-Dec 2011 was widely perceived to have been a season of accomplishment for the Democrats and President Obama. The rush of activity included repeat of Don't Ask Don't Tell, ratification of the New Start treaty -- and, on the economic front, a tax deal that, for the blood price of extending the Bush tax cuts for the wealthiest, bought Obama hundreds of billions in more efficiently stimulative tax cuts.

It was a busy time, and one thing the Democrats failed to do was pass a budget for FY 2011. That gave the incoming GOP House the opportunity to commence its budget-cutting orgy for discretionary domestic spending a year early.  That includes a head start on the drive to defund implementation and enforcement of the health care and financial reform laws.  And in its opening gambit, the Tea Party delivered.  Its proposed $61 billion in cuts would kill 700,000 jobs by the end of 2012 according to Moody's economist  Mark Zandi,, and shave 1.5-2% off GDP growth in the 2nd and 3rd quarters of this year by Goldman Sachs' estimates.  The Goldman analyst, Alec Phillips, also forecasts that actual cuts in FY 2011 will come in at about $25 billion and, once enacted, will slow growth by 1% of GDP, but that the effect of that sudden hit will fade quickly later in the year.

Question: would the U.S. economy -- and Democrats -- have been better off without the global tax deal but with a Democratic FY 2011 budget passed during the lame duck session?  Does the short-term destimulative effect of the 2011 budget we're likely to get (leaving aside any long-term damage to economic viability) fully offset, or more than offset, the stimulative effect of the tax cut package?

Who won the lame duck?

The late great lame duck session of Congress in Nov-Dec 2011 was widely perceived to have been a season of accomplishment for the Democrats and President Obama. The rush of activity included repeat of Don't Ask Don't Tell, ratification of the New Start treaty -- and, on the economic front, a tax deal that, for the blood price of extending the Bush tax cuts for the wealthiest, bought Obama hundreds of billions in more efficiently stimulative tax cuts.

It was a busy time, and one thing the Democrats failed to do was pass a budget for FY 2011. That gave the incoming GOP House the opportunity to commence its budget-cutting orgy for discretionary domestic spending a year early.  That includes a head start on the drive to defund implementation and enforcement of the health care and financial reform laws.  And in its opening gambit, the Tea Party delivered.  Its proposed $61 billion in cuts would kill 700,000 jobs by the end of 2012 according to Moody's economist  Mark Zandi,, and shave 1.5-2% off GDP growth in the 2nd and 3rd quarters of this year by Goldman Sachs' estimates.  The Goldman analyst, Alec Phillips, also forecasts that actual cuts in FY 2011 will come in at about $25 billion and, once enacted, will slow growth by 1% of GDP, but that the effect of that sudden hit will fade quickly later in the year.

Question: would the U.S. economy -- and Democrats -- have been better off without the global tax deal but with a Democratic FY 2011 budget passed during the lame duck session?  Does the short-term destimulative effect of the 2011 budget we're likely to get (leaving aside any long-term damage to economic viability) fully offset, or more than offset, the stimulative effect of the tax cut package?