StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Pawlenty's Wishful Thinking

09 Jun 2011
Posted by Bruce Bartlett

The usual right-wingers like Larry Kudlow and the Wall Street Journal's editorial page are falling all over themselves to praise Tim Pawlenty for his "plan" to double the real rate of economic growth from its historical level of about 2.5% per year to 5% for 10 years. I don't want to waste much time on such an idiotic idea -- as I told a reporter, if he could actually do this he deserves not only the presidency, but the Nobel Prize in economics. The truth is that there is no substance whatsoever to Pawlenty's plan except to essentially abolish taxation for the wealthy. And doubling the growth rate is just childish wishful thinking. If there were any policies that could bring this about, every country everywhere would already be doing it.

Two points I haven't seen mentioned elsewhere: (1) According to the OECD, no county in its database has ever achieved 10 continuous years of +5% growth except Korea; a few had compounded growth rates above 5% annually for 10 year periods, but none have done so for many years and the U.S. has never done so in its history. (2) The U.S. has only once in its history gone 10 years without a recession -- the George H.W. Bush/Bill Clinton expansion that ran exactly 10 years from March 1991 to March 2001; the average postwar expansion only lasted 5 years. 

ADDENDUM

Larry Kudlow makes a fool out of himself gushing over Pawlenty's "plan."

Wishful Think'in

There is, of course, nothing inherently wrong with lofty goals. Unrealistic goals and predictions do, however, have a nasty habit of coming back to haunt one, particularly in the political arena. With respect to Pawlenty's 5 percent growth goal for a decade, one probably wouldn't really know whether he had a chance of achieving it until well into his second term, so in that respect it might not be realistic economically, but quite clever politically.

This does, by the way, remind me of a more recent goal and prediction, to wit, the assertion by the current administration that their stimulus program (the one they enacted, not they one some pundits now say they should have) would keep unemployment below 8 percent and would have driven have driven it below 7 percent by now and to about 5 percent before thé next election. http://www.thompson.com/images/thompson/nclb/openresources/obamaeconplan... (see Figure 1) If Pawlenty's goal and prediction is idiotic, I would be hard pressed to come up with a better (i.e., worse) description for that one. As the business folks say, it pays to manage those expectations.


The big difference between Obama's and Pawlenty's predictions...

...is that Obama's prediction in Jan. 2009 was based on data provided by the Bush Administration dating from the fall of 2008, and those numbers did not encompass how deep the recession would actually turn out to be.

Whether the numbers were too early, simply inaccurate, or deliberately massaged by the Bush White House in attempt to hide the extent of its own failures at the expense of wrongfooting the next president at a time of grave economic crisis, the fact remains that based on the data Obama's team was given at the time, the prediction was reasonable. Only when the recession turned out to be much deeper that any economists were expecting at the time did Obama's numbers begin to diverge from later assessments.

On the other hand, the data Pawlenty's predictions are base on came out of his butt.


The Big Difference--There isn't Any

I doubt your reply was meant to be taken seriously, but seriously, if it was, it's completely unpersuasive. I would be interested to know what "data" the Obama Administration economists were relying on when they made their estimates and predictions you now say exonerates them from responsibility. Those economists, including Christine Romer, were Obama political appointees. They were on board quite a while before the actual transfer of power and have access to many sources of data, including reams of stuff that is put out by think tanks closely related to their own party.

If what you refer to is data generated by the Bureau of Labor Statistics, for example, that kind of data is not generated by political appointees in any administration Career civil servants produce those sorts of statistics and it's not really susceptible to the type of political manipulation you might be hinting at.

Nevertheless, and just for fun, if I were to accept the premise that just because some sort of data "generated by the Bush administration" were relied on by those unsuspecting dupes in the Obama administration, I guess, by the same illogic, I would have to conclude that Pawlenty, having making his unreasonable goal during the Obama administration, must have relied on data they generated. Thus, if eventually Pawlenty were to come up short on his growth goal, he could always argue "I was relying on data generated by the Obama administration and therefore the recovery was not as strong as predicted".

Your argument doesn't really pass the laugh test, but you never know. Voters can be pretty gullible.


Laughing right back at you

Oh Vivian, you're a riot. Are you suggesting that Pawlenty might actually have data to back up the Unicorns & Ice Cream plan that can't even pass the laugh test on FOX News Sunday? (Google the video, it's pretty funny) Despite that amusing implication, I will assume your rebuttal was meant to be taken seriously and offer you a serious reply.

Let me start by acknowledging that perhaps I shouldn't have thrown in the suggestion that Bush may have massaged the numbers, since that would not have been necessary for the numbers to skew the Obama team's projections. The undisputed fact remains that the data available in the fall of 2008 did not encompass the full extent of the eventual damage to the economy, so everyone's projections at that time were just as far off. It is widely understood, at least in the reality-based community, that economic conditions deteriorated dramatically over the winter of 2008, so no one who is intellectually honest could reasonably say that the error in Romer's projection based on the incomplete data is evidence that the stimulus policy failed (partisan hacks excepted).

I hope that makes my point clear enough for you to understand, so you can offer a more serious rebuttal. And in your repy, please do discuss the magical tome you imagine gave Pawlenty the, um, "data" that would make his 10-years-of-5%-Growth "plan" less laughable than your previous response.


Current Data are Never Future Data

I'm glad that you've at least partially come to your senses to admit that Romer et al were not thrown off track by faulty statstics they inherited from the Bush administration.

You wrote: "The undisputed fact remains that the data available in the fall of 2008 did not encompass the full extent of the eventual damage to the economy, so everyone's projections at that time were just as far off. It is widely understood, at least in the reality-based community, that economic conditions deteriorated dramatically over the winter of 2008, so no one who is intellectually honest could reasonably say that the error in Romer's projection based on the incomplete data is evidence that the stimulus policy failed (partisan hacks excepted)."

This is a rather silly statement because it is circular: you are arguing that the Obama administration got their projections wrong because they didn't have information about what the future would bring. But, that's precisely what making economic projections is all about---predicting the future based on current data. The data available to the Obama administration was as current as it could be and to my knowledge was not subsequently subject to material revision.

Of course, there's another, more important factor that we shouldn't ignore. The rosy prediction about the future unemployment rate was not just based on the current data regarding the state of the economy. It was equally based on the belief of those economists as to the effect that the stimulus bill would have on the course of the economy and the unemployment rate, particularly the effect of the particular measures they chose to employ. Evidence to date strongly suggests they were wildly optimistic about the effect that spending would have. This had nothing to do with the "incomplete data" and everything to do with a flawed economic policy going forward.

With respect to Pawlenty, I think you've not read what I wrote very carefully. I clearly wrote that his prediction about the effect *his* proposed policies might have is too rosy as well and I certainly didn't attribute this to his over-optimism to the fact that the data currently available is "incomplete".


Now we're getting

Now we're getting somewhere.

I'm going leave aside the legitimacy of the rightwing's retrospective sniping at the Obama team's inability to accurately predict the eventual cost of rebuilding a burned-out city block while the fire consuming was not even under control yet, since that was never really what this thread is supposed to be about.

You were defending Pawlenty's Unicorns & Ice cream "plan" by suggesting that his promises were no more outlandish than Obama's 2008 assessment of the downturn and how much it would cost to keep unemployment from going above 8%. That is, following the standard GOP playbook of excusing the failures of your own politicians by immediately attacking a Democrat for something vaguely similar.

When I pointed out that Obama's promises for the stimulus plan, though ultimately incorrect, were at least based on actual data, while Pawlenty's entire laughable fairytale was pulled straight out of his ass, you again failed to actually defend your candidate's position and instead just waved a red herring to distract from it (another tactic from the GOP handbook).

The point here is your false equivalency between Obama's promises for the stimulus plan and Pawlenty's 5%-growth-for-a-decade fever dream. We may disagree on the quality/completeness of the mid-crumble data on the collapsing economy that Obama had to work with at the time, but it does appear that we do at least agree that his estimates were at least based on actual data.

While you again sidestepped the crucial question of what sort of actual data could possibly back up Pawlenty's delusions, that fact alone indicates that you do understand that no data set -- not even one concocted at the Heritage Foundation -- could make his predictions not sound ridiculous on their face.

That is that important qualitative difference between those two cases that I pointed out to you in my original reply, and it seems now that you understand what I was saying, whether you're prepared to admit it or not.

So to bring this back to your original post, when you expressed an inability to differentiate between Obama's promises for the stimulus and Pawlenty's promises for his magic beans, allow me to offer this solution:

Obama's projections of the effects of his stimulus plan based on a snapshot of the economy in mid-collapse, made before Congressional horse-trading turned half the spending into corporate tax breaks, could accurately be called "Inaccurate."

Pawlenty kicking off his presidential run with an economic "plan" promising mathematically impossible growth that even makes FOX News hosts giggle, however, could indeed safely be called "Idiotic."


The Big Difference--There isn't Any

You are completely wrong in your assertions. The depth of the recession was not clear to most folks. Even Ben Bernanke has stated that he did not expect the downturn to be this severe. Obama's stimulus package and assertions of 8% unemployment rate were therefore based on the data that was available when he took office.

In contrats, if Pawlenty were actually using Obama's data he would not be making a fool of himself in saying we could have 5% growth rates every year for a decade. If anything he is blasting Obama's numbers as plain wrong and Obama's views on the economy as defeatist, but has yet to show how he came up with his projected growth rate or the fact that his tax policy will add $11 trillion to the debt. He is clearly passing out those numbers from his butt with nothing whatsoever to back it up. The bigger shame is that the CNN moderators did not take him to task on this in the debate last night asking him to back the numbers up, instead going for stupid softball questions.


Doing the time warp

Even if Pawlenty's supply-side nostrums actually had some effect, they primarily would boost the economy's growth potential.

Since the output gap is still huge (about 5 percentage points of GDP) and isn't likely to be closed until 2016 at the earliest (even using the CBO's relatively optimistic growth projections), that wouldn't be of much practical benefit, unless pushing the USA into outright deflation is considered a benefit.

In the supply side mind, it's always 1980 -- just like for a generation of Keynesian economists in the '60s and '70s, it was always 1932.


We will be due for another recession before this "recovery" ends

The U.S. has only once in its history gone 10 years without a recession

This "recovery" could last that long. The way things are now, I'm not sure anyone would notice if we entered another recession. I suppose the inflation hawks would notice, and warn against doing anything to stimulate demand and employment.


playing a different game

You're evaluating Pawlenty's remarks for their truth or falsity. But he's running for the Republican nomination. He's trying to win a panderfest to crazy people. Real world application isn't a relevant consideration.


Real GDP grew 5.4% in 1976

Real GDP grew 5.4% in 1976 with a top marginal rate of 70%.
Real GDP grew 5.6% in 1978 with a top marginal rate of 70%.
Real GDP grew 7.2% in 1983 with a top marginal rate of 50%.
Real GDP grew 4.9% in 1999 with a top marginal rate of 39%.

Real GDP grew on average 2.59% per year between the 2001 recession and the 2007 recession.
Real GDP grew on average 2.64% per year under the 28% rate.

Economic growth does not require a low marginal tax rate and there has not been strong growth under either the 28% rate or the 35% rate.

Pawlenty's plan will merely rack up more debt. Doubt he revenue would ever get higher than 15% of GDP under his plan.


Pawlenty will say whatever he

Pawlenty will say whatever he thinks the most people want to hear. The truth, falsity, correctness or incorrectness is of no concern.
We've had a string of better governors here in MN than him, including Jesse.


The U.S. Has Done It Before (1931-1950)

Bruce,
I hate to correct you (you're rarely wrong) but you wrote:

"Two points I haven't seen mentioned elsewhere: (1) According to the OECD, no county in its database has ever achieved 10 continuous years of +5% growth except Korea; a few had compounded growth rates above 5% annually for 10 year periods, but none have done so for many years and the U.S. has never done so in its history."

The US has done it before:
1931-41--5.05%
1932-42--8.35%
1933-43-10.15%
1934-44--9.86%
1935-45--8.81%
1936-46--6.25%
1937-47--5.62%
1938-48--6.45%
1939-49--5.57%
1940-50--5.57%

Now, mind you, those were exceptional circumstances involving a recovery from a Great depression and participating in a World War. But still, never?

And, it's worth noting, this occurred using policies which are dramatically different from what Pawlently is proposing.

P.S. Of course, the OECD database doesn't go this far back.


I assumed

that Pawlenty was talking about 5% in each and every year, not a compounded 10 year average growth rate.


However, that's not what you wrote.

You wrote:
"...a few had compounded growth rates above 5% annually for 10 year periods, but none have done so for many years and the U.S. has never done so in its history."


The perils

of poor punctuation. 


Forgiven

You're my favorite Republican.

P.S. Bruce Bartlett for President!


The US hasn't anywhere near done it yet.

I have no idea where those 1931-40 "up" numbers come from, but the first great down-leg of the Depression continued through 1933, then the second down-leg recession of Depression hit in 1937-38. So four of those years were seriously negative...

Real GDP, via BEA:

1931: -6.5%
1932: -13.1
1933: -1.3
1934: 10.9
1935: 8.9
1936: 13.0
1937: 5.1
1938: -3.4
1939: 8.1
1940: 8.8

The longest stretch of "5% growth" (outside the WWII war economy) has been three years, twice: 1935-37 and 1964-66.


Looking at the BEA numbers,

Looking at the BEA numbers, 5% growth was fairly common from 1950-1978. Not in consecutive years but 12 years between 1950-1978 (41%) saw real GDP growth exceeding 5%. Since Reagan cut taxes in 1981, there has only been one year where growth exceeded 5% and it probably had more to do with the Fed's interest rate policy unleashing years worth of pent up demand.


OK, done barely once in very extreme circumstance

I understand your numbers now -- the arteries in my brain are hardening, it takes longer for things to sink in these days.

Via BEA again, real GDP (2005 dollars) rose during 1931-1941 from 834.9b to 1366.1b -- which is just barely over 5% (rounds to 5.00%) ... so I sit humbly corrected.

That is from the pit bottom of the Great Depression through the first serious year of war re-arming, so that's a pretty special set of years.

IMHO one can hardly count the post-Pearl Harbor WWII command economy "GDP" as comparable to civilian market economy GDP -- market economies don't have 18% annual growth (in "national product" to be blown up, sunk to the bottom of the sea, or junked as soon as the war is over).

That still leaves only two periods of three-year consecutive 5+% growth in the civilan economy since 1930.

In the 59 ten-year periods starting in 1943 there has been just one averaging >4.5% growth, eight more >4%, and 50 at 3.x% or less.

So sustained 5% growth seems just not credible.


It all Depends on Where You Start From

I tend to agree with consensus that 5 percent growth over a decade is pretty unusual and frankly unrealistic but maybe this guy Pawlenty is on to something.

The key to statistically sustaining this type of growth depends mostly on your starting point. As noted, the only time that this type of growth has been recorded over the past 100 years has been in the immediate aftermath of the Great Depression followed by stimulus induced by war spending. The harder and longer you fall, the higher and longer you bounce seem to be the rules of physics and economic cycles. So, if things continue on their current lousy trajectory in this Great Recession, Pawlenty could start from an extremely low point and we could have a great bounce like we had after the Depression. And, if we default on our debt to China, we could find ourselves in WWIII over that. It's not likely, but it could happen.


One thing you're forgetting:

Voodoo economics can defy, and in fact remake, what you infidels pretend to understand as "reality."


Giddy up, Mao Mao

I'd agree that Pawlenty is an economic lightweight. That said, his prescription would have helped Maoist China avoid mass starvation, and have reduced poverty pretty much everywhere else over the long term. I'd guess Hauser's Law is not welcome around these parts.


Giddy up Mao Mao?

Is this intended to be facetious? It is not really clear to me why any system of governance based on a wilful rejection of objective reality would help anyone, and is in all lilklihood worst for those at the bottom of the power structure. The record from history is that such approaches have been catastrophic to those governed (the entire bolshevik era in the USSR, as well as Mao's insane polices, esp. the great leap forward are excellent examples of this)


Appropo to History

You need to separate propaganda from history, history being a bit less fiction than propaganda.

If the Bolshevists were so disruptive why did Russia beat Nazi Germany? And how come China is doing what it did the past 20 years?


Bolshevism and Maoism had DREADFUL policies

Not to be combative, but I have to agree that Mao's Great Leap Forward betrayed a COLOSSAL lack of awareness of basic economics, and so did Soviet Russia's policies; nor is Russian economic policy responsible for their victory in the Second World War.

Soviet Russia exacerbated their problems of famine terribly, during the early 1930s and at other times of famine. They also had an unsustainably complex and wide-reaching central planning apparatus. This was largely because of their attempts to allocate industrial raw material, and to keep anyone from profiting unduly. If I recall correctly, these attempts to prevent profiteering made the Scissors Crisis (wherein farmers' pay and urban workers' pay diverged so drastically that the economy was plunged into crisis) much worse, as they tried to keep middlemen from profiting from crop price fluctuations; because, of course, if money exists, there's ALWAYS profiteering--by definition! Who wants to spend more and get less?

Russia also made simply horrible tactical mistakes during World War II, as Richard Evans discusses in his Third Reich trilogy. However, among the main reasons they won were simply that they had a huge amount of troops available, and a huge amount of land; also, because Hitler insisted upon directing his generals' battlefield tactics personally, which famously caused several disasters. This had nothing to do with Russia's economic system being inferior or superior, although, at best, you might observe that they were still at least able to produce arms. But this is true of any system.

Also, observing that Mao ordered his private citizens to create iron smelters in their backyards, during the Great Leap Forward, and that this led to NO great amount of usable metals being produced, one can't say much for Maoism. To answer your question, then, the reason China has prospered is that the ruthless, but far more intelligent, or at least economically literate, Deng Xiao-Peng, took over China's economic policy in the 1980s, leading China much more in the direction of western-style capitalism.


Hauser's law is another good

Hauser's law is another good example of Republican junk economics. Hauser's law falls apart if you subtract the social security surplus from tax revenue. The lower marginal tax rates since 86 coincided with an increase in the FICA tax rate. The social security surplus has exceeded 1% of GDP since 1989.

"No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." = Hauser's law

Tax revenue peaks at the top of the business cycle. At the peak of the business cycle in 2000, tax revenue - social security surplus was only 18.1% of GDP. At the peak in 2007, tax revenue - social security surplus was 17.2% of GDP. At the peak of the business cycle in 1989, tax revenue - social security surplus was 17.9% of GDP.

http://www.cbo.gov/ftpdocs/108xx/doc10871/AppendixF.shtml#1097028


So the Great Leap Forward would have been a huge success . . .

if it had only included lower marginal tax rates???

Talk about the price of tea in China . . .


What has the world come to

What has the world come to when a member of the Reagan and Bush I administrations can non-ironically refer to "the usual right-wingers"? By todays absurd standards, Reagan and Bush I would be considered "european socialists"!


Everyone would be doing it if there were a way--not

He says: "If there were any policies that could bring this about, every country everywhere would already be doing it." Ridiculous. Heard of rent-seeking? Public choice? Interest groups? You think property rights are shaky in China and the Soviet Union because, in our collective wisdom, we're not sure if secure property rights play a role in economic development? Yeah, right!


The Soviet Union hasn't been

The Soviet Union hasn't been around for close to 20 years.


You can engineer fake "growth"

FDR did it '33-'38 through devaluation.

It can be done, but ten years is a stretch - you only get that through a once-in-centurty confluence of very strong demographics and broad participation in investment bubbles.


5% real growth easily obtainable

"The truth is that there is no substance whatsoever to Pawlenty's plan except to essentially abolish taxation for the wealthy. And doubling the growth rate is just childish wishful thinking. If there were any policies that could bring this about, every country everywhere would already be doing it."

What Mr. Pawlenty is talking about is the real (inflation adjusted) growth rate. We had growth in the double digits during the 1970's. It is just that most of the growth was inflation. 5% real growth isn't hard to get to if you know what you are doing - and it is pretty clear that Mr. Pawlenty does not.

The problem isn't the ability, it is the willingness. And the lack of willingness you can lay at the feet of politicians who get elected on handouts and give aways instead of a solid understanding of economics. Speaking of economics, have you heard of the national ruler who won a Nobel Prize in economics? Neither have I because politicians in general suck at it.

Real growth is predicated on just a couple things that the federal government has influence over:
Outstanding federal debt
Interest rates on federal debt
Taxes
Government spending

GDP = Personal Consumption Expenditures + Business Investment + Government Expenditures + Exports - Imports

And so.

1. Lowering the federal debt can be accomplished in a number of ways. Higher tax rates decrease disposable income and reduce private investment. Lower government spending decreases GDP in a more directly measurable way. Selling tax breaks through the Treasury Department reduces both federal debt and the tax burden in the private sector.

2. Interest rates on federal debt. Real disposable income and in fact real GDP track real interest rates on federal debt closely. And so the federal government should raise them. The private sector realizes its cost of debt service on an after tax basis. And when the federal government sells tax breaks, the after tax cost of debt service can be pushed to below zero.

3. Taxes - See #1

4. Government expenditures. When will Republican presidential candidates learn? Government expenditures fill the holes left by the private sector where profit is not the ultimate objective - defense, education, retirement security, etc.




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