Tuesday, December 7, 2010

Goldman's Hatzius - The "Don't Call it a Stimulus Plan, Because the American People are Sick of that Word" Will Add 0.5% to 1% GDP to 2011

Prepare to get your 'better than expected' bumper stickers out for 2011 GDP.  Of course when we marvel at the strength of the organic U.S. economy, please don't mention the liquidity tsunami.  Amazing what borrowing a few trillion here, and stuffing a few trillion there can do for GDP.   Again, one last call from my end for 0% tax rates for everyone (per the Laffer curve this should lead to infinity revenue - I kid, I kid; bad economic humor), and $100,000 checks written for every breathing soul in 2011.  This is essentially what we are doing but kidding ourselves by doing it incrementally rather than just having the government pay off everyone's auto loans, mortgages, and credit card debt.  Let's go big, or go home. I want to beat China's (man made) GDP at least once more before 2050.

Goldman's Hatzius has been flip flopping his economic views as quickly as the Federal Reserve and fiscal government are racing each other to hand the good souls of America money we don't have.  [Dec 2, 2010: Goldman's Jan Hatzius Turns Quite Bullish, Helps Drive Rally]  Now due to the it's not a stimulus plan he has tacked on 0.5 to 1.0% of GDP to 2011, pending final details.

Via the ZeroHedge

BOTTOM LINE: The “framework” that President Obama and congressional Republican leaders have agreed to, if enacted, could boost growth above our recently revised forecast for 2011. While the details of the agreement are not yet entirely clear and some political uncertainty remains, our rough estimate is that this package could add 0.5 to 1.0 pp to growth in 2011.  We will await details on the specifics of the fiscal package, as well as additional clarity on the likely legislative outcome before deciding on any changes to our forecast.

Key Points: 

1.  The fiscal package as presented last night by President Obama as an agreement between the White House and congressional Republicans should substantially reduce the drag on growth from federal fiscal policy in 2011.  We already assumed that the 2001/2003 tax cuts would be extended in their entirety, and that emergency unemployment benefits would be extended for an additional three months. However, the payroll tax reduction, an extension of unemployment benefits through the end of 2011, and the extension of other personal tax breaks included in last year’s stimulus package add an incremental $185 billion (1.2% of GDP) in stimulus above and beyond what we currently have built into our assumptions. Since this will be spread out over the course of the year, and the various provisions will each have different effects on spending behavior, the effect on real GDP growth in 2011 is likely to be a boost of somewhere between ½ and 1 percentage point relative to our current forecast, depending on the specific timing of provisions and other assumptions.  This effect rests heavily on our starting fiscal assumptions; other forecasters may assume larger or smaller effects due to differences in their assumptions of fiscal policy in 2011 prior to the announcement.

2. Details of the package may still change slightly. While the president announced the broad outlines of the package last night, no cost estimate has been provided yet, and some details remain unclear.  So while we are reasonably confident of the magnitude of the large pieces, it is too early to quantify the effect of the entire package.  Moreover, some congressional Democrats have expressed interest in changing the agreement; major changes don’t look very likely, but small changes are conceivable.

3. The legislative outlook is not yet clear, but the risk that tax cuts expire remains low.  As we noted in last night’s Skinny, many Democrats have voiced concerns with the proposal while many Republicans have expressed support. Given this unusual political dynamic, the legislative outlook is somewhat uncertain, though we are still confident that one way or another, the expiring tax cuts will be extended by the end of the year. We expect additional clarity over the next 24 hours, as members of each party caucus privately to discuss the agreement, and congressional leaders work on a strategy to move the bill forward. Action this week is possible, though the deal is unlikely to be finalized by the House and Senate until next week at earliest. Congress hopes to adjourn for the year on December 17, though this date could be pushed back if work on the fiscal package has not been completed.

4. The package obviously has implications for the deficit that we will also work out once more details are known. Our latest estimates, $1.25trn for FY 2011 and $1trn for FY 2012, were already under review for adjustments to accommodate our stronger growth forecast. On balance, we would expect the FY 2011 figure to rise, but probably not by much more than $100bn, while the net implications of these changes for the FY 2012 deficit are less clear. We would not expect significant increases in coupon issuance as a result, as the Treasury Department had stopped cutting the sizes of these auctions before it needed to. Our current thinking is that most, if not all, of any increased borrowing is apt to occur in bills.

Point 4 is a bit misleading because on first glance it sounds like "oh, adding $450B of spending only increases federal debt by $100B or so".  But keep in mind they already had the Bush tax cuts and an extension of unemployment benefits of 3 months in their model, in line with the $1.25T deficit for 2011.   They did not have the additional measures (and full year benefits extension) so that additional $185B in spending over and above what they already modeled, equates to the $100B extra in debt.  So in essence they expect the growth in GDP to generate $85B to help lower the $185B price tag.

Either way, another year in a string of them of massive deficits for a $14T economy.... the U.S. seems to be in permanent 10%ish of GDP deficit spending which for any other country would be considered egregious.  Thankfully, we need not play by anyone's rules - reserve currency baby.

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