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Peter Crabb: Why the search persists for one-handed economists

Harry S. Truman is famous for saying, “Give me a one-handed economist! All my economists say, ‘On the one hand, on the other.’” No such economist appears to be working these days.

In the economic office of Congress, the Congressional Budget Office, the economists clearly have both hands intact. The CBO’s most recent report on the economic outlook includes good news on the one hand and bad on the other.

First, the good news: The CBO’s August report on the federal budget and economic outlook says that the recent deal between Congress and the president will reduce the long-term deficit. The report says cumulative federal budget deficits will total $3.5 trillion between 2012 and 2021. This is a sharp reduction from a 10-year estimate of $6.7 trillion in deficits over the next 10 years that was projected by the CBO in March.

Lower federal deficits and the resulting decline in federal debt held by the public helps the economy grow at a faster rate by keeping long-term interest rates low. Further, lower deficits today help the government better meet its obligations in the future.

Now, the bad news: The CBO says, on the other hand, that its forecast of economic output will remain well below potential for several years. Potential GDP refers to the highest level of real gross domestic product that an economy can sustain by using all available labor and without raising the rate of inflation.

The CBO currently estimates potential GDP for the second quarter of 2011 at $16 trillion. Actual GDP in the second quarter was only $15 trillion. That’s a 6.25 percent gap.

When the economy is at potential, all workers who want a job can find one fairly easily. When the economy is below potential, unemployment stays high. With only modest economic growth anticipated for the next few years, the CBO expects the unemployment rate to remain above 8 percent through 2014.

Economists also need two hands to explain the outlook for Idaho. In its most recent report, Idaho’s Division of Financial Management says there are “signs of growth this year followed by modest gains thereafter.”

On the one hand things are picking up, but on the other this pickup is not likely to be sustained. Income growth is expected at more than twice last year’s rate, but the longer-term expectations for economic growth and employment in the Idaho Economic Forecast have been revised down.

Growth in state-level inflation-adjusted personal income is forecasted to average only 2.8 percent over the next three years. Total employment in Idaho is forecasted to average only 2.5 percent.

With a 2.8 percent growth rate of personal income per capita, income in the state will still be below its 2007 level. With 2.5 percent employment growth, total nonfarm employment will return to its 2007 level, but population growth will mean unemployment rates stay elevated.

Financial markets have lately been concerned that another recession is setting in. Forecasts at both the national and state level suggest this is not the case. On the other hand, the long term outlook is weak.

Truman’s search for a one-handed economist continues.

PETER CRABB is a professor of finance and economics at Northwest Nazarene University in Nampa

prcrabb@nnu.edu

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