This post is a little premature; we’ll be covering this topic in the last half of February.
Anyway, the editorial entitled “Fiscal Fantasy” in the February 7 issue of The Wall Street Journal presents standard GDP estimates as somehow politically motivated. While much of the article is a solid analysis of the problems we have with funding our government obligations and raising revenue, here’s the offending part:
All of this is based on CBO's [typical analysis which says] … the economy will expand by 1.4% in 2013 and 3.6% on average after that. But every year since 2009 CBO has predicted that a new burst of growth is just a year or two away. Perhaps the Panglosses should revisit their optimism … [link added]
What’s wrong with this? The answer is that, whether low or high currently, we always expect growth rates of real GDP to return to somewhere in the 3-4% range. The reason for this is twofold: 1) the long-term average for real GDP growth rates is in that range, and 2) estimates of autoregressive models for real GDP suggest that when pushed away from its mean, real GDP growth returns to its mean in about a year.
In short, the CBO is predicting that “… a new burst of growth is just a year or two away” because … well … a new burst of growth is always just a year or two away.
That optimistic position (driven by experience with the data) does have a pessimistic flip-side though. If growth rates don’t return to that level within a year or two, one should conclude that there continue to be negative shocks pulling the economy downward.
It probably isn’t a surprise to hear The Wall Street Journal’s editorial page making that claim. Personally, I tend to agree with it; but I’m honest enough to note that I’m biased.