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Economic Forecast 2014-2015: Looking Better With Help From Oil And Gas
The outlook for the United States economy is better than it had been. The increased production of oil and gas is not the main cause of the strength, but it did lead me to revise my forecast upward. More on that in a moment.
The economy is growing largely because that’s it underlying trend. More people are available to work due to population growth, the general level of skills in the workforce is gradually improving, and physical and intellectual capital grows in magnitude and quality. For the economy to move off of the trend, a significant force must push it off trend.
We are still suffering structural harm from the recession’s aftermath and from the misguided policies adopted to fight the recession. However, these are not enough to overcome the economy’s inherent strengths.
A demand-side approach, favored by Keynesians and Monetarists, comes up with mild growth. A supply-side approach shows a little better opportunity, but with some significant stumbling blocks. Let’s address the demand side first.
Consumers are spending as their incomes rise, but they are unwilling to go out on a limb and borrow more money. Housing construction is growing nicely. Because it remains below the long-run need for additional houses to meet population growth, housing construction will continue its growth, though at a slower pace than in 2013. Businesses are starting to edge up their capital expenditures on equipment, but not on buildings. There’s reason to expect an acceleration of spending this year, but not to extreme amounts. Government spending will be roughly flat in 2014 and 2015, thanks to gridlock. (Yep, I like gridlock. If you don’t like the things that get done when Congress is getting things done, then gridlock is good.)
Net exports are a strong positive to the U.S. economy going forward. Recall that Gross Domestic Product includes exports minus imports. (The government statisticians add up our spending, plus foreigners’ spending on our exports, but then have to subtract the spending we did on imported goods.) The key fact is the growth of oil and gas production. Petroleum accounted for 77 percent of our imports in 2012. That figure is declining now and will continue to drop in the coming year. Incorporating this into my forecast—which I just did, I’m sorry to say—pushed the forecast growth rate up by about a percentage point.
In sum, the demand side of the economy will generate better growth than we saw last year, with good, solid growth in 2015.
The supply side is a concern. As I mentioned above, labor and capital continue to grow. However, higher marginal tax rates will lead a number of potential workers to stay out of the labor force. Higher tax rates on upper income workers will have an impact on those with discretion about how much they work and whether they work at all.
Of greater concern to me is the loss of benefits that lower income workers receive as they earn more. If getting a job entails a loss of various subsidies, that’s equivalent in behavioral terms to a tax on income. A wide variety of government aid programs are tied to income levels. The Affordable Care Act, for example, provides a higher subsidy to people with lower incomes. A comprehensive analysis of all federal programs by the Congressional Budget Office shows that in the range of $5,000 to $20,000 of annual income, the net benefit of earning an extra dollar is about 15 cents.
The Great Recession pushed many people out of jobs and into government support programs. Now these people are finding not much benefit to returning to work. That will reduce our nation’s total productive capacity. So even if I believed that the demand side would come roaring back, the supply side isn’t ready to support it.
Thus we have a moderate pace of growth in the overall economy. It’s not a bad forecast, but it does not show us working up to our potential.