Few things in life are as treacherous as unrealistic expectations. You are sure to be disappointed if you place your hopes on something that has an extremely low probability of coming true. But highly unrealistic economic expectations seem rampant right now on both sides of the political spectrum.
Some weeks ago, I criticized the Obama administration for its lack of a realistic strategy to deal with long-term deficits. I got an angry e-mail from an administration supporter who asserted my concern was groundless since “a decade of double-digit economic growth” not only would make the deficit disappear, but make the national debt itself shrink.
The reader was correct. A decade in which national outcome and income grew by 10 percent or more a year would indeed solve many budget problems. The problem is that it is not going to happen. In the 80 years we have tabulated gross domestic product, one finds only five years of double-digit growth. Three were during World War II. The other two, 1934 and 1936, were when we were recovering from the depths of the Great Depression.
There is one 10-year span where growth averaged 10.6 percent per year, 1933 to 1943 — from the worst Depression year to the height of the ensuing war. The average annual growth rate for these eight decades is 3.3 percent. The average for the last 40 years is 2.45. If you look at presidential administrations, John F. Kennedy was the only post-war president with average annual growth above 5 percent.
Using less-reliable statistics for earlier decades, it seems clear that in 220 years, the United States never has had one decade of double-digit growth during peacetime.
So don’t count on “a decade of double-digit growth” to solve deficit problems.
But supporters of the current administration aren’t the only ones who need a reality check. From the other end of the political spectrum, a recent e-mailed newsletter described “swelling criticism of the failure of Obama’s stimulus package.”
Yes, the economy shows little improvement, other than stock prices, over the five months since Obama was inaugurated or four months since the stimulus bill was passed in Congress. And yes, the administration set itself up for such criticism with its ill-advised and unmeasurable claims of “2 million jobs created or saved.” But no economist who supports Keynesian monetary and fiscal policies to stimulate a recessionary economy ever claimed results would come swiftly.
Obama signed the stimulus bill on Feb. 17. Given how slowly the wheels of government grind, virtually no money other than the tax rebate embodied in people’s 2008 tax returns actually has been disbursed.
Both monetary and fiscal stimulus efforts have long lag times before having any effects. For money supply and interest-rate changes, the lags often are between eight and 20 months. For tax and spending changes, it often takes from six months to more than a year after substantial sums are actually disbursed for the overall economy to show any effects.
So it is entirely to be expected that no results — other than those based on optimistic expectations — would be visible yet.
To the extent the public understands that these views simply are cases of partisan rhetoric, little harm is done. But if the electorate really believes our economy can grow by more than 10 percent a year or that economic stimulus programs have immediate effects, we have set ourselves up for bad policies.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.