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), and $100,000 checks written for every breathing soul in 2011. Let's go big, or go home. I want to beat China's GDP at least once more before 2050.
Goldman's Hatzius who 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. Now due 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.
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.