A bit of pessimism

There are three ways the economy could go in 2010: up, down, or lateral (what I call doldrums). That’s pretty obvious.

For most of last year I predicted the strongest likelihood of up, secondary doldrums, and a slight chance of down.

The chances for down have increased, as have the chances for doldrums, both at the expense of up. I think the general odds of up and doldrums are very close, and right now I’m pessimistic enough to give the nod to doldrums. Less than 3% real growth and more likely around 2% to GDP, and unemployment staying around 10% — at best a half a percent decline over the year.

Let me begin with “up”. I’ve said that what was needed to burst things upward was a second stimulus. Though none were big enough alone, I expected three things to work together to do the kicking. These were the delayed effects (mostly tax-based) from 2009, the passage of a second small stimulus in the guise of a jobs bill, and the passage of the health care bill. That last explains my sudden pessimism, of course. While there’s still a chance we’ll get something, I now think it unlikely. Even if we do, it’ll be so minimal as to have no stimulative effect.

Likewise I’ve become pessimistic regarding a jobs bill. In part this is because it’s facing the same resistance the health car bill faced – a reflexive “no” from Republicans supplemented by a “not if it means spending money” from several Democrats.

No stimulative effects mean we have to wait for Misean instead of Keynesian effects. That in turn means a slow – VERY slow – climb out. Essentially, growth will wait till there’s enough pressure to force it otherwise, at which time it will explode. Then we’ll see inflation and high interest rates as we try to control the bomb we’ve built. Unless, of course, we get our second plunge.

The second plunge is being primed. A commission is being created to look at “controlling the budget deficits”. I’ll keep this short: see Hoover. See the 1930s interruption in growth caused by “return to balanced budgets” (and controlling the deficit). When you’re trying to restart a stalling engine, cutting the gas is stupid.

That said, the timing’s wrong, I think, for us to see the plunge this year. Two “if” statements apply that, should they happen, make the plunge very likely 2011. If one is that the commission creates and congress approves a cut. If two is that we are still in the doldrums by then.

We’ll all have a better idea come March. By then the question of jobs bills (and maybe health care) will be pretty much final. By then we’ll know when the budget commission is due to return. Until then, however, it’s still up in the air.

Oh – and yet China has dumped a bunch of money into stimulative projects, and lo and behold it’s recovering. At a certain point you’d think people would recognize the clue-by-four being used.

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