Analysts Raise GDP Forecasts Following Tax Cut Deal

Analysts from Goldman and JP Morgan are raising their forecasts for 2011 economic growth after the tax cut extension deal was made. The drawback is that it may make long term fiscal reform harder and the US deficit will grow. See the following post from Economist's View.

Greg Ip at the Economist summarizes the estimates of the macroeconomic impact of the tax cut agreement:

Did Barack Obama lose a political battle but win a war?, Free Exchange: The number crunchers have had their first stab at Monday’s tax deal and the economic impact is impressive. Goldman Sachs now thinks the economy will grow 0.5 to 1 percentage points faster next year than its current forecast of 2.7%, which was bumped up from 2% only a week ago. JPMorgan has raised its 2011 forecast (fourth quarter compared to a year earlier) to 3.5% from 3%. Moody’s Economy.com sees growth next year at 4%. All of these forecasts imply some decline in the unemployment rate. ...

The initial reaction, in particular among liberal commentators, was that this was a political loss for Barack Obama, since he gave up more than the Republicans. I initially shared that view, but a colleague notes that this constitutes a loss only by narrow Beltway-based accounting. What will ultimately matter in 2012 is how the economy performs, not whose policies are responsible for that performance. If the economy is booming a year from now, Mr Obama may be seen to have lost the battle but won the war. ...

Outside the beltway, it doesn’t matter who wins or loses but whether it’s good for the economy. In the short run the answer is, unambiguously, yes. In the long run, there’s not much comfort to be taken from the fact that Democrats and Republicans have once again proven they can come together to run up the deficit. ...

In some ways this deal might make thoughtful long-term fiscal reform harder. Mark Thoma worries that the payroll tax cut may be difficult to reverse a year from now, with bad consequences for both the deficit and, ultimately, Social Security...

The estimated impact seems a bit high to me given that the net stimulus is all tax cuts, spending on items such as infrastructure are not included in the deal. So I hope the estimates -- which rely upon a presumption about how much of the tax cuts will be spent rather than saved -- are correct. The worry is that this will be used as an excuse to avoid even thinking about doing anything further to help labor markets recover faster even though under the most optimistic estimates of the effects of the tax deal full recovery of labor markets will still take a very long time.

This post has been republished from Mark Thoma's blog, Economist's View.