Doom or Sunshine? It Depends…

[Why do some who frequent this forum see only blue skies ahead for the economy while others expect something like economic Armageddon?  Forum regular Andy Gutterman, aka ‘”Avocado,” has a theory that one’s point of view may be colored more by income level than by any other factor. In the guest commentary below, he looks at his own circle of friends to expand on the point. Meanwhile, whatever we as individuals might expect, Government itself sees the clouds parting in 2014, ushering in strengthening growth into 2018. Could the Congressional Budget Office be right?  The answer, according to Andy, would probably depend on how optimistic you are about your own economic future. RA]

Fred and I are former Republicans now voting Democrat (I voted straight Republican ticket everywhere from 1972 to 2000, then Democrat in 2004 and 2008, Libertarian in 2012, and Democrat in VA in 2013. Even Obama got to me after his election in 2008. Obama cannot lead.) Bob is a Republican turned Democrat. I know Thomas is a Democrat. Charles is Democrat turned Republican — Tea Party, no less, hence the lively conversations. Yet Fred and I and probably Bob are closet Republicans, and if the Republicans could field a viable candidate we would might vote for them in 2016. (Ted Cruz is not a viable candidate).  Here goes:

Muddle Along Indefinitely?

Fred argues — persuasively, I’ll have to admit — that there’s no good reason why we cannot continue to muddle along indefinitely. Why does there have to be a crash, he asks? Part of his argument rests on the fact that although I’ve been expecting a crash for 30 years, it has yet to occur. And if 2008 produced as much of a crash as we’re going to see, it must be acknowledged that the Government, or the FED, or the two acting in concert, were able to stop it in its tracks. So why couldn’t they do it again in the future, Fred wonders? I’m hard pressed to counter this argument.

I think this is Bob’s position as well, gleaned from reading his email.  Charles, Thomas and I see it differently. Yet none of us have succeeded in convincing Bob or Fred to change their minds.  It may be because of our different stations in life. Fred is much better off than the rest of us, although Bob is pretty much in agreement with Fred, even though Bob is also at the bottom. Fred may see the world through a different lens. People at the bottom who live from paycheck to paycheck worry about what will happen if the economy slows down to the point where we cannot pay our bills. I think the economy would have to slow down a lot more for Bob and Fred to feel the same way, even though Bob is on the bottom rung as well.  Charles, Thomas, Bob and I are among the bottom 15%, while Fred is in the top 25%. (Click here for a handy little calculator can tell you where you are.) I’m at 12%, Fred at 75% (i.e., bottom 12% and top 25%).  And married. We see the world very differently.  So we have four very intelligent people at the bottom and one near the top – a good cross-section of haves and have-nots. (There are of course a lot more have-nots than haves.) If you are a have, then you see the economy one way; if you are a have-not, you see it differently.

The Wealthy Peak Later

Generally speaking, people with money reach their spending peaks later in life. Most consumers peak in their mid- to late-forties; wealthier people, in their early fifties. This is possibly what has kept the economy humming longer than it might have if our spending patterns were equal. The challenge for those who foresee doom is to explain why it is inevitable. This is the an important concern for everyone else as well, since, if most people don’t see extremely hard times coming, they aren’t going to prepare for it.

Naturally, the Congressional Budget Office paints a rosy picture. After the economy adjusts this year to the slower fiscal growth inherent in current law, the CBO predicts, underlying economic factors will lead to more rapid growth:  3.4 percent in 2014, and an average 3.6 percent a year from 2015 through 2018.  Moreover, says the CBO, the effects of the housing and financial crisis will continue to fade, and an upswing in housing construction (albeit from a very low level), rising real estate and stock prices, and increasing availability of credit will help to spur a virtuous cycle of faster growth in employment, income, consumer spending, and business investment over the next few years.

Relative to this sunny forecast, the question becomes, What doom?  It must be noted, however, that in 40 years of studying CBO projections, I’ve never seen them factor a single recession into their outlook. It’s as though, in their crystal ball, recessions simply don’t exist.