There is a powerful lot of wishful thinking going on about the American economy these days, starting at the very top. President Obama has promised that we will always be a Triple A nation -- despite just having had our credit rating reduced for the first time in our history. Some days later, USA's CEO suggested that reducing the federal budget deficit will require merely some modest tax reform and and a minor adjustment of the Medicare program -- a claim that in my opinion was beyond wishful thinking -- and seemed to be a quick bit of fudging to calm the natives. No one picked up on it either, because the stock market was in the midst of plunging over 600 points that day.
Then there's the CBO, the Congressional Budget Office, which appears to have an exalted reputation as the final precise word on budget deficit numbers. Here's why I'm losing faith. Just recently the CBO predicted that the budget deficit would be 8.5% of GDP this year, 2011 -- then, magically drop to 6.2% of GDP in 2012, perform another miracle by falling in 2013 to 3.2% and then, believe it or not Ripley, declining to the almost invisible 1.2% of GDP from 2014 to 2021. This is more like magical thinking than wishful thinking.
Now, for the Jobs Speech on Thursday. My Harvard economist friend who served in the Obama White House assures me that we could count on a base of at least 2% growth in GDP if we increased the tax holiday on the employee tax from the current 2% to a full 6%; in other words, just got rid of this costly business expense in order to stimulate more hiring. An additional 2% of $14 trillion would add $280 billion to the GDP.
Indeed, Eric Gibbs, an orthodontist in New York who employs 8 people in his office, claims he would hire at least one more person if the wage tax came off. We'll hear more on this issue in Obama's speech Thursday evening. I'm doing some powerful wishful thinking that the Tea Party will eschew its Scrooge-like character and go for boldness. It won't necessarily re-elect Obama.
Last, but not least, are the faithful devotees of QE3, who keep predicting Bernanke will inject more Fed funds into the economy, despite his clearly stating it was time for a fiscal stimulus -- which is not in his power. You are bound to keep being inundated with clarion calls for QE3 as the knee jerk policy needed to stabilize the stock market and prevent further job losses. For myself, I've seen what QE2 did, and I didn't see it hire anyone besides a few more gold and commodity analysts on Wall Street.