4 Economic Predictions Prove Doomsayers Wrong
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By Josh Boak and
The Fiscal Times
May 30, 2013

The past few months have been brutal for economic doomsayers.

The U.S. economy has not succumbed to sequestration budget cuts, runaway inflation, or tax hikes. Potential triggers for disaster such as negotiations to increase the federal debt ceiling have been pushed off until autumn, calming down any anxiety about the possibility of a default.

The recovery from the 2008 financial crisis continues at its slow and steady pace. State governments are no longer resorting to survival mode. Federal Reserve officials are openly discussing how to unwind their quantitative easing policies that were designed to stimulate growth.

Housing prices have sustained a rebound, with prices increasing year-over-year in the Las Vegas and Phoenix markets that were the epicenter of the burst bubble, according to the Case-Shiller index.

PNC Bank chief economist Stuart Hoffman said in a client note that improvements in real estate coupled with a stock market surge “will support consumer spending this year through the wealth effect.”

Things are far from perfect. Millions of Americans remain unemployed. Average wages are close to stagnant. But it might be time to get pessimistic about economic pessimism, a lesson worth considering for both Democrats and Republicans.

Sequester’s Bite Has Been Soft – The White House famously predicted chaos. Could that still happen from the cumulative impact of more than $80 billion spending reductions? Sure.

But it hasn’t yet. The biggest disaster from sequestration thus far was delayed flights at major airport hubs, a public relations nightmare that Congress quickly triaged before departing for recess.

As Jim Tankersley noted Thursday in The Washington Post, nowhere should have suffered as much from sequestration as the metropolitan Washington, D.C. area.  But the prophecies of a recession-like downturn are still unfulfilled. The regional unemployment rate is holding at 5.3 percent, well below the national average of 7.5 percent. Homes in the D.C. area are spending just 11 days on the market before getting sold, according to the firm Real Estate Business Intelligence.

“I think the sequestration isn’t going to be quite as bad as a lot of people had feared, at least in terms of direct job losses,” James Bohnaker, an associate economist at Moody’s Analytics who focuses on the Washington region, told the Post. “The reason for that is that people were already planning for this last year.”


Debt and Inflation Problems Not Happening
– For the past few years, top Republicans claimed that the  $16.7 trillion national debt would put the United States into a European-style death spiral.

Mitt Romney warned last year during the first two presidential debates that the national debt put the country “on the road to Greece” and “down the path of Spain.” But the recent surge in 10-year Treasury yields from 1.66 percent at the start of the month to 2.13 percent reflects confidence in economic growth, rather than panic in the debt.

In short, the bond market has not registered any of the concerns that voters have heard so much about. This could occur years from now, but Republicans will struggle to pin the blame on a safely-retired Obama.

At the same time, congressional lawmakers worried that the Federal Reserve’s stimulus policy would cause inflation. Wisconsin Rep. Paul Ryan, Romney’s vice presidential running mate, has sounded the alarm about this alleged problem.

The Bureau of Labor Statistics reported this month that inflation over the previous 12 months has been just 1.1 percent, well below the Fed target of about 2 percent.

Health Care Costs Are Stable…At Least for Now – The family budget intersects with the federal budget with health insurance. The price of medical treatment was driving Americans into bankruptcy, while the costs of Medicare and Medicaid were consuming a ravenous share of federal spending, adding to the deficit and crowding out money to invest in long-term growth.

Few government officials or analysts dispute that – with the retirement of  baby boomers --  the cost of health care poses one of the most serious threats to the country’s long term fiscal picture.

But for now, at least, that narrative is being contradicted by figures showing a sharp and surprisingly persistent slowdown in the growth of medical costs. Health care expenses grew by 4.3 percent last year, significantly below the recent average.

The White House hopes the figure could fall even further with the launch of Obamacare next year, although Republicans predict a “train wreck,” because of doctors dropping out of Medicare and insurance premiums rising dramatically.

In February, the Congressional Budget Office said lower than expected growth rates for medical costs had erased hundreds of billions of dollars in projected spending for  Medicare and Medicaid. The CBO now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent less than it projected three years ago.

This impacts other policy debates. One of the ways to control health care costs is to get more payments from the uninsured into the system, since it pools risk and enables the newly insured to receive preventive treatment instead of care from the emergency room.

In a widely discredited study, the Heritage Foundation projected that amnesty for illegal immigrants would cost taxpayers $6.3 trillion net over 50 years, as more of them signed up  for Medicare and other entitlements and social programs.

But a new study led by researchers at Harvard Medical School further undercuts conservatives’ arguments that illegal immigrants would be a drain on the government’s coffers.

Their study measured immigrants’ contributions to the part of Medicare that pays for hospital care, a trust fund that accounts for nearly half of the federal program’s revenues. These contributions help to alleviate deficit pressures, in something of a virtuous cycle for the economy.

The study found that immigrants generated surpluses totaling $115 billion from 2002 to 2009. By contrast, the American-born population incurred a deficit of $28 billion over the same period.

The finding “pokes a hole in the assumption that immigrants drain U.S. health care spending dollars,” Leah Zallman, an instructor of medicine at Harvard Medical School and the lead author of the study, told The New York Times.