What if there’s no economic growth?
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TEXT OF INTERVIEW
Kai Ryssdal: There is a little piece of Newtonian physics in macroeconomics. I’m thinking here about the part about every reaction having an equal and opposite reaction. Thinking about the president’s budget plan too, the one that came out yesterday. The White House is expecting GDP to slow just 1.2 percent for all of this year. And then grow by more than 3 percent next year. I asked Brookings Institution economist Barry Bosworth what happens to the president’s economic plan if, as seems plausible given today’s numbers, we don’t see that.
Barry Bosworth: Well, I think that they do have a forecast that assumes that this huge crisis is going to end awfully soon. I think most outside economists would say this is going to be harder than that. If they do, they’re not going to have the type of revenue that they’re projecting for 2010, 2011, 2012. It’s just a period of enormous uncertainty and they really don’t know how much resources they’re going to have available to them.
Ryssdal: What about the other big part of the president’s budget plan that came out yesterday — his plan to cut the deficit by $2 trillion over ten years. How can we do that if we have negative GDP growth this year and really weak growth next year?
Bosworth: You have to have very strong growth to achieve this. I guess I would argue forget about the budget deficit for the next two years, we got to try to save the economy. Once we have a strong economy, I believe history shows it’s pretty easy to reduce budget deficits.
Ryssdal: I wanted to take the premise of my earlier question and apply it to the nation’s banking system. There has been much made of this stress test that the Treasury Department’s going to put the banks through. But that stress test assumes a certain bad economic scenario — 2 percent economic shrinkage over the next couple of years. And in fact today, here we have 6 percent. What does that say about whether or not the banks are going to be able to come back?
Bosworth: Well, you got to remember, if you want to do a stress test you’re going to have to a bad situation. There’s no point to it otherwise. So you should not confuse the two forecasts. The stress test, I think, is a legitimate negative type economic development. Can these banks withstand that kind of situation? I think it’s a very good idea, I think the basic parameters of it have been quite well designed. But it’s not meant to be a forecast of where the economy’s going to go.
Ryssdal: But are we stressing them enough? I guess that’s my point.
Bosworth: You could argue for even a more negative outcome. That’s a possibility. But I think we’ll learn a lot from this. There’s not a lot of sense to asking people what would happen if something’s so bad it’s one percent probability should occur.
Ryssdal: Let me ask you this, though. If we come back to you the next time gross domestic product numbers come out for the first quarter of this year, and they are equally bad or worse, how might our conversation go that day? Would you be more worried?
Bosworth: Yes. I expect them to be very bad for the first quarter. Everything I see — the economy is still basically in freefall. I think that without an economic recovery, it’s hard to go ahead with this agenda that the president had before the crisis. In his campaign he had a very well articulated program and policies that he wanted to do. And then the world got hit with an enormous shock, and everything’s changed. They seem to have a bit of trouble understand the extent to which the world has changed on them and how much just dealing with the economic crisis that we’re not in is going to absorb all of their time.
Ryssdal: Barry Bosworth, an economist and the Brookings Institution. Mr. Bosworth, thanks a lot for your time.
Bosworth: Thanks you.
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