Using 2.5-3.0% GDP growth through 2012 as the potential with only modest policy changes in Washington, GDP growth will be below this range if Obama gets most of his requests and near the top of the range if Congress rejects most of his proposals.

Each of the Obama plans has two significant aspects.  First, lot of additional money will be spent. Second, the bold plans will reorganize as much as one-third of the economy causing disruption in how every household conducts much of its personal business. The impacts are offsetting.  More spending, whether wise or not, boosts GDP immediately.  The higher level of spending can be sustained two ways. Ii will be sustained if it yields something people are willing to pay enough for to cover the cost or if additional appropriations are made financed by borrowing or higher taxes.

Disruption immediately reduces spending although it may lead to a long term rise in the level of GDP.  When the rules and institutions both households and businesses are familiar with are challenged, Spending is cut to preserve against the risk that the changes are adverse.

The disruption impact has already begun with the rules for on-third of the economy now in play.  It is likely to very depressive in the second half of 2009 because the debate over changing the rules is proceeding very slowly.  No resolution of the carbon tax or healthcare proposals is now likely before the end of September. This pushes the budget expansion debate back several months. The debate could last even longer.

Reduced spending while the current rules are being challenged is already evident in the delay of scheduled hospital and electricity generation projects. The disruption may also be reducing consumer spending through the unusually low level of consumer confidence at the beginning of the recovery period. Households that account for most of consumer spending are becoming concerned about the risk of major tax increases.

Beyond the disruption there are two possible paths for GDP growth in 2010-2012.  If the Obama agenda is largely rejected, we stay with the current familiar rules and GDP growth gradually rises toward its potential level and probably pushes above potential for a period in 2011-12, drawing on resources still idled from the recession.

I

If the Obama agenda is largely enacted, a burst of spending to implement it begins as soon as late this year and likely will be the dominant economic event in 2010. But it will not be sustained because it will yield very little that households want to buy. Progressives believe that cutting carbon dioxide emissions and expanding healthcare spending are themselves the benefit. Households want consumer goods; they do not want more government administrators, green jobs that raise energy costs or higher healthcare costs.  If there is too little immediate economic benefit – sales revenues cover the cost – Obama and the Congress will have to choose from three ugly options when the initial spending appropriations are exhausted, likely late in 2010.

The options are to appropriate more funds financed by borrowing or higher taxes or drastically scaled back the new programs. The first two options will immediately cut private spending by reducing disposable income and business capacity needs. The third option will result in the dismissal of hundreds of thousands of employers. Whatever option is chosen will result in a slowdown in GDP growth later in 2011 and in 2012.

It is too soon to know the outcome of the Washington policy debates.  Experience suggests that Obama will get whatever he is going to get by yearend and then Congress will move on to other matters. The Reed Construction Data GDP forecast assumes that Congress gives Obama a little bit of everything but only enough to modestly depress GDP growth below its potential over the next few years. The proposals are clearly behind Obama’s schedule and are attracting growing opposition.

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