The Obama Budget: Doomed From The Start?

Will the grand plans of the Obama budget be sabotaged by the economy? There are more than a few people predicting just that sort of fate.

Much of the template for significantly increased spending funded by tax increases and revisions depends on some fairly optimistic projections for economic growth. The plan counts on 3.2% growth in 2010 and 4% thereafter. It’s hard to find many economists that agree with this sort of growth. Below is a table from Greg Mankiiw’s blog that summarizes the outlook from a panel of economists (the red numbers are the administration’s projections).

2009: -1.2% -1.9%
2010: +3.2% +2.1%
2011: +4.0% +2.9%
2012: +4.6% +2.9%
2013: +4.2% +2.8%

There is a significant difference in future outlook. Now, one could argue that crystal balls aren’t clear enough to put too much credence in either scenario and I would tend to agree with that assessment. What I do find difficult to swallow is the 4% plus growth that the Obama people have for the out years. That’s pretty robust growth at any time and I see nothing that would argue in favor of that sort of outcome.

But leaving that argument aside for the moment, it certainly seems as if the economy is shrinking at such a rapid pace that the forecast for 2009 and 2010 are just not anywhere in the ballpark. An article in the New York Times today uses the “D” word.

Mark Zandi, chief economist of Moody’s, now places the odds of “a mild depression” at 25 percent, up from 15 percent three months ago. In that view, the unemployment rate would reach 10.5 percent by the end of 2011 — up from 7.6 percent at the end of January — average home prices would fall 20 percent on top of the 27 percent they have plunged already, and losses in the financial system would more than triple, to $3.7 trillion.

Allen Sinai, chief global economist at the research firm Decision Economics, sees a 20 percent chance of “a depressionlike possibility,” up from 15 percent a week ago.

“In the housing market, the financial system and the stock market, we’re already there,” Mr. Sinai said. “It is a depression.”

If the economy does careen into something resembling a depression or if it just gets stuck in the severe recession that currently afflicts it then a lot of the budget is going to have to be rethought. Tax increases would have to go out as would some of the more aggressive spending on health care. The fact is that further and hopefully more targeted stimulus spending will be required.

Even if the economy starts to recover but recovers at a rate more in line with the conservative estimates, the spending targets in the current Obama budget will be unsupportable absent either massive deficits or tax increases that dig deeply into the middle class. All presidents tend to over estimate future growth and usually find themselves forced to scale back their ambitions. The question this time is whether this president may be so far off the mark that the budget never gets off the ground at all.

more: here and here

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