Archive for Saturday, February 28, 2009

Budget goals depend on recovery

GDP has worst quarterly showing in 26 years

President Barack Obama walks to the Oval Office on Friday after arriving on the South Lawn of the White House in Washington.

President Barack Obama walks to the Oval Office on Friday after arriving on the South Lawn of the White House in Washington.

February 28, 2009


— President Barack Obama’s ambitious plans for a new era of big-government activism depend on a full economic recovery — and those prospects don’t look good anytime soon.

More grim economic news out Friday means it will be even harder to get the economic growth that Obama baked into his bold new $3.6 trillion budget.

Just one day after the White House optimistically forecast a return to solid growth in 2010, the Commerce Department issued a downward revision showing the economy shrank 6.2 percent in late 2008 — far more than the 3.2 percent drop in the gross domestic product previously reported.

It was the worst quarterly showing since early 1982 and the size of the decline caught many economists by surprise.

It showed the recession was far more severe than thought at year’s end.

And since conditions have generally worsened further since then, it was not a good harbinger of the kind of strong recovery the administration is counting on.

“We’re in bad shape, very bad shape, and this just confirms it,” said Mark Zandi, chief economist at Moody’s “I think the administration budget is optimistic on growth, especially this year and 2010. I think it will be tough to get the kind of growth rates they’re expecting.”

The White House is relying on a relatively fast return to GDP growth in the range of 4 percent and above to help boost government revenues to help pay for the new, more active government role spelled out in Obama’s first budget.

In a sharp break with policies of the past eight years, he called for a new, more activist course for the government in education, health care, energy and protecting the environment. That’s on top of federal help for struggling banks, automakers and homeowners facing foreclosure.

Obama’s budget, unveiled on Thursday, would increase taxes and limit deductions on affluent Americans and businesses to help foot the bill.

But if recovery doesn’t materialize as quickly as the White House has forecast, Obama will be unable to make good on meeting his spending targets while also keeping a pledge to try to significantly reduce the annual deficit — expected to be a staggering $1.75 trillion for 2009 — to $533 billion by the end of his term.

Even a string of congressional victories on his agenda won’t alter the daunting budget math.

In its budget, the administration predicted the economy will shrink by 1.2 percent this year but snap back and grow by a solid 3.2 percent in 2010. That would be followed by even stronger increases of 4 percent in 2011, 4.6 percent in 2012 and 4.2 percent in 2013.

By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators this month predicted the GDP will fall by a larger 1.9 percent this year and then increase at weaker rates of 2.1 percent in 2010, 2.9 percent in 2011 and 2012 and 2.8 percent in 2013.

The administration needs GDP growth in the 4 percent-plus range for successive years to be able to make its budget math work add up.

It defends its projections as based on a belief that the president’s various recovery steps, including the recently passed $787 billion economic stimulus bill, will lead to a fast recovery.

“We certainly are more optimistic (than some private forecasts), but nothing out of the ballpark,” said Christina Romer, who heads the president’s Council of Economic Advisers. And, she noted, the deepest recessions have often led to the strongest recoveries.

Still, Friday’s downward revision in end-of-year economic activity raised fresh questions about the administration’s projections.

The Republican National Committee suggested Obama was relying on overly optimistic assumptions — a tactic used frequently in the past by presidents of both parties — in spite of his pledge that his budget was transparent and gimmick-free.

“Today’s news is yet another reminder that families and small businesses are hurting during this recession,” said House Republican Leader John Boehner of Ohio. He said it was no time “to take more of their money away to pay for a big government spending spree.”

Is it possible that the White House will be right and the economy will recover along the time line projected in Obama’s budget?

“Yes, it’s possible. Do I think it’s probable? No, I don’t. But I don’t think anybody’s forecast is probable,” said Rob Shapiro, head of the globalization program at NDN, a Democratic think tank, and chairman of Sonecon, an economic-consulting firm.

“No one has called this cycle correctly,” Shapiro said. “Because it is so unlike any other downturn, economists are legitimately more uncertain about what its course will be.”


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