The Midsummer Review (MSR) of the federal budget, long overdue, has now hit the stands after the Administration softened the news by "pre-leasing" the $1.9 trillion of additional debt expected over the next decade. This comes less than five months after the original budget proposal.

Nearly all of the revision comes from a deteriorating economy, one that has not responded to the government's fiscal policy thus far. In their original budget they expected 3.5 million jobs "created or saved". That language is not in the MSR, and unemployment is expected to be 2% higher than previously supposed for 2010. That would mean 2.8 million fewer jobs. Now, one might wish to argue that there were more jobs to be lost than they expected, momentum was worse, etc. Let me give you two looks at this from comparing the original OMB budget economic assumptions and the MSR. The first is the unemployment rate (fourth quarter average.)

Notice the glidepath for reaching full employment (which is a 5% unemployment rate in their modeling.) You end up in the 2012 election with a 7.5% unemployment rate. Now it may be that the change in unemployment in 2012 is good for the electoral chances of President Obama, but there will be much long-term unemployment by then, and how will this be expected to change?

The other comes from the estimation of wages and salaries (which is, of course, a big driver for estimates of individual income tax receipts.)

I thought at first this was an acceleration due to inflation, but that's not it. Current dollar GDP in the out years is expected to be almost identical to the April budget. So how do wages and salaries increase while GDP falls? That's a puzzle to me, and it helps to drop the deficit in the second half of the decade.

One last graph, this time showing how the changes from 2010 to 2019 (the 2009 decline in the deficit already being attributed to the decision not to put money in the deposit stabilization fund.) Only the blue part at bottom is the result of what the Congress has changed over the last four months -- the remainder is entirely due to the revisions to economic assumptions.

Now I could be mistaken on this, but it's not a coincidence that the decline in the budget deficit is due entirely to a decline in the rate of decline of tax receipts. The purple area is the increased cost of servicing our national debt. The primary deficit never goes to zero, reaching a nadir of $90 billion in 2018 before rising in 2019. To give you an analogy: This is like spending so much on your credit card and then making payments less than the interest on your card balance. We now have rules that advise consumers not to do this. Too bad Congress doesn't read them.

Ed argues that heads should roll, particularly Orszag's, but he's pointing at the wrong person. The MSR's error was a macro forecasting error, and the responsibility for that lies with the Council of Economic Advisers and particularly Christina Romer, who was out explaining her position this morning as simply "the recession was worse than we thought." Um, no. Prof. Rosy has been busted on this from last spring by both private economists and the Congressional Budget Office. The administration has now been made to walk back last spring's forecast to where the rest of the profession already had it. It is too bad Prof. Romer has been made to say such nonsense. Continuing to work with this White House only further damages her reputation.

UPDATE: CBO weighs in, but they note that it's not an apples-to-apples comparison. "OMB�s projection of the BEA baseline deficit is roughly $6.3 trillion over the 2010-2019 period, or about $0.9 trillion lower than CBO�s baseline total for that period." So did the OMB even understate the new figure??

Labels: economics