Tuesday, February 02, 2010

When all that's left is hope 

According to reports yesterday, CEA Chair Christina Romer now expects that unemployment will be 9.8% at the end of 2010, 8.9% at the end of 2011, and 7.9% at the end of 2012. Many liberal economists are exasperated that the Administration is focused on budget reduction rather than stimulating ever more jobs. For instance, Mark Thoma:
Additional fiscal policy measures could make a difference to the unemployed, but instead the administration is proposing policies that might sell well, but only address a tiny fraction of the long-run deficit problem.

Health care reform is the key to solving the deficit problem, but reform is being held up by the party of just say no. That's the message Democrats need to hammer into public perception, that true inroads into deficit reduction through health care reform are being blocked by Republicans. In the meantime, Democrats need to take care of business the unemployed. Yes, the party of no will try to block additional stimulus, but they fight everything, and helping struggling households is worth standing toe to toe and fighting back.

When the next election rolls around and unemployment is still too high, but falling, we'll hear all about how the administration helped to put us on the road to recovery.
So we get some people deciding damn the deficit, full stimulus ahead like Rep. Clyburn, Paul Krugman's new friend. But the Administration has turned back on this beginning in October. They will freeze, and maybe make a few more cuts.

Because all they seem to have left to save this is hope. They are clearly betting on the economy improving and, stung by their unrealized optimism of 2009, are now using Dr. Romer's dour forecast to in essence undersell the program. Ryan Avent explains the dilemma that faces the Administration.
Currently, America is looking at a budget deficit around 10% of output. Mr Orszag noted in the press conference that the administration would like to cut that to 3%. But their expectations are that the bulk of the improvement in the near-term deficit�producing a decline in the deficit from 10% of GDP to 5% by 2015�will come from economic recovery, and the resulting increase in tax revenues and decline in automatic stabiliser spending.

Near-term deficit reduction is almost entirely about the strength of the economy. And nothing anywhere in the president's policies will do anything meaningful about the long-term deficit, which is almost entirely about growth in spending on health care.
So how could this possibly work? I think the Administration positions itself to benefit greatly from a positive surprise to GDP and employment with the budget. Suppose the V-shaped recovery comes true. Tax revenues soar, and the Obama budget soaks up that money and can avoid issuing quite so much debt in the early years of the decade. I don't give that a high probability, but it's greater than zero. The administration uses a 2.7% forecast on GDP while private economists are averaging 3% and there is more than one forecaster north of 4%. (As opposed to last year, I'm largely in agreement with the budget's economic assumptions.)

So balancing the budget might be easier than Obama is making this out to be. Let me leave you with one last thought. Obama will certainly get a few dollars more out of the wealthy, but did anyone catch this change? He's not only ending the Bush tax cuts, he's ending his own.
[Obama] dropped a request to make permanent the payroll tax credit that fattened worker paychecks by $400 per person in 2010. In Monday's budget blueprint, Mr. Obama proposed extending only through 2012 that credit, which was his signature tax-cut proposal for middle-class workers during his campaign.
He's willing to raise taxes on the middle class out of his fear of the deficit hawks? Glory! Another campaign promise has expired.

Labels: ,