Tags: Obama | Budget | Years | Growth

Obama Budget Relies on Six Years of Strong Growth

Tuesday, 02 Feb 2010 11:41 AM

The White House budget proposal released Monday assumes the U.S. economy is heading for a six-year run of above-average economic growth with no sign of a worrisome spike in inflation or interest rates.

The forecasts underlying President Barack Obama's budget plan show real gross domestic product rising 2.7 percent this year, which is largely in line with private forecasts.

Beginning in 2011, the White House's projections diverge.

It expects six consecutive years of strong growth ranging from 3.2 percent to 4.3 percent — well above what most economists consider the longer-term trend of around 2.6 percent.

The last time the economy saw a similar streak of strong growth was in the late 1990s, during the dot-com boom. Obama has said both that expansion and the housing-powered growth in the mid-2000s were bubble-driven, and he wants the next expansion phase to rest on sturdier pillars.

If the White House is assuming stronger economic growth, that implies bigger tax revenues and a smaller budget gap. The proposal shows the deficit shrinking to just under 4 percent of GDP by 2014, from an estimated 10.6 percent this year.

Compared with the economic growth forecasts Obama's administration released a year ago, these figures show more modest expectations for 2010 through 2012, but considerably stronger growth beginning in 2014.

Peter Morici, a professor at the University of Maryland's Smith School of business and a long-time critic of U.S. economic policy, called the GDP forecasts "extraordinary."

"Rosie Scenario wrote this budget," he quipped. White House economic adviser Christina Romer acknowledged that the forecast beyond 2010 was above consensus but pointed out that the budget called for more modest economic growth than what has typically been seen following deep recessions.

The average growth in the five years after the trough was 4.2 percent, she said. The budget forecast reflects a 3.8 percent five-year average.

"We think this a reasonable, honest forecast," she said at a news conference, in response to a question from Reuters. Still, many private forecasters see a conflict between the administration's need to boost growth and hiring now without doing more harm to long-term finances.

"Put simply, the deficit is so big that it will be hard to pass another stimulus, which I think is necessary to combat the recession," said Carl Birkelbach, chairman and chief executive of Birkelbach Management in Chicago. "Without that... I think we're looking at an extended period of slow growth."

While the White House expects robust growth, its forecast shows the jobless rate receding only slowly, averaging around 10 percent this year and then easing to 9.2 percent in 2011. It isn't expected to dip below 6 percent until 2015.

The White House appears to have bumped up its long-run projection of unemployment. It shows the jobless rate holding at 5.2 percent in 2018 through 2020. In the economic assumptions included with last year's budget plan, it pegged long-run unemployment at 5 percent.

Some private economists have raised their long-term unemployment forecasts as well, arguing that the latest recession has done lasting harm to the labor market.

The White House is assuming inflation poses no serious threat through the 2020 forecast horizon. Its figures show the consumer price index below 2 percent this year and next, and then holding steady at 2 percent to 2.1 percent through 2020.

That would be welcome news for the Federal Reserve, which has cut its benchmark interest rate to near zero and pledged to hold it there for a while.

The ultra-low rates, combined with the Fed's special lending programs that have swelled its balance sheet to $2.2 trillion, have led some economists to worry inflation will spike once the economy has recovered from the deep recession.

The White House appears to be expecting the Fed to normalize rates slowly over the next four years, judging from its projections on three-month Treasury debt interest rates.

It expects the rate on three-month Treasury bills to average 0.4 percent this year, which would be up modestly from its current yield. For next year, it expects that rate to average 1.6 percent, and in 2012 it sees 3 percent.

As for longer-term Treasury debt, the White House is predicting 10-year rates will gradually rise to an average 5.3 percent in 2014 and hold there through the forecast horizon.

That would seem to reflect a view that the Obama administration will be successful in bringing down deficits and debt quickly enough to keep investors happy.

© 2017 Thomson/Reuters. All rights reserved.

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The White House budget proposal released Monday assumes the U.S. economy is heading for a six-year run of above-average economic growth with no sign of a worrisome spike in inflation or interest rates. The forecasts underlying President Barack Obama's budget plan show real...
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