The Obama administration sees the economy through extremely rose-colored glasses.
In its 2010 budget request, the White House says it sees a 3.5 percent spike in growth in the fourth quarter and left unchanged its prediction of just a 1.2 percent overall reduction in GDP for 2009.
That is a lot more optimistic than most private forecasts.
Consider that the latest Blue Chip Economic Indicators Survey, which sees just 1.8 percent fourth-quarter growth. Meanwhile, the latest Wall Street Journal survey calls for a 1.4 percent full year decline.
Meanwhile, the latest estimate of the deficit is $1.84 trillion — equal to 12.9 percent of gross domestic product. In February the White had projected a deficit of $1.75 trillion, or 12.3 percent of GDP.
The administration is banking on the fiscal stimulus package, the government’s bank rescues and the Federal Reserve’s massive easing programs to get the economy going.
The first of the $787 billion stimulus package is just now hitting the states, while the Federal Reserve seems more focused on staving of deflation than heading off any rebound in inflation ahead.
“Although the economic downturn so far in 2009 has been more severe than the administration expected when the forecast was finalized, if the financial system begins to function more normally, there is every reason to expect a somewhat stronger recovery given the depth of the current recession,” the White House told journalists today.
The White House also expects “housing starts to reach bottom this year and to begin a robust recovery as relative housing prices stabilize.”
Of course there is some incentive to project growth on the high side.
The higher the predicted growth, the higher the predicted tax revenue and the lower the budget deficit — all good politics in the medium term, regardless of the reality. The administration would obviously like to deflect the heat it is taking for a deficit that may top $2 trillion this year.
Despite the billions in spending and trillions of Federal Reserve support, former IMF chief economist Kenneth Rogoff fears the administration isn't being forceful enough.
Like Japan in the 1990s, Obama has put forward a big fiscal stimulus program to try to get the economy moving again, yet may have been too cautious in acting to repair the financial system.
"If the banking plan still falls short, the fiscal stimulus will have been wasted to some extent," Rogoff told Bloomberg.
"We could end up like Japan, sliding in and out of recession."
Though no branch of government is behaving illegally or unconstitutionally, it appears that Congress prefers delegating more power to the executive branch as well as to the Fed for the time being, according to economist Tyler Cowen.
“Trillions of dollars of financial commitments have been made without explicit Congressional approval,” Cowen writes in The New York Times, adding that the Fed has lent hundreds of billions of dollars to banks and issued more than $500 billion in potential guarantees to money market funds.
“(The Fed’s) term asset-backed securities loan program could eventually involve up to $1 trillion in purchase of securities backed by credit cards, student loans and other assets,” Cowen notes, and selling those assets could prove costly when the time comes.
“In the longer run… the United States requires a Congress courageous enough to accept responsibility for potentially unpopular policies,” he says.
“We are moving further away from that every day.”
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