Deficits Up, Unemployment Up
WASHINGTON-President Obama's Mid-Session Review, an update of the Budget published by the Office of Management and Budget in February, shows that the deficit is increasing and unemployment will remain high for years to come.
The Mid-Session Review, issued on Friday, July 23 at 3:00 pm - just when people might head off for a weekend at the beach or by the pool - is not even listed on the OMB home page under "What's New." Unlike last year, OMB Director Peter Orzsag does not discuss it in the OMB Blog. Rather, it is one small line item under a heading entitled "The President's Budget," just after the appendix.
It's unusual for the Mid-Session Review to come out on a Friday. It has happened only one other time this decade, on Friday, July 30, 2004.
According to Ethics and Public Policy Center fellow James Capretta, formerly associate director at OMB under President George W. Bush, "The fact that OMB released the mid-session review at 3 pm on a Friday afternoon is a dead giveway that they were trying to bury it as much as possible."
A quick glance through this recent report shows why. Next year's budget deficit is projected by Mr. Obama's own analysts to be $1.4 trillion, up from $1.3 trillion projected in February. Over the next decade, under his own policies, the cumulative deficit would be $10 trillion. And the national debt would rise from $6 trillion in 2008 to $19 trillion in 2020.
These are Mr. Obama's numbers, not those of his Republican critics.
The deficit as a percent of GDP is projected at 10% in fiscal year 2010 and 9% next year, and is not forecast to fall below 3.5% until 2017, after President Obama's possible second term. Then, it rises again in 2019 and 2020.
This is far above levels seen earlier in the decade. The deficit as a percent of GDP stood at 9.9% in fiscal 2009, but before that the highest percentage this decade was 3.5% in 2004.
Government receipts are projected to be lower, not just in 2010 and 2011, but through 2017, because fewer Americans will be working. When fewer people work, the government collects less tax revenue.
Outlays are also projected to be lower, which should be good news. But a third of the savings over the next decade are attributed to Medicare, either through the new health care law, which mandates cuts in Medicare, or through savings in the current program.
These Medicare savings are a mirage. Congress has repeatedly overridden statutory Medicare cuts, the latest being cuts of 21% in physician reimbursement, due to take place on June 1. Instead, Congress voted a 2.2% increase. With an expanding elderly population, other planned cuts are equally unlikely.
OMB acknowledges that "the collapse of the housing bubble and subsequent financial crisis have taken a significant toll on the economy, and many of the after-effects are likely to be felt for years to come." Yet the report forecasts real GDP growth to be 3.6% in 2011, in contrast to the forecast of the International Monetary Fund of 2.9% and the Congressional Budget Office forecast of 1.9%. GDP growth rates are projected to be above 4% for 2012 through 2014 and 3.6% in 2015.
This is a five-year average of 3.9%, a pace our economy has rarely met over the past 40 years. One exception was the five years from 1996 to 2000, not coincidentally, the last time the federal budget was balanced.
Such growth rates necessitate a falling unemployment rate and rising real incomes fuelling a decent recovery in consumer spending, along with a substantial boost from net trade over coming years. There are no signs yet that any of these are occurring.
In fact, administration economists project higher levels of unemployment, albeit slowly declining, than have been the case under prior expansions. Between 1996 and 2000, unemployment averaged 4.6%, and in 2003 to 2007, it averaged 5.2%. In contrast, the Mid-Session review predicts annual average unemployment to stay above 8% through 2012, falling below 6% only in 2015.
A boom in trade seems far from certain given Europe's precarious economic situation, with Spain due to follow Greece as the next bailout candidate and French and German taxpayers on the hook for the tab. Meanwhile, Congress has shown no signs of ratifying pending free-trade agreements with South Korea, Panama, and Colombia, agreements that, if approved, would help to boost American exports.
The most serious issue facing Americans today is lack of employment opportunities and how to deal with growing spending and entitlement programs.
What is the path to economic prosperity? Many Democrats recommend raising taxes on upper-income taxpayers in order to shrink government deficits and rein in growth of the national debt. Many Republicans - and some Democrats - counter that these tax increases would slow economic growth by reducing incentives to work and invest.
For one sensible observation on tax increases and growth, look no further than a new paper published in June's American Economic Review, the flagship journal of the economics profession. It was written by Council of Economic Advisers Chair Christina Romer and her husband David Romer, both professors at the University of California (Berkeley).
Entitled "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," the paper distinguishes between the effects of tax changes arising from legislation and increases in effective tax rates that occur automatically, for instance as individuals move into higher tax brackets.
The Romers conclude that legislated tax changes had far more effect than had automatic tax increases. Looking at data from 1947 to 2007, and examining the legislative record behind the tax changes, they conclude "Our estimates suggest that a tax increase of 1% of GDP reduces output over the next three years by nearly 3%." A major reason is that higher taxes have a markedly negative effect on investment.
The Mid-Session Review, which underscores the worrisome economic and fiscal conditions that prevail, should be a warning that our current policies are unsustainable. As Mr. Obama, along with other Americans, awaits the July jobs numbers due out on August 6, he might want to glance at his CEA chair's latest paper.