Wednesday, March 11, 2009

The Obama administration is basing its budget forecasts on the economy growing an eyebrow-raising 15.6 percent above inflation between 2008 and 2013 - a drop of 1.2 percent this year followed by an average of 4 percent growth over the following four years. That’s very impressive growth for any period of time. Even small deviations in growth rates can mean hundreds of billions or even trillions of dollars in the federal budget deficit.

The federal government faces a $1.75 trillion deficit this year, over 12 percent of GDP - more than twice as large a share of GDP as any deficit since World War II. Despite all its new spending programs, the Obama administration claims that it will be able to cut the deficit down to 3 percent by 2013, and that depends on fast economic growth and thus more government revenues.

If President Obama is correct that the economy will only shrink by 1.2 percent this year, despite all the rhetoric comparing our current plight to the Great Depression, this will be a relatively moderate recession. During the first four years of the Depression the economy shrank by 27.5 percent. For a more recent example, the economy shrank by 1.9 percent in 1982.

Harvard economics Professor Greg Mankiw thinks that Mr. Obama’s growth forecasts are overly optimistic and that the federal deficit will be a lot larger than Mr. Obama thinks. He was chastised by Princeton’s Paul Krugman, a Nobel Prize winner in economics, who on his New York Times blog claims that Mankiw can only make the predictions that he does because of “more than a bit of deliberate obtuseness.” He titled his post on Mankiw, “Roots of Evil.”

Last Wednesday, Mankiw responded to Krugman’s attacks by suggesting: “Well, Paul, if you are so confident in this forecast, would you like to place a wager on it and take advantage of my wickedness?” Krugman has still not responded. It seems even a Nobel Prize winner isn’t willing to lay money on Mr. Obama’s rosy projections.

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