Smack in the middle of the debt-ceiling crisis comes word that the economic situation is worse than everyone thought. New Commerce Department figures show the gross domestic product (GDP) growing at an anemic 1.3 percent rate in the second quarter of 2011. Even more alarming, the initial first-quarter 1.9 percent figure was sharply downgraded to a scant 0.4 percent. If the second-quarter rate is later reduced that much, it would signal that the country is in a recession. Most Americans suffering during this historic downturn wouldn’t be surprised.
The weak GDP numbers raise serious questions about the economic assumptions on which the various budget projections and debt-ceiling plans are based. Revenue projections assume an unrealistic growth rate of nearly 3 percent through 2020. The claimed savings in the plans - whether they are from the House, the Senate or the purported “secret” White House plan - are only cuts against projected spending. They are the equivalent of someone claiming to be frugal for not going on a planned unsustainable spending binge but instead just splurging on a moderately pricey shopping spree.
While spending levels are hard numbers, the revenue side of the equation is soft; it is based on the amount of money the economy is expected to generate. When GDP drops, future revenue declines and deficits go up. Thus, even the Senate debt-ceiling plan, which seeks to take the issue off the table for the 2012 election, may no longer give President Obama and the Democrats the necessary margin of safety.
The new numbers also show the widening gap between Mr. Obama’s promised economic performance and what he has delivered. His first budget was ironically titled “A New Era of Responsibility,” but the country saw the opposite. With comfortable Democratic margins in both houses of Congress, the government sought against common sense to spend the country into a robust recovery. But that’s not how markets work. The era of big government returned with a vengeance, and America has continued to teeter on the brink of collapse throughout the entire Obama term.
The results of this reckless approach are clear. The first Obama budget promised GDP growth of 4.0 percent in 2011. Instead, the current annual rate is 1.3 percent, and year-to-date growth annualizes to less than 1 percent. The promised unemployment rate for 2011 was 7.1 percent, to drop to 6 percent in 2012. Actual June unemployment was 9.2 percent, up from 8.8 percent in March and showing no signs of declining. The projected 2011 federal deficit was $912 billion, which was supposed to be almost halved by 2012, to $581 billion. Unfortunately, the nation’s finances have gone in the other direction. The Congressional Budget Office now projects the 2011 deficit at $1.5 trillion. For purposes of comparison, the actual budget deficit for all of 2007 was $160 billion. Perhaps the United States needs to return to the old era of responsibility.
Comparing economic reality to the promises of two years ago illustrates the shaky ground on which the war over the debt ceiling is being waged. All the plans, from every side of the spectrum, are exercises in prognostication that are certain to be wrong. The intense passions being generated over which plans “save” however many trillions of dollars over the next decade are a waste of energy. These plans are fictions based on unrealistically rosy scenarios. The only numbers that really matter are those on the bottom line. The real battle will come this autumn when Congress grapples with the coming fiscal year’s federal budget. That battle will truly separate those who want to do what it takes to save America from insolvency from the tax-and-spenders who pretend there is no crisis.