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...
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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Conservatives suspected that something irreversible was happening: that the sheer immensity of President Obama's fiscal and financial interventions may permanently change the size of government and the shape of post-Reagan conservatism...
For decades, everyone pretended to have a profound ideological disagreement about the size of government, but the reality was a comfortable standoff between 21 percent liberalism and 18 percent conservatism. In the end, both sides got what they most wanted: 21 percent spending for liberals, 18 percent revenues for conservatives -- at the politically tolerable cost of a deficit averaging 2 to 3 percent of GDP. This result was handy for politicians and acceptable to the public.
In Washington now, the obvious question is: Has Obama ended the 21 percent era? In January, the Congressional Budget Office forecast outlays at 25 percent in fiscal 2009. That was before enactment of the latest stimulus, which increases outlays by more than $500 billion through 2012; and the forecast didn't account for further financial bailouts. Unofficial estimates take 2009 spending to 26 percent or higher...
How will we pay for, say, 24 percent government? Permanent deficits at 6 percent of GDP would be unsustainable, and the creaky, inefficient income tax is barely able to raise even today's inadequate revenues.
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