he Next Bubble: Obama's Budget Deficit
Joshua Zumbrun, 03.20.09, 6:00 PM ET
WASHINGTON, D.C.--As President Obama prepares to send his budget to Congress next week, he's run into a bit of a stumbling block. The Congressional Budget Office said Friday that the national debt under the president's budget will be $2.3 trillion deeper than the White House estimates.
Now for the real bad news: Both estimates are optimistic. If the economy continues to deteriorate faster than economists project, those numbers will balloon further.
Over the next decade, the CBO projects that the White House budget will run $9.3 trillion in deficits. The White House projection had been $7 trillion. The problem for Obama, as his budget moves to Congress: Lawmakers tend to trust CBO figures over all others. "CBO's word is the gospel," Sen. Chuck Grassley, R-Iowa, the ranking member of the Senate Budget Committee, said in a statement.
When the White House released its budget in February, its economic forecast was in the same ballpark as other estimates, but decidedly on the sunny side. One assumption, for example, was that the average unemployment for 2009 would be 8.1%. That assumption was quickly blown to pieces when the Bureau of Labor Statistics announced two weeks later that unemployment had already reached that level by January. The CBO projects 2009 unemployment will instead be 8.8% before peaking in 2010.
The key metric, when determining if a deficit is controllable, is looking at the ratio of the debt to the country's GDP. If this ratio is shrinking, then the debt is manageable. The White House said this would happen by 2013. The CBO says this will not happen, even by 2019. This difference between White House and CBO estimates is driven primarily by assumptions about the overall direction of the country's economy.
That economic reality could be even worse than what the CBO projects. After a 1.5% loss in 2009, the CBO says real GDP will grow by 4.1% in 2010 and 2011, hopeful assumptions shared by Obama's team. "As you emerge from a recession, economic growth rates can temporarily be quite high because you're starting from such a low base," promises Peter Orszag, director of the White House Office of Management and Budget.
This is indeed the case with some recessions. But growth can also be quite slow for years coming out of a recession, leaving tax revenues much lower--and deficits higher--than either the CBO or White House projections.
The White House estimates are "incredibly high by recent historical standards," says Martin Regalia, chief economist for the U.S. Chamber of Commerce. The Chamber, quick to point out that it supported both the $700 billion bank bailout and the stimulus package, is opposed to Obama's budget. If spending stays elevated without a robust recovery, an increase in taxes is one of the only ways to close the deficit....
