On the afternoon of another discouraging assessment of the nation’s economic growth, the Obama Administration late Friday quietly released its mid-year update of the budget. The synchronicity made clear just how far from reality the President’s fiscal and economic policies have drifted—and the imperative of a prompt course correction.
Friday morning, the Bureau of Economic Analysis reported a tepid 1.5 percent growth in real gross domestic product (GDP) for the second quarter of this year. That reflected a slowdown from the anemic 2 percent in the first three months of 2012 and an ominous warning of growing sluggishness through the rest of the year.
Later Friday, the Office of Management and Budget (OMB), nearly two weeks past the legal deadline, trickled out its Mid-Session Review of the budget. It predicted a slight decline in the deficit this year to $1.2 trillion—still the fourth consecutive year of 13-digit red ink. For 2013, OMB now projects a deficit $91 billion greater than its February estimate, largely due to $148 billion in new “stimulus” spending the President originally sought for 2012. Through the rest of the decade, the Administration projects lower deficits and debt than its February budget estimated.
The foundation of every budget is the set of underlying economic assumptions, and that is where the problems with the President’s numbers start. His economic figures are all but unachievable. The Administration projects GDP growth of 2.3 percent for all of this year. Reaching that annual rate would require the economy to expand at nearly 3 percent for the balance of 2012—double the pace of the second quarter. That growth rate is not impossible, but is highly unlikely, especially given the growing talk of recession.
At least as disturbing is the Administration’s rosy forecast beyond this year. OMB projects 2.7 percent GDP growth next year, 3.5 percent in 2014, 4.1 percent in 2015, and 4 percent in 2016. All four projections are higher than the Blue Chip consensus of private forecasters, and the discrepancy widens over time: the 2015 and 2016 estimates exceed the Blue Chip by more than a full percentage point. Moreover, the U.S economy has not seen growth rates greater than 4 percent since 2000. One should certainly hope for such growth rates, but credible budgets are not built on wishes.
Friday’s disappointing growth figures also demonstrate the unquestionable failure of the Administration’s economic analyses and Keynesian-inspired “stimulus” program. In President Obama’s initial budget submission, in February 2009, the Administration projected the economy, jolted by the $831 billion Recovery Act, would be surging by 4.6 percent this year in inflation-adjusted terms. That is exactly twice the Administration’s growth forecast now.
Yet the President still demands $98 billion in tax hikes next year and nearly $2 trillion in tax increases over the next 10 years. Indeed, his allies in the Senate are willing to risk a recession by letting the $500 billion Taxmageddon tax hike take effect next year just to win an ideologically driven challenge. As commentator Pat Buchanan recently noted, their attitude resembles the “chicken run” scene in the classic 1955 film Rebel Without a Cause, in which Buzz Gunderson “wins” by driving over a cliff to his death—because his sleeve gets caught in the door handle of his car.
The looming tax hikes and general uncertainly about fiscal and regulatory policy are stifling growth right now. While the government has little capacity to “jumpstart” the economy, one thing it can do is remove the threat of tax hikes hanging over investors and employers. Given the economy’s growing weakness, the President and his congressional allies should promptly renounce any tax increases and extend all existing tax policies—including current rates on upper-income brackets. They should yield their ideology and accept economic reality.