Economists question budget's economic assumptions

[February 27, 2009]  WASHINGTON (AP) -- The administration insists it isn't so, but some private economists are wondering if the Obama administration has brought "Rosy Scenario" back to town.

In unveiling his budget, President Barack Obama pledged to bring "honesty and fairness" back to the budget process by getting rid of the gimmicks past administrations had used to hide the real costs of government programs and proposed tax cuts.

But many economists who examined the economic assumptions that undergird the spending plan believe that Obama may have resorted to one of the oldest gimmicks around -- relying on overly optimistic economic assumptions to make it look like you are dealing with soaring budget deficits when in reality you are only closing the gap on paper.

"They used to joke during the Reagan years that the highest-ranking woman in the administration was Rosy Scenario," said Nariman Behravesh, the chief economist at IHS Global Insight, a major private forecasting firm, who called the Obama administration's forecasts "way too optimistic."

"We may be seeing a return of Rosy Scenario," Behravesh said.

For its part, the administration insisted that it hadn't cooked the books to show greater growth, and thus more tax revenues, in coming years. But the administration forecast is far higher than the projections for growth in the overall economy, as measured by the gross domestic product, of many private analysts.

GDP plays the biggest role in determining the accuracy of deficit forecasts because weaker-than-expected growth swells government payments for such things as unemployment benefits and food stamps and reduces tax receipts.

In its budget, the administration predicted that the overall economy, as measured by the gross domestic product, will shrink by 1.2 percent this year but will grow by a solid 3.2 percent in 2010. That growth would be followed by even stronger increases of 4 percent in 2011, 4.6 percent in 2012 and 4.2 percent in 2013.

By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators in February predicted that the GDP will fall by a larger 1.9 percent this year and then increase at weaker rates of 2.1 percent in 2010, 2.9 percent in 2011 and 2012 and 2.8 percent in 2013.

Many private analysts believe that the current recession and rebound will be more U-shaped than V-shaped.

"When a country is griped by a financial crisis, the ensuing downturn often lasts much longer than normal," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University. "I think this downturn is gong to last longer and the rebound will be fairly anemic."

Christina Romer, the head of the president's Council of Economic Advisers, defended the administration's stronger GDP forecast, contending that in previous severe recessions, the pattern often showed a stronger rebound once the downturn was over. She cited the Great Depression as one such episode when the economy rebounded by strong rates after years of sizable declines.

Romer also suggested that many private forecasters may not be adequately taking account of the size of the government support that has been put forward, including the recently passed $787 billion economic stimulus bill.

"If there is ever a time when we think policy is going to contribute ... now is the time," she told reporters at a budget briefing on Thursday.

But Mark Zandi, chief economist at Moody's Economy.com, said he believed the extent of the downturn will be more severe than the administration's forecast for this year and that this will prompt even larger policy responses on the part of the government, including increased help for homeowners facing foreclosure and another stimulus from Congress a year from now.

The administration's budget projects that the downturn will result in a 13.4 percent drop in government receipts this year, one of the contributing factors to the administration's forecast that the deficit will hit an all-time high of $1.75 trillion.

For 2010, when the administration is forecasting the deficit will decline to $1.17 trillion, the administration is forecasting that the rebounding economy will boost revenues by 8.9 percent. Based on the stronger growth, the administration is forecasting steadily declining deficits in coming years with the deficit dropping to $912 billion in 2011, $581 billion in 2012 and $533 billion in 2013.

[Associated Press; By MARTIN CRUTSINGER]

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