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 In a budget proposal unveiled on Monday, the White House cut
forecasts for an array of economic variables, depicting less growth,
weaker inflation and lower interest rates than officials expected
only a year ago.
This comes despite an unemployment rate that the Obama
administration expects to hit the 5.2 percent level considered to be
roughly in line with full employment sometime this year.
The administration's take on the economy moves it closer to the
growing view among economists that the United States could be stuck
in a prolonged period of stagnation.
"In the 21st century, real GDP growth in the United States is likely
to be slower than it was in earlier eras," the budget proposal says.
Obama's $3.99 trillion budget plan for fiscal 2016 would mark a
spending increase of about $240 billion from the current year.
The economic vision presented in the plan is all-the-more
pessimistic given that it incorporates the impact of higher spending
on infrastructure and education, as well as overhauls of tax and
immigration laws. Many of those proposals are unlikely to pass the
Republican-controlled Congress.
Even with these measures, which are aimed to counter rising income
inequality, weaker growth would leave the economy about $500 billion
smaller in 2020 than the administration projected a year ago. The
administration expects the share of national income going to labor -
as opposed to capital - to hold near historic lows for years to
come.
An aging population that is less inclined to work could help limit
long-run economic growth to around 2.3 percent annually, the budget
says, a rate that would be roughly a percentage point lower than the
average since World War Two.
In the White House view, the jobless rate could drop to as low as
4.9 percent in 2017. But even that is not expected to lead to
substantial wage or price increases, suggesting officials are
sympathetic to stagnation arguments made prominent by economists,
such as former Treasury Secretary Lawrence Summers, who have argued
the government should spend more to make up for weak private sector
demand.
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While the White House's estimate of potential growth was unchanged
from a year ago, it now sees interest rates holding lower for years
even under the assumption that the government boosts spending
substantially, something that in other eras would lead lenders to
jack up interest rates more.
"The administration forecast projects that interest rates will
stabilize below their historical averages," while inflation is
expected to remain low for years to come, according to the budget
documents.
Other developed economies are confronting a similar set of
circumstances, and slowly acknowledging that their long-run
potential may be constrained. The Obama administration has been
pressing European nations, primarily Germany, to act accordingly and
lift government spending to make up for weak household and business
demand.
In the wake of the 2007-2009 financial crisis, the administration
was restrained in its own response, as it tried to control the
deficits generated by stimulus programs set in motion to battle the
deepest economic downturn since the Great Depression. The impact of
budget cuts continued to be felt through last year.
The latest budget document marks a turn in that debate as Obama
makes the case for more government pump priming.
(Reporting by Howard Scheider and Jason Lange; Editing by Tim Ahmann
and Tomasz Janowski)
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