Obama's rosy scenario turns thorny

OBAMA FOR USA. President Barack Obama’s economic forecasts for long-term growth are too optimistic, many economists warn, a miscalculation that would mean budget deficits will be much higher than the administration is now acknowledging.

The White House will be forced to confront the disconnect between its original, upbeat predictions and the mainstream consensus about how the economy is likely to perform in a new budget forecast to be unveiled next month.

Christina Romer, chairwoman of the White House’s Council of Economic Advisers, said in a POLITICO interview that the administration — like many independent economists — did not fully anticipate the severity and pace of this recession. She said the White House will be updating its official forecasts.

The new numbers will come as part of a semiannual review that, under ordinary circumstances, is the kind of earnest-but-dull document that causes many Washington eyes to glaze over.

This time, however, the new forecasts — if they are anything like what many outside economists expect — could send a jolt through Capitol Hill, where even the administration’s current debt projections already are prompting deep concerns on political and substantive grounds.

Higher deficit figures also would arrive at a critical moment in the health care debate, as lawmakers are already struggling to find a way to pay for the president’s nearly $1 trillion reform package.

Alternately, if Obama clings to current optimistic forecasts for long-term growth, he risks accusations that he is basing his fiscal plans on fictitious assumptions — precisely the sort of charge he once leveled against the Bush administration.

White House officials rebuff such suggestions, saying the midyear correction is precisely intended to keep their economic program reality based.

But a series of POLITICO interviews in recent days with independent economists of varied political stripes found widespread disdain for Obama’s first round of assumptions, with some experts invoking such phrases as “rosy” and “fantasy.”

Obama’s current forecasts envision 3.2 percent growth next year, 4 percent growth in 2011, 4.6 percent growth in 2012 and 4.2 percent growth in 2013.

The administration is already under intense pressure over its economic calculations on the most politically sensitive statistic: employment. The administration once vowed to use stimulus policies to keep the jobless rate below 8 percent; it is now just shy of 10 percent.

Deficit figures do not pack the same emotional punch as unemployment lines do. But they matter greatly to policymakers and the financial markets as a measure of whether the country can afford Obama’s big agenda.

And the general public is paying attention, too.

In a June NBC/Wall Street Journal poll, a bare majority — 51 percent — of respondents approved of Obama’s handling of the economy, down from 56 percent in February.

In addition, 58 percent said the president and Congress should focus on keeping deficits down, even if that delays an economic recovery, the poll found.

“They used a rosy forecast, and that’s understandable because a quick recovery makes the rest of the agenda possible. It creates the basis for the revenues you need for health care and climate change,” said Robert Shapiro, a former Clinton economic adviser.

“But it’s also dangerous and risky because if the forecast doesn’t come true, you’ve undermined the basis for the rest of your policies,” he added.

White House officials note that at the time of their forecasting, the depth of the crisis was less clear. For instance, the global reach of the downturn wasn’t fully apparent late last fall.

Another challenge was that the slowdown “was going from a relatively normal recession into something much worse, and we were at a pivot point, if not a turning point,” Romer said.

“There was just inherently a lot of uncertainty. None of us has a crystal ball, especially at a time when there is a lot of new information coming in. That’s when you have to be ready to update. That’s certainly what a lot of forecasters have done and what we will do, as well,” she added.

Those outside forecast adjustments have been almost universally in a downward trend.

White House officials began to lay the groundwork for the politically ill-timed revisions when Vice President Joe Biden recently conceded the administration had “misread” the economic indicators in January about how bad the economy actually was.

Obama later amended those remarks, saying the White House had “incomplete” information, which led to their miscalculations.

Either way, those admissions appear to pave the way for a significant rewrite of the White House’s economic outlook, starting with it growth predictions.

“Those numbers will prove to be much, much too optimistic,” said J.D. Foster, a former economic adviser in the Bush administration.

To appreciate the potential problems that can arise once those numbers are changed, consider this:

The White House projected revenues for 2012 are forecast at $3.1 trillion. But if growth is just 2 percent, rather than around 4 percent, as some economists now expect, that income would hover around $2.4 trillion — adding another $700 billion to the projected deficit of $581 billion.

“That would be a significant change in the deficit,” said Foster, who did the math.

There is a case for hewing close to the administration’s original, out-year conclusions, said some economists.

The president’s hope for a burst of new economic activity around “green” jobs in the energy and environment sectors and the kick-in of the infrastructure phase of the stimulus package could provide some healthy growth, economists say.

“The question is, what will drive the growth? It’s not likely to be the housing market or another tech bubble. We don’t know what it is going to be, but it doesn’t make sense to assume it won’t be anything,” said James Horney, an economist with the Center on Budget and Policy Priorities.

Still, it’s not clear whether another optimistic outlook will sell on Capitol Hill.

Mark Zandi, chief economist for Moody’s Economy.com and a frequent adviser to Capitol Hill, said the worsening economic picture makes passage of health care reform even more essential.

“It’s so important for policymakers to show that they will address the long-term fiscal pressures on the economy and budget very, very soon,” he said, including the rising costs of Medicare and Medicaid that are overwhelming the federal budget.

The key for outside investors, he said, is “to see if policymakers credibly pay for it.” If Congress does it right, “that could be quite a positive thing” by boosting U.S. credibility in the world markets that are financing the nation’s debt.

Roger C. Altman, another former Clinton economic adviser, recently suggested in a Wall Street Journal column that Congress move aggressively on health care reform and Social Security — both fixes that could ease deficit pressures.

“Public anxiety over deficits may make this fix [of Social Security funding] possible now, even though it has been elusive for years,” he said.

But Peter Morici, a University of Maryland economist, said the White House should set aside major domestic initiatives and focus on stabilizing the economy by attacking the trade deficit.

“The spending required for health care, the tax on business with a [climate change] cap-and-trade system, and the wasteful spending inside the stimulus will finish the job that the Chinese mercantilism began,” he said. “We’re headed for a disaster here.”

Go slow is also Shapiro’s guidance, suggesting a phased-in approach to any universal health care insurance program, which would delay its full costs.

Almost all of the economists interviewed — including former Bush White House officials — were sympathetic to the Obama economic team’s plight.

Its January forecasts didn’t deviate sharply back, then, from most other predictions by established and respected economic experts.

The Congressional Budget Office, for instance, predicted growth in 2012 of 4.4 percent, compared with the White House’s 4.6 percent.

But some worry the administration now is on the verge of making another mistake by inadequately addressing the next big threat: inflation fears.

No one can predict when that day will come, but many think now that it will be sooner rather than later.

When it does come, the Federal Reserve Bank will face a Hobson’s choice, said Morici: either runaway inflation or higher interest rates, both of which could stall a recovery and send the economy back into recession.

The Fed’s decision to pump money into the economy to stave off disaster in the financial sector and elsewhere last year was understandable, said Foster.

“But a price must be paid for what they did,” he added, and that means withdrawing that liquidity from the market to combat inflation. “In this case, the amount of liquidity to be withdrawn is unprecedented,” he added.

Zandi doesn’t dismiss Foster’s scenario, but he said it’s possible the country could get through inflation scares without as much damage.

“I think policymakers will do roughly the right thing with health care reform and get a reasonably credible package from a fiscal perspective,” he said.

“Then the current stimulus will be reasonably sufficient to push us out of recession later this year and into early recovery,” he added.