Obama's Economy Forecast Threatens To Destroy His Credibility

If Barack Obama is to hold the support of the American public, he needs to be brutally frank about how bad things are how long they are likely to take to recover. 

So far, when describing the situation that he has inherited, he as done that.  Now that he’s trying to sell a massive budget and spending plan, however, he’s donning the rose-coloured glasses.

As we noted yesterday, Obama’s budget calls for GDP growth of 3.2% next year–in other words, a normal year.  The average private forecast, meanwhile (also probably too optimistic) calls for 2% growth. 

If Obama wants people to take his own forecast seriously, he needs to explain exactly why he’s being so optimistic and why other forecasters are wrong.  But the smarter move would probably be to stop trying to put a happy face on the future and just tell it like it is. 

Obama didn’t create this mess.  Right now, Americans will trust him to do what he thinks is necessary to fix it.  The moment he overpromises and under-delivers, however, he’s done.

Peter S. Goodman, New York Times: A sense of disconnect between the projections by the White House and the grim realities of everyday American life was enhanced on Friday, as the Commerce Department gave a harsher assessment for the last three months of 2008. In place of an initial estimate that the economy contracted at an annualized rate of 3.8 per cent — already abysmal — the government said that the pace of decline was actually 6.2 per cent, making it the worst quarter since 1982…

Mark Zandi, chief economist of Moody’s Economy.com, now places the odds of “a mild depression” at 25 per cent, up from 15 per cent three months ago. In that view, the unemployment rate would reach 10.5 per cent by the end of 2011 — up from 7.6 per cent at the end of January — average home prices would fall 20 per cent on top of the 27 per cent they have plunged already, and losses in the financial system would more than triple, to $3.7 trillion.

Allen Sinai, chief global economist at the research firm Decision Economics, sees a 20 per cent chance of “a depressionlike possibility,” up from 15 per cent a week ago…

Yet, in drawing up the budget, the White House assumed the economy would expand by a robust 3.2 per cent in 2010, with growth accelerating to 4 per cent over the next three years.

“It’s a hope, a wing and a prayer,” Mr. Sinai said. “It’s a return to a sanguine view of the economy that is simply not justified.”

If, as is widely anticipated, the economy grows more slowly than the White House assumes, revenue will be lower, forcing the government to cut spending, raise taxes or run larger deficits.

Economists also criticised as unrealistically hopeful the assumptions by the Federal Reserve as it began so-called stress tests to gauge the health of the nation’s largest banks. In testimony, Ben S. Bernanke, the Fed chairman, said that the nation’s unemployment rate would most likely reach 8.8 per cent next year.

“That forecast just doesn’t seem realistic,” said Dean Baker, co-director of the centre for Economic and Policy Research in Washington, “and I don’t think it helps the Fed’s credibility to make these sorts of forecasts right now.”

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