A $1.9 trillion error explained

posted at 1:38 pm on August 26, 2009 by King Banaian

The Midsummer Review (MSR) of the federal budget, long overdue, has now hit the stands after the Administration softened the news by “pre-leasing” the $1.9 trillion of additional debt expected over the next decade. This comes less than five months after the original budget proposal.

Nearly all of the revision comes from a deteriorating economy, one that has not responded to the government’s fiscal policy thus far. In their original budget they expected 3.5 million jobs “created or saved”. That language is not in the MSR, and unemployment is expected to be 2% higher than previously supposed for 2010. That would mean 2.8 million fewer jobs. Now, one might wish to argue that there were more jobs to be lost than they expected, momentum was worse, etc. Let me give you two looks at this from comparing the original OMB budget economic assumptions and the MSR. The first is the unemployment rate (fourth quarter average.)

Notice the glidepath for reaching full employment (which is a 5% unemployment rate in their modeling.) You end up in the 2012 election with a 7.5% unemployment rate. Now it may be that the change in unemployment in 2012 is good for the electoral chances of President Obama, but there will be much long-term unemployment by then, and how will this be expected to change?

The other comes from the estimation of wages and salaries (which is, of course, a big driver for estimates of individual income tax receipts.)

I thought at first this was an acceleration due to inflation, but that’s not it. Current dollar GDP in the out years is expected to be almost identical to the April budget. So how do wages and salaries increase while GDP falls? That’s a puzzle to me, and it helps to drop the deficit in the second half of the decade.

One last graph, this time showing how the changes from 2010 to 2019 (the 2009 decline in the deficit already being attributed to the decision not to put money in the deposit stabilization fund.) Only the blue part at bottom is the result of what the Congress has changed over the last four months — the remainder is entirely due to the revisions to economic assumptions.

Now I could be mistaken on this, but it’s not a coincidence that the decline in the budget deficit is due entirely to a decline in the rate of decline of tax receipts. The purple area is the increased cost of servicing our national debt. The primary deficit never goes to zero, reaching a nadir of $90 billion in 2018 before rising in 2019. To give you an analogy: This is like spending so much on your credit card and then making payments less than the interest on your card balance. We now have rules that advise consumers not to do this. Too bad Congress doesn’t read them.

Ed argues that heads should roll, particularly Orszag’s, but he’s pointing at the wrong person. The MSR’s error was a macro forecasting error, and the responsibility for that lies with the Council of Economic Advisers and particularly Christina Romer, who was out explaining her position this morning as simply “the recession was worse than we thought.” Um, no. Prof. Rosy has been busted on this from last spring by both private economists and the Congressional Budget Office. The administration has now been made to walk back last spring’s forecast to where the rest of the profession already had it. It is too bad Prof. Romer has been made to say such nonsense. Continuing to work with this White House only further damages her reputation.

UPDATE: CBO weighs in, making it seem that even this gloomier OMB forecast might be a little too rosy. “OMB’s projection of the BEA baseline deficit is roughly $6.3 trillion over the 2010-2019 period, or about $0.9 trillion lower than CBO’s baseline total for that period.” But they point out the two forecasts are not apples-to-apples.

Note (Ed): I promoted this post for its excellent analysis and because we’ll be discussing this on TEMS at 3 pm ET today. Be sure to join us!

This post was promoted from GreenRoom to HotAir.com.
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They used Turbo-Tax?

Daggett on August 26, 2009 at 1:39 PM

Kennedy RIP
ObamaCare RIP
Cap & Trade RIP

America..Clear…I think we have a pulse.

HoustonRight on August 26, 2009 at 1:43 PM

TurboTax should sue Geithner for besmirching its good name.

bayview on August 26, 2009 at 1:44 PM

best administration evahhhh.

SHARPTOOTH on August 26, 2009 at 1:45 PM

I like in the last chart, how all mandatory spending is eaten by interest on the debt, and their analysis probably ignores interest rates going up. That’s refreshing…

Vashta.Nerada on August 26, 2009 at 1:45 PM

Math ‘B’ Hard… for liberal arts majors…

phreshone on August 26, 2009 at 1:46 PM

Kennedy RIP
ObamaCare RIP
Cap & Trade RIP

America..Clear…I think we have a pulse.

HoustonRight on August 26, 2009 at 1:43 PM

Perfect – now if the ambulance does not crash on the way to surgery we might have a chance!

izoneguy on August 26, 2009 at 1:46 PM

TurboTax should sue Geithner for besmirching its good name.

bayview on August 26, 2009 at 1:44 PM

No way. They should advertise that Turbo Tax can save you lots of money, and use Turbo Timmy as the example. ;)

Daggett on August 26, 2009 at 1:47 PM

Yeah when interest rates start rising in 2010 to get rid of the excess liquidity in the system, what will happen to the interest payments on the debt? Is that figured in to these charts?

txmomof6 on August 26, 2009 at 1:47 PM

The April budget was a midsummer night’s dream compared to the revision.

ICBM on August 26, 2009 at 1:48 PM

Obviously they didn’t pick Christina Romer for her looks. Dumb and ugly is a deadly combination.

bw222 on August 26, 2009 at 1:49 PM

Romer shouldn’t be serving in a capacity anymore prestigious than as an instructor of a course in introductory economics at a community college. And I apologize to instructors at community colleges because she probably shouldn’t even be serving in that capacity. Perhaps I should have said middle-school social studies teacher.

BuckeyeSam on August 26, 2009 at 1:50 PM

I question the timing

Hening on August 26, 2009 at 1:50 PM

Janet Reno’s twin.

stenwin77 on August 26, 2009 at 1:50 PM

So how do wages and salaries increase while GDP falls? That’s a puzzle to me, and it helps to drop the deficit in the second half of the decade.

____________________________________________________________

Expected rise in union membership?

ICBM on August 26, 2009 at 1:51 PM

Anyone who believes that the Obama “administration” and the Democrat Congress have any ability to address the grave economic and defense issues our country currently faces, is severely delusional.

The skill set is not there. These people were elected on the basis of their skin color, the pretty speeches they give, who their daddy was and because they were deep party insiders.

None of them have the skill set necessary to address these problems or even to know who can do it.

We are flying blind in a snowstorm because Americans have voted for representation, based on all of the wrong reasons.

NoDonkey on August 26, 2009 at 1:52 PM

From The Heritage Foundation:
The public national debt–$5.8 trillion as of 2008–is projected to double by 2012 and nearly triple by 2019. Thus, America would accumulate more government debt under President Obama than under every President in American history from George Washington to George W. Bush combined.
Yea; It’s all good; Ya know what I’m sayin?

Cybergeezer on August 26, 2009 at 1:52 PM

i don’t understand any of this. goody! i’m smart enough to be President!

kelley in virginia on August 26, 2009 at 1:52 PM

Kennedy RIP
ObamaCare RIP
Cap & Trade RIP

America..Clear…I think we have a pulse.

HoustonRight on August 26, 2009 at 1:43 PM

Heh..

TXMomof3 on August 26, 2009 at 1:55 PM

The Gang that can’t shoot straight can’t ADD straight… Downright dangerous… Time to close this circus and get these clowns OUT OF DC and OUT OF OUR LIVES!!

Khun Joe on August 26, 2009 at 1:57 PM

a story from the times to reinforce how disconnected disingenuous this admin has been, from Feb 27th:

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 percent — already abysmal — the government said that the pace of decline was actually 6.2 percent, making it the worst quarter since 1982.

rob verdi on August 26, 2009 at 1:57 PM

When Ramses destroyed the Assyrians, that was an error, Obama is a catastrophe.

elduende on August 26, 2009 at 1:58 PM

Romer lives is always in her “happy” place…

d1carter on August 26, 2009 at 2:00 PM

It sure is a good thing that Christina Romer has her looks going for her because she’s dumber than a bag of rocks.

I get the sense here that the chickens have come home to roost. The administration wanted to downplay bad economic news as they propagandized the “success” of the stimulus program and pushed through cap & trade and healthcare legislation- All with huge price tags. Well, you can deviate from the truth for only so long before an adjustment has to be made to deal with the accounting error. It is yet another example of the fact that the current administration cannot be trusted.

highhopes on August 26, 2009 at 2:03 PM

We would have lost a lot more space shuttles if these guys/girls were doing the math. Why do all the good math students want to be astronauts? hmmmm

Tremmy on August 26, 2009 at 2:03 PM

None of them have the skill set necessary to address these problems or even to know who can do it.

NoDonkey on August 26, 2009 at 1:52 PM

The affirmative action presidency. Nevermind that they have trouble understanding that you do not push when the door says pull, as far as race/gender/species/sexual orientation/etc., they look good in group photos.

highhopes on August 26, 2009 at 2:06 PM

Like everyone else in this admin. (including The One) they only read about this stuff in books or taught classes about it. They have never actually had to solve or fix anything. I am sure they are scrambling for some old text books to explain it or come up with someone else’s theory of where it went wrong and what to do next. The only other problem is that they always reach for the wrong books.

Jussi on August 26, 2009 at 2:06 PM

Romer lives is always in her “happy” place…

d1carter on August 26, 2009 at 2:00 PM

It must the place where you can find all these inefficiencies that are going to fund state seizure of the healthcare industry.

highhopes on August 26, 2009 at 2:07 PM

They are the ones we’ve been waiting for.

John the Libertarian on August 26, 2009 at 2:08 PM

SMART Power!!!!!!!!!!

jukin on August 26, 2009 at 2:08 PM

Whenever you see someone moving their hands like that while they talk they’re lying. I know because I’m Italian.

Tremmy on August 26, 2009 at 2:08 PM

I am afraid that America has already been mortally wounded and we are just stumbling along like a wounded animal until the shock wears off and the blood loss becomes too much to keep moving forward.

While I have this fear, the Drones who blindly follow Chicago Jesus stand on the sidelines with their slack jawed grins and cheer us on.

John D on August 26, 2009 at 2:09 PM

Christina Romer is nothing more than a teacher. She has no practical experience and has never had to deal with her theories being “wrong” – appears she can’t deal with that reality now either.

It seems to be true in her case – that those who “can” … “do” and those who “can’t” … teach.

The problem is – she’s not the only teacher in the Obama administration – it’s rank with these idiots who have no practical experience.

HondaV65 on August 26, 2009 at 2:10 PM

Forecasting…slippery slope for all presidents. Too honest? Everyone will say you’ve hurt recovery by being pessimistic. Too optimistic, you get jeered for being wrong.

None of them are every really right, frankly, and we all know it.

AnninCA on August 26, 2009 at 2:11 PM

The MSR’s error was a macro forecasting error, and the responsibility for that lies with the Council of Economic Advisers and particularly Christina Romer, who was out explaining her position this morning as simply “the recession was worse than we thought.”

Yeah, they’ve tried to pull that one before. But the same question remains, how do you get worse than the utter catastrophe they claimed the economy was in order to get enough fear going to pass their insane Porkulus? The US was about to go into an “irrecoverable” recession, if I recall correctly. So now they are saying that our economy was in a worse state than that? I don’t know that there is a worse state.

I have to say that no one quite bothers me as Romer does. Aside from the fact that she’s an idiot (there are lots of idiots out there, and the left is almost nothing but idiots) she just has the most annoying smile plastered on her face, as the idiocy flows from her mouth. Sometimes, I don’t even think she’s a real person.

progressoverpeace on August 26, 2009 at 2:11 PM

Jussi on August 26, 2009 at 2:06 PM

The great thing about economics is that you don’t need to be right, you just have to have a plausible excuse and the graphs and pie charts to back it up. If you don’t like the answer, you just tweak the “assumptions” a bit. On the off chance you are accurate, you look like a hero.

The fundamental problem with this administration is that too much of these forecasts are based on political considerations. Because of Rahm Emanuel’s summer agenda which included energy and healthcare, the true state of the economy needed to be understated and useless tools like Romer needed to be out there defending absurd positions.

highhopes on August 26, 2009 at 2:13 PM

What falls under “Mandatory Spending” in the last graph, and if it is “Mandatory” how can it go to almost zero?

RobD on August 26, 2009 at 2:14 PM

Dumb & Dumber… I am so astonished that these tools think we are so damn stupid. Just like cockroaches in a kitchen, we can’t get them out fast enough.

HomeoftheBrave on August 26, 2009 at 2:14 PM

AnninCA on August 26, 2009 at 2:11 PM

They were sold to us as Super Genius, like nothing that has come before. They were the smartest bastards in the room and were the very best this country had to offer at any time in its history. They get no slack. Zero. None.

John D on August 26, 2009 at 2:14 PM

http://www.youtube.com/watch?v=-9SPdh4Nzy4

I just had this sent to me and thought I would share.
What have we done?

milwife88 on August 26, 2009 at 2:15 PM

None of them are every really right, frankly, and we all know it.

AnninCA on August 26, 2009 at 2:11 PM

But you have to reach decisions by some method other than feelings and forecasts at least give a sense about what is going on though utterly worthless more than a couple years out.

highhopes on August 26, 2009 at 2:17 PM

A $1.9 trillion underestimate is small potatoes compared to what we would see if they took over health care. We’d be well into 14 figures on that baby.

progressoverpeace on August 26, 2009 at 2:20 PM

But you have to reach decisions by some method other than feelings and forecasts at least give a sense about what is going on though utterly worthless more than a couple years out.

Frankly, we knew enough a year ago to know that something as big as 2 major financial bailouts, a bailout for GM, a bailout for states, was going to be all that people could choke down.

To attempt reform in healthcare? Lordy.

Even I am not that optimistic about anyone’s ability to adjust quite so fast.

We don’t need a bunch of numbers. This is commonsense.

AnninCA on August 26, 2009 at 2:20 PM

highhopes on August 26, 2009 at 2:13 PM

Good point on the second part.

Sad but true.

Jussi on August 26, 2009 at 2:22 PM

They were sold to us as Super Genius, like nothing that has come before. They were the smartest bastards in the room and were the very best this country had to offer at any time in its history. They get no slack. Zero. None.

The day I buy that just because you graduated from an Ivy League school, you’re a genius, is the day I truly have lost it.

My own program ate that “league” alive in my area of expertise.

I’d pit a Big 10 school any day, any hour against those types.

AnninCA on August 26, 2009 at 2:22 PM

But, but, but. Chrissy Matthews said that Dear Leader has saved the economy. We should all be riding our unicorns down streets paved with Skittles.

rbj on August 26, 2009 at 2:27 PM

Does this forecast take into account the Bush tax cuts expire so tax receipts will naturally go down despite the liberal mentality thinking that they would go up because the rates are higher despite the overwhelming evidence to the contrary?

larvcom on August 26, 2009 at 2:28 PM

Looks like Romer needs to go back and retake 3rd grade math.

MADgirl91 on August 26, 2009 at 2:31 PM

We don’t need a bunch of numbers. This is commonsense.

AnninCA on August 26, 2009 at 2:20 PM

Common sense isn’t all that common when it comes to government. People got skittish over TARP I & II and the stimulus package. The amount of money being spent was simply staggering. Then the energy bill got out of the house with trillions more. Then the administration is proposing to seize healthcare (otherwise known as 20% of the economy). And to top it all off, there is a movement afoot to launch a second stimulus package. Not to mention “lesser” programs like $3B for the C4C program.

A trillion here and a trillion there and pretty soon it adds up to real money, even in Washington. Citizens, cities, and states are all slashing budgets and tightening their belts. It is somewhat offensive that Congress is still out there spending as if the economy is booming and there is no limit on resources.

highhopes on August 26, 2009 at 2:38 PM

I TRUST everything the OMB puts out!

Hahahahahahahaha!!!!!!!!

GarandFan on August 26, 2009 at 2:38 PM

Looks like Romer needs to go back and retake 3rd grade math.

MADgirl91 on August 26, 2009 at 2:31 PM

At the minumum, her college professors need to retroactively fail her for such nonsense.

highhopes on August 26, 2009 at 2:39 PM

Common sense isn’t all that common when it comes to government. People got skittish over TARP I & II and the stimulus package. The amount of money being spent was simply staggering. Then the energy bill got out of the house with trillions more. Then the administration is proposing to seize healthcare (otherwise known as 20% of the economy). And to top it all off, there is a movement afoot to launch a second stimulus package. Not to mention “lesser” programs like $3B for the C4C program.

Well, I think most people have a ton of commonsense. Even my greenie/oh-so-SF liberal son’s girlfriend has it. She said, “Too much, too fast.”

Well, hello.

And now we’re back into partisan bickering.

That’s due to poor judgment by Obama. He bought those job approval poll ratings, and nobody will ever convince me otherwise. He really thought he could do the insane.

Back to earth time.

AnninCA on August 26, 2009 at 2:41 PM

Looks like Romer needs to go back and retake 3rd grade math.

MADgirl91 on August 26, 2009 at 2:31 PM

Romer just hasn’t brushed up on her “profit and earnings ratios”. She’ll get back to us.

progressoverpeace on August 26, 2009 at 2:41 PM

So how do wages and salaries increase while GDP falls?

Easy: Turn the economy over to the unions. They always get wages to go up, right?

iurockhead on August 26, 2009 at 2:48 PM

Actual Deficit? Nine Trillion? Nope. Try $14.4 Trillion.
—Ace

Over ten years. Hey, that’s just 1.44 trillion per year. Practically chump change.

maverick muse on August 26, 2009 at 3:03 PM

Even my greenie/oh-so-SF liberal son’s girlfriend has it. She said, “Too much, too fast.”

Socialism is a dish best cooked slowly.

And now we’re back into partisan bickering.

That’s due to poor judgment by Obama. He bought those job approval poll ratings, and nobody will ever convince me otherwise. He really thought he could do the insane.

Back to earth time.

AnninCA on August 26, 2009 at 2:41 PM

I think you are mostly correct in your estimate. He thought he had the political capital to get healthcare reform through the legislative process quickly. That’s not an unreasonable assumption when it only took $2K to a group of the blue dog Democrats to get the trillion-dollar energy bill out of the house. I truly think he went into the process thinking that it would be a cakewalk for the government to seize and nationalize healthcare.

Where he has made his biggest mistake is making it a zero sum game where you have to support the version he’s touting or you are against any sort of reform. Instead of whining about misinformation and myths, he should have been the one getting bi-partisan support and managing expectations. Essentially, he’s created a toxic environment where a protracted debate is hurting his agenda and polling numbers but there is no easy way to wrap the issue up and move on.

All of this, I might add, is self-inflicted by the Democrats.

highhopes on August 26, 2009 at 3:05 PM

So how do wages and salaries increase while GDP falls?

Easy: Turn the economy over to the unions. They always get wages to go up, right?

iurockhead on August 26, 2009 at 2:48 PM

At least they always get their cut no matter what.

The Federal Reserve chose a labor leader to succeed a former Goldman Sachs executive as the chairman of the Federal Reserve Board of New York’s private-sector board of directors. Denis Hughes, president of the New York state branch of the AFL-CIO, had been serving as acting chairman of the New York Fed board since May, when Stephen Friedman stepped down from the position.

maverick muse on August 26, 2009 at 3:06 PM

highhopes on August 26, 2009 at 3:05 PM

You would think that Obama had no executive experience in getting large, disparate groups to agree on things before.

Because he doesn’t.

NoDonkey on August 26, 2009 at 3:10 PM

What falls under “Mandatory Spending” in the last graph, and if it is “Mandatory” how can it go to almost zero?

RobD on August 26, 2009 at 2:14 PM

Note that is revisions in spending, i.e. changes from the previous estimate.

It is likely extra entitlement spending due to the recession being worse than admitted in the previous estimate

agmartin on August 26, 2009 at 3:22 PM

The error may be because she spends too much time at the
waffle house.

diogenes on August 26, 2009 at 3:36 PM

The Federal Reserve chose a labor leader to succeed a former Goldman Sachs executive as the chairman of the Federal Reserve Board of New York’s private-sector board of directors. Denis Hughes, president of the New York state branch of the AFL-CIO, had been serving as acting chairman of the New York Fed board since May, when Stephen Friedman stepped down from the position.

Don’t know whether to laugh or cry…

itsacookbook on August 26, 2009 at 4:23 PM

Perhaps it’s a reputation worthy of ill repute.

All of these numbers are rosier than what reality will show, and fantasy land if we double dip this recession.

Nothing can hide the fact that obambos policies and the socialists wants are going to take this economy and bury it for 30 years. Maybe they’re hoping after it gets dragged through the pigsty and buried in the back pasture for 30 years it’ll be dug up and have value as an antique or something.

Spiritk9 on August 26, 2009 at 6:10 PM

just because this “economist” sticks their hear up their ass, doesnt mean the rest of us have to.

UNREPENTANT CONSERVATIVE CAPITOLIST on August 26, 2009 at 6:20 PM

head

UNREPENTANT CONSERVATIVE CAPITOLIST on August 26, 2009 at 6:21 PM

Faithonomics states that the economy will increase geometrically simply because the hyper-inflated ego of ’0′ is elected and everyone is lifted into a new paradigm of happiness by virtue of being lifted fro the quagmire of the Bush years.

How’s it working, Barry?

TinMan13 on August 26, 2009 at 6:57 PM

They have to keep Romer around because of the work she did on the magical nature of tax hikes to reduce deficits. If you say they’re for deficit reduction, you see, they don’t impact the economy as negatively.

Yeah, that contribution to the literature is going to come in really handy really soon.

DrSteve on August 26, 2009 at 7:09 PM

I hope Christina Romer goes to her local buffet and stuffs herself yet again, while thinking over her abysmal record of financial “prognostication”. The only thing this blob can forecast is where and how much lunch she’s going to have.

bradley11 on August 26, 2009 at 9:06 PM

I have had eighth grade students who could do a better job of mastering the math of the federal budget than these fools in the Kenyan Communist’s administration! That lets me know that this Depression is intentional in order to forever alter our capitalist way of life. These Communist Clunkers should be Capped (Knee) and Traded in as quickly as possible!

Marco on August 26, 2009 at 11:16 PM

I just finished up my requirements for a master’s degree. Unfortunately, I gave the wrong ZIP code and FedEx delivered it instead to a guy near LeGrange, Florida. I don’t know what you can do with a degree in Astro Physics these days, so I’m going to order a new one, but this time I think I’ll go for Economics and Finance because I hear the current Administration is looking for some smart money people. I’m considering getting a Certificate for Master Pressman as well because you really move up to the top levels quickly if you can print money. I had also considered a degree in constitutional law, but apparently they’ve become somewhat worthless as of late.

geotopia on August 27, 2009 at 4:00 AM