High unemployment sticking around: No quick end to joblessness: OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president's Fiscal Year 2011 budget. Ms Romer... noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections. She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration's forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%....
[B]udget balancing amid a weak economy is a bit like pushing on a string. The more you increase taxes and reduce spending, the weaker is the economy, which leads in turn to reduced revenues and increased spending on things like unemployment insurance. But as Ms Reinhart and Mr Rogoff point out if you don't address the deficit at all then markets eventually get worried and interest rates rise, choking off recovery.
The way you get around this is by taking credible steps to address long-term deficit issues while maintaining government support for the economy in the short run.... [T]he freeze itself will do nothing to convince markets of the administration's deficit-cutting resolve, given that it will result in only $250 billion in savings over the next ten years—a drop in the debt bucket.... Currently, America is looking at a budget deficit around 10% of output. Mr Orszag noted in the press conference that the administration would like to cut that to 3%. But their expectations are that the bulk of the improvement in the near-term deficit--producing a decline in the deficit from 10% of GDP to 5% by 2015--will come from economic recovery, and the resulting increase in tax revenues and decline in automatic stabiliser spending. Near-term deficit reduction is almost entirely about the strength of the economy. And nothing anywhere in the president's policies will do anything meaningful about the long-term deficit, which is almost entirely about growth in spending on health care.
The president has looked at the problem, correctly identified its nature, and proposed solutions which are irrelevant to harmful. I don't doubt that they perceive political advantages.... But having sacrificed a narrative that makes sense, I struggle to understand what they're gunning for.