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April 1, 2010 Thursday 7:16 AM GMT
Analysis: Move goal posts to hit economic targets
By TOM RAUM, Associated Press Writer
There’s little doubt about it: Many of the jobs lost in the downturn are unlikely to return even when the economy recovers. It also seems beyond dispute that, without drastic policy changes, the nation’s bulging debt will haunt future generations.
Yet there’s no reason these dark forecasts can’t be lightened with a little creative math, a quiet moving of the goal posts. And that’s what U.S. policymakers seem to be up to.
So many jobs have been lost, particularly in hard-hit sectors like real estate, construction, manufacturing and financial services, that many economists say employment won’t get back to pre-recessionary levels of 5 percent or under for years if ever.
So the Federal Reserve is considering easing its benchmark for “full employment,” supposedly the state in which everybody who wants a job can find one at locally prevailing wages.
Charles Evans, president of the Federal Reserve Bank of Chicago, recently told a conference of economists that “labor market conditions are even bleaker than the unemployment rate alone suggests.”
With more than 40 percent of the unemployed out of work for more than six months, the Fed is thinking about raising its full employment benchmark from 4.75 percent unemployed now to 5.25 percent, Evans said. That would provide an easier-to-reach target. Unemployment has been hovering around 10 percent for months.
With deficits mushrooming, balancing the budget anytime soon seems like a mission impossible.
Even so, President Barack Obama is tackling the job. He tasked a bipartisan budget-cutting commission to propose ways to eliminate the “primary deficit” by 2015.
But his formulation also appears to move the goal posts closer by leaving out one of the biggest annual expenditures: interest on the $12.7 trillion national debt, the accumulation of years of annual deficits.
Interest payments will cost the U.S. $209 billion this year alone, the biggest federal spending item after Social Security, Medicare-Medicaid and defense.
Leaving it out is like figuring credit card debt without mentioning finance charges.
But it makes the budget-balancing job sound a lot easier, said Stanley Collender, a longtime Capitol Hill budget analyst and now a managing director of Qorvis Capital, a Washington-based economic consulting firm.
“It’s roughly the equivalent of talking about the deficit and not including defense spending,” Collender said. “To a certain extent, it’s a PR stunt. It changes the field from 100 yards to 80 yards.”
Nearly every administration at some point has used fancy budget footwork to dance over politically divisive spending issues.
President George W. Bush didn’t fully account for the cost of the wars in Iraq and Afghanistan in his regular budgets. President Lyndon Johnson cloaked spending on the Vietnam War under big Social Security surpluses.
And President Ronald Reagan’s first budget director, David Stockman, tried unsuccessfully to remove from the budget ledger the billions being spent on filling the nation’s emergency petroleum stockpiles in the early 1980s. It was not really an expense, he reasoned, but a deficit-neutral asset swap of cash for oil.
A bailout-weary nation is now clamoring for more government budget austerity. The deficit is shaping up as a prime issue in November elections that will determine control of Congress.
So Obama has been putting much emphasis on fiscal responsibility, even insisting that his health care restructuring must help lower deficits an outcome many economists find dubious, given the monumental scope of the program.
The recently enacted national health insurance law is laden with optimistic cost assumptions and projections.
And a big chunk of the $138 billion in deficit reduction that congressional economists project the law will create over its first decade comes courtesy of higher taxes kicking in three years before most of the new benefits take effect.
With the deficit on track to hit a record $1.6 trillion this year, Obama’s 18-member deficit-cutting panel may propose tax increases, spending cuts or a combination of both. “Everything’s on the table. That’s how this thing’s going to work,” the president promised.
But “primary deficit,” the shortfall the commission is charged with trying to eliminate in five years, is a term seldom heard in the past except from the mouths of budget wonks. The concept, along with variations on the theme, has caught on at the Obama White House.
“By balancing the primary deficit,” the nation will stabilize the debt-to-gross domestic product ratio, said Christina Romer, who heads the White House Council of Economic Advisers. The deficit commission will be “producing plans that will balance the budget, excluding interest payments on the debt, by 2015,” Budget Director Peter Orszag said.
Orszag and other administration officials deny any budgetary sleight of hand. Instead, they suggest balancing the primary deficit is equivalent to bringing the actual deficit down to about 3 percent of GDP by 2015 from an estimated 10.6 percent of GDP now. It’s just another way of saying the same thing, they argue.
The Obama White House is quick to blame the policies of past administrations for most of the nation’s deficit woes, including emphasizing that predecessor Bush began his eight-year presidency with a budget surplus.
Talking about the primary deficit, a tactic that emphasizes present rather than past fiscal practices, is just another way of driving home the administration’s “we-inherited-the-mess” message.
EDITOR’S NOTE Tom Raum covers economics and politics for The Associated Press.
April 1, 2010