SMRs and AMRs

Thursday, February 04, 2010

An opportunity wasted

The problems are obvious. How to deal with them is not

Feb 4th 2010 | WASHINGTON, DC |
From The Economist print edition

A YEAR ago, the way forward seemed clear. First, run up large budget deficits to make up for plummeting private demand in the recession. Then, when the economy has recovered, switch smartly to deficit reduction, to prevent nervous bond markets from pushing up interest rates and choking off the fledgling recovery. Barack Obama’s new economic team wasted no time starting out on this course. Shortly after he took office the president signed into law a two-year stimulus package worth about $787 billion, which the administration estimated would “save or create” about 3.5m jobs. With the stimulus, the White House predicted that unemployment would peak at about 8%. Instead, unemployment rose to 10% in 2009, where it will stay, according to administration forecasts, for most of 2010.

This unexpectedly bad performance has placed the president in an uncomfortable spot. Just when he ought to start switching his attention towards deficit reduction, he faces a labour market which is far weaker than forecast last January. Meanwhile economic weakness has further damaged the country’s fiscal position (see chart). The 2010 deficit will be 10.6% of GDP, up from 9.9% last year. The deficits between now and 2020 are forecast to add up to over $10 trillion. That’s a lot of T-bonds to sell.

So it fell to Mr Obama to craft a budget, and a revised domestic policy agenda, with two opposing goals in mind—maintaining sufficient support for the weak economy, and creating a credible framework for budget sustainability. He has done the first of these in spades, adding more stimulus this year and next and bringing deficits to 10.6% and 8.3%, respectively. But he has failed to meet his goal of medium-term sustainability.

(Continued here.)

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