Saturday, February 28, 2009
WE WONDER whether President Obama's proposed budget for fiscal 2010 could pass the "stress test" to which his administration is subjecting America's 19 largest banks. Mr. Obama's budget assumes a sharp but short recession; unemployment will average 8.1 percent in 2009, it says, then decline in 2010 and after. However, the bank test assumes unemployment will hit at least 8.4 percent this year and that it will continue rising through 2010, perhaps into double digits. Needless to say, a good many private forecasters are even gloomier, predicting not only a much deeper slump but a slow, or even flat, recovery.
So, does the Obama administration's forecast breach its honest budgeting promise? No doubt, the relative optimism -- as opposed to, say, actual cuts in entitlement programs -- accounts for much of the deficit reduction after this year's all-time high (in nominal terms) of $1.75 trillion. And equally plainly, any president has to be especially careful about voicing pessimism, lest he prove self-fulfilling.
But while upbeat, the administration's forecasts are within the range of reasonable possibilities, according to economists we consulted. As the White House points out, Mr. Obama's forecasters had the advantage of inside knowledge of upcoming policy moves. The administration is clearly banking on the success of the $787 billion fiscal stimulus package, as well as on its still-emerging plan to shore up the banking system. And, as Christina Romer, head of the White House Council of Economic Advisers, said Thursday, "all forecasts are subject to a substantial margin of error."
But that's just the problem. We live at a time of extraordinary economic distress and extraordinary economic uncertainty. Most of the surprises lately have been on the downside. On Friday, for example, the government announced that the economy shrank at an annual rate of 6.2 percent in the last three months of 2008 -- almost double its previous estimate, and worse than the 5 percent drop many forecasters had anticipated.
It is in that sense that the contrast between the budget forecast and the bank stress test is instructive and unsettling. Whereas banks potentially in need of government aid are expected to show that their business plans can stand up to a worse-than-expected downturn, the government itself is not.