Beyond Folk Activism - Patri Friedman

http://www.cato-unbound.org/2009/04/06/patri-friedman/beyond-folk-activism/

All the Cool Kids have em...

http://www.threadpit.com/store/product.php?productid=200&cat=0&page=1

Obama, Geithner Get Low Grades From Economists

Wasn't Obama supposed to be a genius?

U.S. President Barack Obama and Treasury Secretary Timothy Geithner received failing grades for their efforts to revive the economy from participants in the latest Wall Street Journal forecasting survey.

Economists Give Obama an "F"

3:13

In striking contrast to President Obama's popularity with the public, a new Wall Street Journal survey of economists gives the president and his treasury secretary failing grades. WSJ's Phil Izzo and Kelly Evans discuss.

The economists' assessment stands in stark contrast with Mr. Obama's popularity with the public, with a recent Wall Street Journal/NBC poll giving him a 60% approval rating. A majority of the 49 economists polled said they were dissatisfied with the administration's economic policies.

On average, they gave the president a grade of 59 out of 100, and although there was a broad range of marks, 42% of respondents rated Mr. Obama below 60. Mr. Geithner received an average grade of 51. Federal Reserve Chairman Ben Bernanke scored better, with an average 71.

Charts and Full Results

• See forecasts for growth, unemployment, housing and more. Plus, views on the auto industry, ranking Fed chairmen, grading policymakers and more. Survey conducted March 6-10. (Or download all data as .xls)
• Real Time Econ: Economic news and analysis
• Complete Coverage: Forecasting Survey

The economists, many of whom have been continually surprised by the depth of the downturn, also pushed back yet again their forecasts for when a recovery would begin. On average, they expect the downturn to end in October. Last month, they said the bottom would arrive in August. They estimate that U.S. gross domestic product will continue to contract in the first half of this year, with slow growth returning in the third quarter.

Economists were divided over whether the $787 billion economic-stimulus package passed last month is enough. Some 43% said the U.S. will need another stimulus package on the order of nearly $500 billion. Others were skeptical of the need for stimulus at all.

However, economists' main criticism of the Obama team centered on delays in enacting key parts of plans to rescue banks. "They overpromised and underdelivered," said Stephen Stanley of RBS Greenwich Capital. "Secretary Geithner scheduled a big speech and came out with just a vague blueprint. The uncertainty is hanging over everyone's head."

Mr. Geithner unveiled the Obama administration's plans Feb. 10, but he offered few details, and stocks sank on the news. The Dow Jones Industrial Average is down almost 20% since the announcement, as multiple issues have weighed on investors' confidence. The Treasury secretary has since appeared before Congress and offered more specifics but has said action on key parts of the plan still is weeks away.

About the Survey

The Wall Street Journal surveys a group of 54 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see: WSJ.com/Economist.

"We have taken an unprecedented level of action toward economic recovery, accomplishing in weeks what took other countries years to do," Treasury spokesman Isaac Baker said. "While Wall Street and investors were disappointed when they didn't get a sweeping bank bailout, we've laid out a plan to stabilize the financial system while protecting the taxpayer and ensuring government funds are spent wisely. This crisis was years in the making, and it will take time to solve."

Treasury has started implementing a housing-recovery plan, moved forward on a joint program with the Fed to boost consumer lending, and has begun stress-testing banks in an effort to determine which institutions will need additional capital from the government. The results of the stress tests won't be known for a few weeks. Meanwhile, a key part of the plan -- a public-private partnership to take toxic assets off bank balance sheets -- remains in the planning stages.

The economists' negative ratings mark a turnaround in opinion. In December, before Mr. Obama took office, three-quarters of respondents said the incoming administration's economic team was better than the departing Bush team. However, Mr. Geithner's latest marks are lower than the average grade of 57 that former Treasury Secretary Henry Paulson received in January.

How's Geithner Doing?

How would you rate Timothy Geithner's job performance as Treasury secretary?

• Vote: A | B | C | D | F
• Join the discussion.

Mr. Geithner, who is relying on a skeleton crew of advisers in the Treasury Department as the administration struggles to make key appointments to his staff, is encountering the same problems as his predecessor in dealing with the complexities of a bailout plan. Richard DeKaser of Woodley Park Research, who gave high marks to Messrs. Obama and Geithner, admitted disappointment in the delay in action but said he appreciated the magnitude of the task. "I don't know what's holding it up," he said. "But I'm assuming it's not just because they're hitting the golf course."

There was widespread initial support for the appointment of Mr. Geithner, who as president of the New York Federal Reserve had been on the front lines of the crisis since it erupted. However, in the ensuing weeks Mr. Geithner has had to deal with tax troubles and criticism from those opposed to any bailouts as well as those who think the government needs to be doing more.

Meanwhile, the economists surveyed this month predict that the economy will shed another 2.8 million jobs over the next 12 months as the unemployment rate climbs to 9.3% by December, up from the 8.1% rate recorded in February. Economists also see nearly a one-in-six chance that the U.S. will fall into a depression, defined as a decline in per-person GDP or consumption by 10% or more.

"We just keep moving the date [when the recession will end] out, hoping at some point in time we will be able to move the date back in," said Diane Swonk of Mesirow Financial.

The economists didn't just single out the U.S. for criticism; 70% of participants said the response of governments around the world to the global recession has been inadequate. "The Europeans or Japanese don't seem to be doing near enough to kickstart their economies," said Nariman Behravesh of IHS Global Insight. "It could be we've done all the right things, but the rest of the world goes down the tubes."

Despite the growing criticism elsewhere, the respondents were broadly supportive of the Fed. More than 85% of the economists agreed that the central bank's proliferating lending programs are well-designed, well-executed and helping the economy. And while grades for Mr. Bernanke remain off of their 2007 highs, the average has stabilized after falling as low as 69 in the November survey.

Amid all the gloom, there is a bright spot: Four-fifths of the economists said now is a good time to buy equities, especially if the investor has a long-term view.

Write to Phil Izzo at philip.izzo@wsj.com

Good Reason to Move to New Zealand

John Key

You Can't Spend Your Way Out of the Crisis

New Zealand's prime minister wants to give his country a competitive advantage instead.

• Article

By MARY KISSEL

Wellington, New Zealand

These days, you have to travel far to find a national leader who is talking about market-based approaches to the global recession. All the way to the other side of the world.

Terry Shoffner

"We don't tell New Zealanders we can stop the global recession, because we can't," says Prime Minister John Key, leaning forward in his armchair at his office in the Beehive, the executive wing of New Zealand's parliament. "What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with."

That idea -- growing a nation out of recession by improving productivity -- puts Mr. Key and his conservative National Party at odds with Washington, Tokyo and Canberra. Those capitals are rolling out billions of dollars in stimulus packages -- with taxpayers' money -- to try to prop up growth. That's "risky," Mr. Key says. "You've saddled future generations with an enormous amount of debt that then they have to repay," he explains. "There is actually a limit to what governments can do."

The 47-year-old Mr. Key, a pragmatist by nature, knows a thing or two about how the public sector works. The youngest of three children, he was raised in state-owned housing in Christchurch, on New Zealand's South Island, after the death of his father. His mother worked at blue-collar jobs to keep the family afloat. Mr. Key earned a bachelor's degree in commerce from the University of Canterbury, took a job the next day at a local accountancy firm, and married his high-school sweetheart. After seeing a TV advertisement about a foreign-exchange trader, he started canvassing banks for a job. That kicked off a career as a foreign-exchange trader, with postings in Singapore, London and Sydney -- most recently at Merrill Lynch. "Bank of America," he says, with not a little mirth, "it's probably soon to be owned by Barack Ob-ah-ma!" -- emphasis on the "ah" in Kiwi-speak. His press secretary rolls her eyes.

Mr. Key's coalition government, which includes parties to the right and left of the Nationals, has moved fast to implement a program of tax cuts, regulatory reform and government retooling. He won't label it supply-side economics and smiles when I ask if he's a Milton Friedman or Friedrich Hayek acolyte. "I'm not deeply ideologically driven," he says. "I believe in good center right politics."

Mr. Key is returning the country to a formula for prosperity that's worked in the past. As in Britain, the U.S. and Australia in the 1980s, New Zealand's government implemented a wide-ranging program of economic liberalization, including deep reductions in tariffs and subsidies, and privatization of state-run industries. The plan, nicknamed "Rogernomics" after then-Finance Minister (now Sir) Roger Douglas, was akin to Reaganomics, and the island nation grew smartly.

But while the U.S. and Australia broadly continued their economic liberalization programs under both right- and left-wing governments, New Zealand didn't -- until now. Over the past nine years, Helen Clark's left-wing Labour government rode the global economic expansion and used the revenue surge to expand government welfare programs, renationalize industries, and embrace causes like global warming. As a result, the economy stagnated while Australia took off.

"We have been on a slippery slope," Mr. Key says, pointing to the country's slide to the bottom half of the Organization for Economic Cooperation and Development's per-capita GDP rankings. "So we need to lift those per-capita wages, and the only way to really do that is through productivity growth driving efficiency in the country." He talks at length about how to attract and retain talented workers. What does he think about populist arguments about the end of capitalism? "Nonsense!"

Mr. Key's program focuses first on personal income tax cuts, which -- given that the new top rate, as of April 1, will be 38% -- are still high, especially when compared to Hong Kong and Singapore. "We just think it's good tax policy to lower and flatten your tax curve," he says. "People will move in labor markets and they look at their after-tax incomes."

Cutting the corporate tax rate -- which is now 30% -- isn't as crucial just now as keeping liquidity flowing, Mr. Key argues. "A lot of [companies] won't pay tax if they don't make money," he reasons. "So they might be slightly less focused on corporate tax in the immediate future. Longer-term, they will be." Why? Corporate money is "mobile." "If you really are out of whack with the prevailing corporate tax rates, and there's been a global shift toward countries lowering their corporate tax rate, then you're not likely to attract capital, or you're likely to lose capital." Mr. Key and his coalition partner, the ACT Party -- Mr. Douglas's party -- want to eventually align personal, trust and company tax rates at 30%.

For now, the prime minister is focusing on chipping away entrenched regulations that drive away foreign capital -- a contrast to the U.S. and Australia, which are reregulating their markets in the wake of the financial crisis. "Good regulatory reform can be an important catalyst toward driving economic growth and coming out of the recession faster," Mr. Key says. His government is revising legislation meant to protect New Zealand's pristine environment from private-sector development but misused by greens to stymie all stripes of business plans.

Big government is also coming under the gun. Mr. Key launched a "line-by-line review" of every government department, and committed the government to cap new spending in its May budget. "If we want to fund new initiatives, we by definition have to stop [funding] some of the things we don't think were working. . . . We're just getting better value for money."

The Key government also is wary of climate change orthodoxy. "Half of all of our emissions come from agriculture," he says, meaning cows "burping and farting." "We don't have an answer to that. . . . So at the moment, we either become more expensive or we cut production. And neither of those options are terribly attractive." Mr. Key is reviewing the economic impact of the previous government's cap-and-trade plan. "New Zealand needs to balance its environmental responsibilities with its economic opportunities, because the risk is that if you don't do that -- and you want to lead the world -- then you might end up getting unintended consequences."

Much of Mr. Key's reform agenda hinges on his belief that he has to prepare his country to compete in the global economy. "The world, whether we like it or not, will become more and more borderless," he says. That means Wellington is planted firmly behind free trade. "The sooner Doha is completed," Mr. Key says, referring to stalled global trade talks, "the better from our point of view."

Mr. Key chuckles when I ask him about the "Buy American" provision tucked into the Obama administration's stimulus package. The previous government's "Buy New Zealand" campaign got a "lukewarm" reception, he recalls. "There are so many component parts manufactured in different parts of the world, you're chasing your tail the whole time about where something's actually made."

New Zealand last year inked a free-trade agreement with China, recently signed a deal with the 10-member Association of Southeast Asian Nations, and announced the start of negotiations with India and South Korea last month. Korea "obviously" wants an FTA with the U.S., he says.

Does New Zealand's model hold lessons for the Obama administration? Mr. Key says that might be "presumptive." But he does outline a few general lessons: "Your citizens are entitled to expect you to be realistic . . . to be specific about what it is you're going to do, what you can or can't do. And finally, I think, to be confident that you can get through it. Now there's plenty of doom and gloom merchants out there. But the single biggest risk is that everyone believes them and stops doing anything. I can't see how that helps us." What did he learn in his former trade? "It taught me not to panic."

Going forward, he worries about, among other things, the U.S. dollar's path. Like most other trading nations, the bulk of New Zealand's exports is denominated in dollars, and the country's private sector borrows heavily from offshore markets. Says Mr. Key: "For anyone trying to manage currency risk, and indeed often interest-rate risk, you know, it's not generally the absolute level, it's more the volatility that becomes the determining factor." A strong and stable dollar policy out of the Obama administration would be helpful.

But ultimately, Mr. Key says his biggest fear is rising inflation on the back of rising money supplies. "Economic theory will tell you that inflation is going to rise -- and that inflation will be exported around the world. . . . In the short term, I'm not criticizing U.S. policy: I think inflation is probably the thing that's going to be necessary to get them out of the current issue. [Federal Reserve Chairman Ben] Bernanke sort of signaled that. But longer term, inflation is cancerous to your economy."

So would Mr. Key, the onetime foreign-exchange trader, buy or sell the U.S. dollar? As we move toward the door, the press secretary steps in: That's one call that's off the record.

The Solution

http://www.aier.org/research/beyond-the-numbers/1149-capitalism-the-solution-not-the-cause-of-the-current-economic-crisis

Capitalism the Solution, Not the Cause of the Current Economic Crisis

Written by Richard M. Ebeling

Thursday, 12 February 2009 14:58

If you believe what you read in the newspapers and hear from many of the talking heads on television, the current economic crisis spells the end of capitalism. Multitudes of fingers have pointed to business greed and short-sighted speculation, at mismanaged financial markets and irrational investment decisions as “proof” that it is the capitalist system that has gotten us into the fix we are in. Long rejected theories from the Great Depression years of the 1930s are being resurrected to argue that only far-sighted and wise government interventions and regulations can save us from economic catastrophe and guarantee we never suffer from a similar calamity in the future. Not only is the capitalist system not responsible for the present economic crisis, but any attempt to severely hamstring or regulate the market economy out of existence would only succeed in undermining the greatest engine of economic progress and prosperity known to mankind. Without a doubt the current recession is rapidly turning into one of the worst in post-World War II history. The business slowdown and rising unemployment, now estimated to be more than 7.5 percent of the work force, is starting to affect a growing number of people around the country. But if we are to properly find a cure we have to make sure we understand the cause of the disease. The recession has its origin in years of monetary mismanagement by the Federal Reserve System and misguided policies emanating from Washington, D.C. For the five years between 2003 and 2008, the Federal Reserve flooded the financial markets with a huge amount of money, increasing it by 50 percent or more by some measures. The St. Louis Federal Reserve Bank has tracked the impact of this monetary expansion on interest rates. For most of those years key market rates of interest, when adjusted for inflation, were either zero or even negative. The banking system was awash in money to lend to all types of borrowers. To attract people to take out loans, these banks not only lowered interest rates (and therefore the cost of borrowing), they also lowered their standards for credit worthiness. To get the money, somehow, out the door, financial institutions found “creative” ways to bundle together mortgage loans into tradable packages that they could then pass on to other investors. It seemed to minimize the risk from issuing all those sub-prime home loans, which we now see were really the housing market’s version of high-risk junk bonds. The fears were soothed by the fact that housing prices kept climbing as home buyers pushed them higher and higher with all of that newly created Federal Reserve money. At the same time, government-created home-insurance agencies like Fannie Mae and Freddie Mac were guaranteeing a growing number of these wobbly mortgages, with the assurance that the “full faith and credit” of Uncle Same stood behind them. By the time the Federal government formally had to take over complete control of Fannie and Freddie last year, they were holding the guarantees for half of the $10 trillion American housing market. Low interest rates and reduced credit standards were also feeding a huge consumer-spending boom that that resulted in a 25 percent increase in consumer debt between 2003 and 2008, from $2 trillion to over $2.5 trillion. With interest rates so low, there was little incentive to save for tomorrow and big incentives to borrow and consume today. But, according to the U.S. Census Bureau, during this five-year period average real income only increased by at the most 2 percent. Peoples’ debt burdens, therefore, rose dramatically. The easy money and government-guaranteed house of cards all started to come tumbling down last year, and with a huge crash during the last six months. Now, the same people in Washington who produced the mess we are in say that they need more regulatory authority to repair the very financial and housing markets their earlier actions so severely undermined. And the same Federal Reserve System that produced the monetary excesses that generated the artificial bubbles that have now burst is busy flooding the financial markets with even more newly created money. Over the last five months they have increased the Monetary Base (cash in the system and bank reserves for loans) by 95 percent and M-1 (cash and checking deposits in banks) by almost 40 percent at an annualized rate. The concern, therefore, should not be deflation, but the likelihood of very serious price inflation over the next few years. It is as if Johnny went to the circus with his Uncle Sam and, while he was watching the elephants in the center ring and the trapeze artists high above, his Uncle Sam kept feeding him lots of cotton candy. Then when Johnny develops a tummy ach from all that sugar when he gets home, his Uncle Sam now says, “Oh, feeling bad, Johnny, here, have some more cotton candy.” The fact is, the U.S. economy and the American citizenry cannot escape a correction process after eating all that easy-money cotton candy. Housing prices were pushed far too high and have to settle down at a more realistic lower level; and some people who just cannot afford the homes they purchased during the bubble period will have to either cut back their spending to keep up their house payments or lose their homes. Companies that got over extended will have to dramatically downsize, and in some cases go out of business. Workers who were drawn into unsustainable jobs and wages due to all of that Federal Reserve money sloshing around the economy, and now find themselves temporarily unemployed, will have to search out and shift into more stable and sustainable employments as the dust begins to settle in the market in the months ahead. Trillion-dollar Federal bailouts and “stimulus” packages will only prolong the agony and delay any real economic recovery. Any government-created jobs will be at the expense of private sector employment opportunities, and will disappear as soon as the government projects come to an end. The capitalist system is a great engine of human prosperity. It creates the profit incentives for industry and innovation that over the last half century has literally raised hundreds of millions of people out of poverty around the world. The competitive process of supply and demand brings the productive activities of tens of thousands of businesses into balance with the demands of all of us as consumers, both here in America and around the globe. There is no economic system in all of history has had the same ability to do so much material and cultural good as the open, competitive free market. But the capitalist system cannot do its job if government interferes with its operation. Burdensome government taxes, heavy-handed government regulation, misguided government spending, and mismanagement of the monetary system only succeed in gumming up the works like so much sand in the machine. The best pro-active policy the Federal government can undertake right now is to accept that its own past policies have caused the economic crisis we are in, and leave the market alone to rebalance itself and reestablish the basis for sustainable growth and employment in the years ahead.

Is this what Red Lantern had "Hope" for?

http://online.wsj.com/article/SB123629969453946717.html

Obama's Radicalism is Killing the Dow
By MICHAEL J. BOSKIN

It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.

Martin Kozlowski

The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.

To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.

The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).

Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.

Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.

As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.

Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.

The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.

The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.

A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.

The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.

Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.

Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.

On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Rosy Scenario

http://www.straitstimes.com/Breaking%2BNews/World/Story/STIStory_343752.html

Why do I have to read a Singapore newsite to get articles like this? Where is the American Media right now?

WASHINGTON - THE Obama administration insists it isn't so, but some private economists are wondering if it has brought 'Rosy Scenario' back to town.

In unveiling his budget, President Barack Obama pledged to bring 'honesty and fairness' back to the budget process by getting rid of the gimmicks past administrations had used to hide the real costs of government programs and proposed tax cuts.

But many economists who examined the economic assumptions that undergird the spending plan believe that Mr Obama may have resorted to one of the oldest gimmicks around - relying on overly optimistic economic assumptions to make it look like you are dealing with soaring budget deficits when in reality you are only closing the gap on paper.

'They used to joke during the Reagan years that the highest-ranking woman in the administration was Rosy Scenario,' said Nariman Behravesh, the chief economist at IHS Global Insight, a major private forecasting firm, who called the Obama administration's forecasts 'way too optimistic.'

'We may be seeing a return of Rosy Scenario,' Mr Behravesh said. For its part, the administration insisted that it hadn't cooked the books to show greater growth, and thus more tax revenues, in coming years. But the administration forecast is far higher than the projections for growth in the overall economy, as measured by the gross domestic product, of many private analysts.

GDP plays the biggest role in determining the accuracy of deficit forecasts because weaker-than-expected growth swells government payments for such things as unemployment benefits and food stamps and reduces tax receipts.

In its budget, the administration predicted that the overall economy, as measured by the gross domestic product, will shrink by 1.2 per cent this year but will grow by a solid 3.2 per cent in 2010.

That growth would be followed by even stronger increases of 4 per cent in 2011, 4.6 per cent in 2012 and 4.2 per cent in 2013.

By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators in February predicted that the GDP will fall by a larger 1.9 per cent this year and then increase at weaker rates of 2.1 per cent in 2010, 2.9 per cent in 2011 and 2012 and 2.8 per cent in 2013.

Christina Romer, the head of the president's Council of Economic Advisers, defended the administration's stronger GDP forecast, contending that in previous severe recessions, the pattern often showed a stronger rebound once the downturn was over. She cited the Great Depression of the 1930s as one such episode when the economy rebounded by strong rates after years of sizable declines.

Ms Romer also suggested that many private forecasters may not be adequately taking account of the size of the government support that has been put forward, including the recently passed US$787 billion (S$1.2 trillion) economic stimulus bill.

'If there is ever a time when we think policy is going to contribute ... now is the time,' she told reporters at a budget briefing on Thursday. -- AP