Sunday, March 15, 2009

Mankiw's Lessons From The President's Budget

GREG MANKIW takes a look at President Obama's first budget proposal. He finds several lessons revealed in this proposal: (1) he is an economic optimist, especially concerning his PLAN (assumes 4% growth rate in the economy over the next 4 years), (2) he likes to spend, (3) he is serious about climate change, and (4) he is a deficit dove (i.e., the deficits are rising with his plans).

I guess I'm not surprised by any of the lessons Mankiw sees in the President's first budget. His campaign speeches suggested he would be a big spender, and of course if so, then most likely he would really be a deficit dove. And, what President wouldn't choose a rosy scenario for economic growth when assuming the President's PLAN for government and the economy was implemented?

But, it seems to me the assumption of 4% growth over the next 4 years is quite inconsistent with assuming the President will successfully impose carbon cap-and-trade policies. If government policy forces significant additional reductions in carbon emissions, the relative prices of energy will be much increased, which will reduce both consumption and production.

Here is the bottom line in Mankiw's commentary:
"So if you are a deficit hawk who lamented the Bush budget deficits, the new president’s budget should not make you feel much better. President Obama offers different fiscal priorities than President Bush did: less military spending, more domestic spending and higher marginal tax rates to “spread the wealth around.” But the borrowing and debt imposed on future generations will not be very different, at least if the numbers in the Obama administration’s own budget document can be trusted."

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