The Road to Realism in the Budget

Rosy Scenario has left town. In fact, she probably hasn't been in Washington for a while.

Rosy became personified in the early 1980s, when some economic forecasts of President Reagan's administration were so chipper that observers frequently criticized it for its budget forecasts.

But the economic forecasts behind President Clinton's budget of last week are about the same as those of most economists.

"The forecasts are optimistic, and I don't particularly quarrel with them," says Charles Schultze, who was President Carter's top economic adviser.

He was speaking of the forecasts of both Clinton's Office of Management and Budget (OMB) and of the Congressional Budget Office (CBO).

Both see more moderate growth in gross domestic product (GDP), the nation's total output of goods and services, for years ahead. No recession, or at least no serious recession.

Herbert Stein, President Nixon's top economic adviser, agrees: "I don't think they have over-optimistic forecasts."

So most Americans should enjoy continued prosperity for a while.

Unless something unexpected happens, such as more fallout from East Asia or a clog in the oil pipeline from a United States attack on Iraq.

If anything, Washington forecasters have been Gloomy Gusses in this decade.

For example, the CBO's forecast in January 1996 for real GDP growth in that year and 1997 for was too pessimistic by 1.3 percentage points - a sizable miss.

The CBO was 0.3 percentage points too high in its inflation forecasts for those years. But it did a bit better than a consensus of private forecasters compiled by Blue Chip Economic Indicators in Sedona, Ariz.

Inflation has been lower than almost any economist forecast.

In predicting government revenues, both CBO and OMB have been too pessimistic for three years, underestimating taxable income and overestimating non-taxable income, such as medical-insurance premiums.

Taxable business profits have been far higher than anticipated. This year, CBO foresees only 3 percent growth in profits. It could be wrong again.

The CBO outlook, published late last month, and the OMB budget are quite close in their economic projections.

"I don't know if the meeting of minds will meet at the truth," one official notes.

Clinton's economists see after-inflation GDP growing slower than the 3.2 percent rate of the past two years. It forecasts 2.4 percent growth this year, 2 percent in both 1999 and 2000, and a pickup to 2.4 percent by 2003.

CBO is more pessimistic, predicting a small recession in 2000, and unemployment hitting 5.9 percent by 2003.

Mr. Schultze, now at the Brookings Institution, sees a "high" probability of low unemployment and inflation for perhaps five years.

That would mean the longest economic expansion ever in the US, by far.

In its budget report, the administration happily notes that the "misery index" - the unemployment rate plus the inflation rate - is the lowest in 30 years.

A mere 0.1 percentage point shortfall in GDP growth from what was expected this year would gradually cut the federal surplus to the tune of $14 billion by 2003.

Presumably 1 percentage point less growth would make a $140 billion difference in the surplus (or deficit).

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