Let's start Monday morning with a dose of pessimism. First, here's the dour outlook of economists surveyed by the National Association for Business Economics. Although fewer than half—45 percent—think the United States will suffer a recession this year, the numbers still stink. On average, 49 economists surveyed expect the economy to grow just 0.4 percent in the first quarter of 2008, followed by 1 percent growth in the second quarter.
Next, a Bloomberg story speculates that any pickup in growth later this year from the combo of Fed rate cuts and the fiscal stimulus package will soon fade, "leaving the economy vulnerable to its underlying weaknesses: a retrenching financial industry, indebted consumers and slowing productivity growth." The story then quotes Credit Suisse economist Neal Soss as predicting the economy will grow 1.3 percent this year and just 1.5 percent next. And Lehman economist Ethan Harris weighs in with an equally lousy outlook, 1.1 percent growth this year, 0.9 percent in 2009.
My take: Let's assume for a moment that Soss and Harris—and the Bloomberg reporter who chose to quote only bears—are correct. That means the next president will come into office facing 1) a $400 billion to $500 billion budget deficit, temporarily enlarged by fiscal stimulus spending and perhaps a bank bailout package; 2) inflation higher than the Fed would like; and 3) lousy economic growth. So what would a President Obama do? Raise taxes on the top 2 percent of Americans? That would bring in only $50 billion—and that money would be needed to "pay" for reforming the alternative minimum tax. (Obama has committed to following congressional budget rules.) And the lust for raising taxes beyond that in a weak economy seems unlikely. A $200 billion spending plan? Without slashing defense, Obama couldn't do that without putting the deficit uncomfortably close to $1 trillion. Economics superblogger Arnold Kling thinks he has it all figured out:
How can the Democrats implement policy changes without large spending increases? The answer is regulation.... Once health insurance becomes a regulated utility, the next step will be to go after pharmaceutical companies and hospitals. We can expect major government initiatives to control drug pricing and research and to require hospitals to limit treatments.... We can expect utility deregulation to be halted and reversed. Alternative fuel mandates and emission controls will be gleefully enacted.... Executive compensation is likely to be subject to new laws, perhaps even to a regulatory board.... At the other end of the spectrum, we can expect to see a raft of new requirements placed on businesses requiring them to offer employees subsidized day care, longer vacations, higher minimum wages, and so forth.