Recently, much has been discussed regarding the Obama budget, growth in government spending and the assumptions the administration has used in projecting improving budget deficits beyond the year 2009.  Today’s increase in consumer confidence and the likelihood of an organized bankruptcy by GM, has propelled the DOW to a gain of nearly 200 points and many people are feeling that the worst is over.  But we must question what comprises those assumptions and how likely are the administration’s assessment of future growth to occur?

Several noted financial experts have recently commented.  And what is their perspective?  The United States will have to get used to the idea of sub-par economic growth and a jobless rate of more than eight (8) percent for some time, experts say.

·         A year from now, "the market will realize that potential growth for the United States is no longer 3 percent, but is 2 percent or under," Mohamed El-Erian, chief executive of vaunted fund manager Pimco, told Bloomberg Radio.  "We are transitioning to what we call at Pimco a new normal."  That means the United States will play a less dominant role in the global economy, he says. There is a recognition that the future of the globe depends not only on the United States but on other countries as well," El-Erian points out. "That's a big change."

·         David Rosenberg, the former chief North American economist for Bank of America, also says we better lower our expectations. Get ready for a shift from spending to savings.  "This is going to be a new era of frugality," Rosenberg, now chief economist at Gluskin Sheff & Associates, tells Bloomberg.  "This isn't some flashy two- or three-quarter deal. This is a secular change in household attitudes."

·         Economist Nouriel Roubini, whose pessimistic forecasts have earned him the moniker Dr. Doom, says it may be premature to think of the new normal.  "People like to talk about green shoots" in the economy, he tells Time magazine. "All I see is a lot of yellow weeds."

The administration’s assumptions currently expect that the economy will grow by 3.2% in 2010 and at 4% for the following three years. However, only once in the last decade has growth come in at the 4% level and that was in 1999 when the economy grew a total of 4.5% for the year.  At no time since has average growth in GDP reached 4% for any year.  In fact, the table below shows a very different picture:

The implications for budget deficits should be clear.  If, as the experts above suggest that the new normal will be 2% with structural unemployment of 8%, than we have a sixty (60%) variance to the administration’s assumptions for 2010 and a one hundred (100%) variance for the following three years!  And what will happen if these variances do indeed occur?  Exploding budget deficits as far as the eye can see.  Of course, if these assumptions were used in determining that budget deficit, it would further evidence the irresponsibility of expanding government spending.  

Creating new programs with money the taxpayers don’t have and for which the Treasury would need to print, will create inflation and lower the value of the dollar internationally.  The subsequent downward spiral would include a higher cost of imported goods and an increase in virtually all dollar denominated commodities – think oil.  In fact, some of the recent uptick is due to the decreased value of the dollar as oil is traded in the US currency.

So as we continue to evaluate the “rose colored glasses” that the administration looks through to justify its spending programs and keep feeding the beast, we need to understand the basic economics of our economy and the fungible nature of capital, labor and technology.  Simply stated, money goes where it gets the best return, labor is used where it is cheaper and less encumbered by onerous regulations and technology enables the efficient deployment of both capital and labor!  Perhaps, we should demand that the administration has another eye exam as it looks to spend our tax dollars on the next big effort – healthcare reform.