More Slides from Ed Dolan’s
Econ Blog http://dolanecon.blogspot.com/ How Chronic Budget Optimism Helped Dig the Hole We are In Posted February 20, 2011 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.

The Federal Budget for Fiscal
Year 2012 <ul><li>Early in each year the White House publishes a budget for the following fiscal year, prepared by the Office of Management and Budget (OMB) </li></ul><ul><li>The budget for fiscal year (FY) 2012 was published in February, 2011 </li></ul><ul><li>FY 2012 runs from October 2011 through September 2012 </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Budget Projections and Assumptions for
FY 2012 <ul><li>The FY 2012 budget projects that the deficit will decrease to 3.6 percent of GDP by FY 2014 </li></ul><ul><li>The deficit prediction is based on certain economic assumptions: </li></ul><ul><ul><li>Increasing rate of growth of real GDP </li></ul></ul><ul><ul><li>Decreasing unemployment rate </li></ul></ul><ul><li>If the unemployment rate is higher or GDP growth lower than assumed, the deficit will be greater </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Comparing assumptions with actual outcomes:
An example <ul><li>Each year’s budget document includes economic assumptions for the budget year (B), the next year (B+1), two years ahead (B+2), and so on </li></ul><ul><li>We can look back to see what assumptions were made for a given year, say 2005, in earlier years </li></ul><ul><li>We can then compare assumptions made at various times with the actual values for that year, as in the example at the right </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Example: Examination of assumed values and actual values from past budgets shows that the 2003, 2004, and 2005 budgets all overestimated the growth rate of real GDP for 2005

Chronic Overestimation of GDP Growth
<ul><li>Examination of budget assumptions for the period 2003-2010 shows a pattern of chronic overestimation of GDP growth rates </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Chronic Underestimation of Unemployment <ul><li>Unemployment
rates were subject to chronic underestimation in the same period </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Effects of Overoptimism <ul><li>The chronic
bias toward optimism in the budget assumptions for the years covered in the charts contributed to the budget mess the United States finds itself in today </li></ul><ul><li>If more cautious economic assumptions had been used, the tax cuts and unfunded spending increases in those budgets would have been harder to justify </li></ul><ul><li>As a result the national debt might well now be considerably lower. </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

President’s Comments on the 2012
Budget <ul><li>In a press conference* on February 15, 2011, President Obama appears to have conceded that the FY 2012 budget just prepared by the OMB does not do enough to restore the US to fiscal health. </li></ul><ul><li>“ To get where we need to go, we're going to have to do more” the President said </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Photo source: http://commons.wikimedia.org/wiki/File:FEMA_-_39841_-_Official_portrait_of_President-elect_Barack_Obama_on_Jan._13.jpg *See http://www.whitehouse.gov/the-press-office/2011/02/15/press-conference-president for the full text of the press conference

President’s Comments on the 2012
Budget (continued) <ul><li>Obama also addressed concerns that the FY 2012 budget incorporates few of the proposals of last year's bipartisan fiscal policy commission </li></ul><ul><li>He denied that the commission report had been shelved, and said that it still provided a framework for discussion </li></ul><ul><li>&quot;My goal here,&quot; the President said , &quot;is to actually solve the problem. It’s not to get a good headline on the first day. My goal is, is that a year from now or two years from now, people look back and say, you know what, we actually started making progress on this issue.&quot; </li></ul>Posted Feb. 20, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Photo source: http://commons.wikimedia.org/wiki/File:FEMA_-_39841_-_Official_portrait_of_President-elect_Barack_Obama_on_Jan._13.jpg