Obama’s Planned Fiscal Squeeze Could Choke Economic Recovery

The White House projection that the deficit will narrow by 5.5% of GDP in just two years has to be considered a long shot for economic and political reasons. Outside of demobilization from war, only one other period saw a two-year fiscal contraction even half as great. That 1936-to-1938 fiscal reversal of 5.4% of GDP helped trigger the economy’s relapse in 1937 to extend the decade-long Great Depression.

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Could the White House’s plan to withdraw stimulus while simultaneously raising taxes be a recipe for repeating history?

The Obama administration does not acknowledge such a risk. Rather, it expects the economy to grow at a roughly 4% rate in 2011 and 2012, even as it hits the fiscal brakes.

His own view is this: “The upcoming years will remain very painful … (with) a sluggish economy and high unemployment.”

The White House projects receipts will jump from 14.8% of GDP this year to 18.1% of GDP in fiscal 2012, due to tax hikes and a stronger economy. [Read the full article]

Employers shed a less-than-expected 36,000 jobs in February while unemployment stayed at 9.7%, the Labor Department said Friday, giving hope that modest hiring will finally return.

Analysts expected a loss of 68,000 jobs due to absences and business closures caused by bad weather. But Labor said it wasn’t clear what impact the East Coast storms had. December and January payrolls were revised to show that 35,000 fewer jobs were lost than initially reported.

The jobless rate, based on a separate survey of households, held near a 26-year high. But it did not tick up, as expected, to 9.8%.

Underemployment, which includes discouraged workers and those forced to work part time, rose 0.3 point to 16.8%. The rate peaked at 17.4% in October.

“If you look at the pattern in the past three months there’s been a slow reduction in job losses,” Labor Secretary Hilda Solis told IBD. “We’re expecting that the spring will be more optimistic.”

Investors are too. [Read the full article]

Chinese Premier Wen Jiabao has pledged to extend job-creation programs and keep bank-credit flowing as Beijing tries to keep its factories humming and its workers employed at a time of growing trade tensions with the West.

Although the Chinese action is helping to keep the world’s economy afloat, the budget plan Wen outlined Friday showed that Beijing is sticking with a course that has driven exports and piled up huge foreign exchange reserves rather than buy up more products made outside China.

Wen made his announcement in the government’s annual report to China’s legislature, pledging that government spending will grow, albeit at half the rate of last year during the economic downturn, because the basis of the global recovery remains weak. [Read the full article]

In a March 2 affidavit filed with the New York State Supreme Court in Manhattan, Greenberg said the statute of limitations to prosecute him over the 2000 transaction between AIG and Berkshire’s General Re Corp unit expired on Feb 21.

Federal prosecutors have already obtained five convictions and two guilty pleas of former General Re and AIG officials over the transaction, which boosted AIG’s loss reserves by $500 million without transferring risk. Among those convicted was onetime General Re Chief Executive Ronald Ferguson.

Greenberg said that in October 2008, he invoked his constitutional right against self-incrimination about the transaction, as he was giving testimony in a civil fraud lawsuit originally filed in 2005 against him and former AIG Chief Financial Officer Howard Smith.

But in his March 2 affidavit, Greenberg said he is ready to talk. “I am prepared to testify regarding the Gen Re transaction and to be heard on the issues concerning the Gen Re transaction. [Read the full article]

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