Gloom or Doom from CBO

By :: August 23rd, 2012

The Congressional Budget Office’s summer budget update charts two undesirable paths for the nation’s economic and fiscal health next year. Call them Gloom and Doom.

Gloom is what happens if the tax increases and government spending cuts scheduled to arrive in January actually occur. CBO says that would drive the economy back into recession in 2013 and push unemployment above 9 percent. But there’s some sunshine too: the federal deficit would drop sharply—by nearly half in 2013 alone—and would be under 1 percent of GDP by 2016 (dark blue bars in graph). The federal debt would decline from 73 percent of GDP this year to 59 percent in 2022. And the economy would resume growing in a year or so. Long-term gain for short term pain.

Doom occurs if Congress and the president agree to extend all of the expiring tax cuts and postpone the scheduled spending cuts for the next ten years. Short-term extension would prevent renewed economic collapse—the economy would maintain its slow growth and unemployment would continue its slow downward trend. But deficits would fall much less (the sum of the bars in the graph) and government debt would climb to nearly 90 percent of GDP in 2022.

Gloom and Doom aren’t new to the scene. Our recovery from the great recession has crawled at a painfully slow pace and any fiscal hit could stop it in its tracks. When faced with expiring tax cuts in 2010, President Obama and Congress agreed to extend the cuts through 2012, buying time for the recovery at a cost of two more annual deficits exceeding a trillion dollars. That set the stage for this year’s fiscal cliff.

Meanwhile we’ve had ample warning about our deficit and debt problems. Cutting taxes without controlling spending has proved to be a sure recipe for growing debt. Add burgeoning costs of Medicare and Medicaid, the demographic bulge of baby boomers collecting Social Security, and the cost of two wars, and the debt had to rise—and at an increasing pace. CBO has warned for years about the looming fiscal crisis, even before the recession piled on costs and slashed revenues.

We don’t really have to choose between Gloom and Doom. Combining smaller, well-timed parts of each would be a better alternative. We just need to figure out how to segue from not squelching our nascent economic recovery in the short run to accepting the fiscal discipline required to control deficits and bring down our national debt.

CBO’s update isn’t news. It’s just another reminder that we can’t continue to spend too much and tax too little, despite what presidential and congressional candidates might want us to think.

4Comments

  1. Michael Bindner  ::  8:06 pm on August 23rd, 2012:

    The entire debate over spending cuts has always been a justification of the extension of the Bush tax cuts to the middle class. That is also the justification for doing tax reform, which also helps hide the fact that revenue from the wealthy will go up. Whether this strategy is wise or not will be seen both after the election and on whether Republican donors stay convinced that their party will keep the House and win the Senate. If they can’t do that, they have every reason to demand a deal while they have some stake in the game. Of course, after this week, one wonders if they are deliberately throwing the game (so they don’t actually have to make the hard choices) or are just having a lousing string of luck.

    As to the economics of it, I challenge the contention that at least on the tax side, the expiration of the Bush cuts would be a bad thing. Everyone besides the wealthy needs jobs more than tax cuts. As long as capital gains and dividend rates are 15%, corporate management and investors have a personal incentive to cut or restrain labor costs and pocket the difference (and get 85% before state taxes). Let the tax rate go to 25% automatically on cap gains and match the dividend rate there, or let it go to 45%, and there is less of a marginal incentive – especially if the Government stops providing net pay increases through payroll tax cuts and forces employers to cough up a little in wage gains to motivate its top people.

    I see no downside in letting the tax cuts all expire, especially if making this promise results in comprehensive tax reform sooner than later (especially if it includes consumption taxes so that individuals need not file while having a single rate structure for wealthier taxpayers as Michael Graetz suggests).

  2. Tax Roundup, 8/24/2012: taking a bite out of crime, for herself. « Roth & Company, P.C  ::  9:09 am on August 24th, 2012:

    […] on the sunny side!  Gloom or Doom from CBO (Roberton Williams, […]

  3. AMTbuff  ::  4:17 pm on August 24th, 2012:

    The correct first step is a convincing revision of promised benefits so that boomer retirement will not break the bank. Once the prospect of national bankruptcy no longer looms we can work the shorter-term details of taxes and spending in any number of ways, including some of the ways mentioned here. The markets will give us the necessary slack once we have taken care of the long-term problem.

    Until the long term solution is enacted, shorter-term maneuvering is nothing but a dangerous distraction. Politicians other than Ryan and Coburn seem not to believe that. Neither do the authors and commenters here.

  4. Gordon Johnson  ::  10:40 am on August 25th, 2012:

    Instead of the so-called tax cuts for the rich why not allow them a substantial tax deduction for everiy new long-term job created as measured against the current baseline? If these affluent folks are the job-creators, why not give them the same opportunity to change their net that way rather than as a tax cut with no strings attached?

    As regards capital gains are concerned, any change in the rate needs to accompanied with an indexation plan so no one has to pay taxes on phantom gain due solely to inflation. Dividends should be taxed ony once, either at the payor or the payee.

    A national sales tax would have to take into account that some of the funds being spent have already been taxed once. None of the proposls I have read make any provision for the affect of a national sales tax on the purchasing power reduction sustained by municipal bond interest and disabililty pay.

    And let’s not forget it is not just the millionaires and billionaires that would be affected; all private and public retirement plans would take a major hit from changes in the capital gains tax rate and the double txation of dividends. All of these proposals have to be judged not only on the national level but also on a very personal level. How in the world do you sell any changes to the Social Security and Medicare systems so highly valued by reitrees?