Wednesday, May 23, 2012

CBO Says We’re Between a Rock And a Hard Place

Interesting report released yesterday by the CBO. While it still depends heavily upon the static analysis that I’ve criticized so often in the past, it does still show the hard choices we’re going to have to make in the very near future.

In short, the report says that if the Bush tax cuts expire on January 1, then we will have a short recession in 2013. I think they’re optimistic about the length of the recession, especially taking into consideration external factors such as the economic crisis in Europe, but it’s not a pretty picture regardless.

Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

However, the CBO says that if the Bush tax cuts are extended, then GDP growth for next year will be around 4.4%. That’s extremely optimistic, considering the current state of the economy and the pace of the “recovery” we’ve had so far. I merely present it as a data point from which to judge the rest of their projections.

Unfortunately, extending the Bush tax cuts is not all sunshine and rainbows, according to the CBO. Since they believe that such an occurrence will limit tax revenue, they see this as a problem down the road. I can’t say it any better than the CBO did, but I will bold some key points:

If all current policies were extended for a prolonged period, federal debt held by the public—currently about 70 percent of GDP, its highest mark since 1950—would continue to rise much faster than GDP.

Such a path for federal debt could not be sustained indefinitely, and policy changes would be required at some point. The more that debt increased before policies were changed, the greater would be the negative consequences—for the nation’s future output and income, for the burden imposed by interest payments on the federal debt, for policymakers’ ability to use tax and spending policies to respond to unexpected challenges, and for the likelihood of a sudden fiscal crisis. And the longer the necessary adjustments in policies were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be.

The CBO is going to keep hammering this home (and so will I), until someone other than Congressman Paul Ryan (R-WI-01) gets it. The economic path President Barack Obama (D-USA) has put us on leads to financial ruin. And we are very far down the path. Every day we delay doing something about it a) makes it harder to solve, and b) makes the required solutions more drastic.

Now, the CBO thinks that we can avoid this financial ruin by raising taxes. But, unless we can raise taxes to 30% of GDP without destroying the economy (we can’t), then the CBO is wrong. We may need to raise taxes. But we absolutely need to lower spending. And, until we commit to doing the latter, there’s no point in even considering the former.

One final point: politicians, regardless of party, who are ignoring this problem or pretending it doesn’t exist are endangering the future of America. These people must be stopped. Quickly. This is what the elections this November are all about. It’s very simple. You can either vote for America, or against it. The time to choose is now.

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