Wednesday, August 22, 2012

CBO and Fiscal Cliff ... Pay Now or Pay Later

Here's a brief analysis of the just released Congressional Budget Office (CBO) report from earlier today.

Budget Pain Is a Cliff Hanger says this about the much talked about fiscal cliff ahead at the end of 2012 unless Congress acts:

"Looked at one way, the fiscal cliff doesn't seem so horrific.

The Congressional Budget Office noted Wednesday in its update to the budget and economic outlook for the next decade that looming tax increases and spending cuts, the so-called fiscal cliff, likely would send the economy back into recession in 2013. Gross domestic product, under that scenario, is expected to decline 0.5% for the year, while unemployment would move back close to 9%. But growth is projected to snap back quickly. CBO estimates call for real gross-domestic-product growth in 2014 of 3.1% and then 4.8% the following year, a heady pace.

Such a rosy estimate has to be taken with a grain of salt, especially given the potential for Europe to disrupt global markets. Should growth prove more anemic, any debt-reduction gains from the tax rises and spending cuts may not be as great as the CBO projects. And avoiding the cliff results in a better short-term result, with far stronger growth in the next few years, the CBO noted. Depending on how tax increases and spending cuts are moderated, 2013 GDP could increase between 0.1% and 3.3%, rather than contract, while unemployment would be closer to 8%.

But sidestepping the cliff involves a trade-off: It results in debt held by the public as a percentage of GDP rising to nearly 90% in 2022 from 72% in 2012. Going off the cliff, on the other hand, results in debt declining to less than 60% of GDP in 2022.

That higher, long-term debt load would come with its own cost. The CBO noted that it actually would reduce output relative to what would occur if the fiscal cliff hit short-term growth before allowing it to bounce back.

In other words, kicking the can on deficit cuts might be politically more palatable, but it could leave the country worse off in 10 years' time."


We'll have more to say about this CBO report later.

For now let's just acknowledge that there's no painless or easy short term way to (1) get our financial problems under control, (2) get our economy growing strongly, and (3) achieve demonstrated success in reducing the unemployment rate.

Of course, all three of the above mentioned accomplishments are absolutely necessary and need to be accomplished asap or sooner.

Thanks. Bob.

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