That fiscal cliff -- you know... the one everyone's all wound up about? Well, the Congressional Budget Office (CBO) just released their analysis of its potential impact on the economy and it ain't pretty. Add up all the stuff that's scheduled to turn into fiscal pumpkins at midnight on December 31, and you get about 5% of GDP (all the Bush tax cuts, automatic spending cuts, alternative minimum tax fix, payroll tax cut, unemployment insurance (UI) extension, and more!).
What impact might that have on the economy? Their best guess is that it means declining real GDP in the first half of next year to the tune of 1.3% (annualized; or around $100 billion through the first half), followed by growth of 2.3% in the second half of 2013, or 0.5% for the full year. Unemployment would reverse course and start rising if that fiscal scenario remained in place -- a big, important "if," as I'll return to in a second.
Suppose Congress enters full can-kick mode and extends everything -- a very bad idea, in my humble opinion. Then, according to CBO, the economy grows 4.4% next year and unemployment reliably continues its recent downward trend. CBO also estimates a middle-ground extension scenario where the payroll tax break and UI extension expire but most everything else stays with us. Under that regime, they project growth of about where we are now, around 2%.
By now, if you're still with me, you're probably torn -- at least I hope you are -- between the full-extension scenario to tap the higher growth rate and keep the recovery on track, and the fiscal and inequality-worsening agony of extending the high-end Bush tax cuts, the ones the President very clearly wants to finally sunset.
Well, here's the thing: CBO doesn't score that scenario -- what would happen to growth if the high-end tax cuts expired -- but a) it's a relatively small share of the full fiscal constraint package -- something in the neighborhood of $80 billion in 2013 out of about $600 billion; and b) equally important, because these high-income folks are not income constrained, the growth multiplier on their tax cuts is low, about 0.3 (give them a $1 tax cut and their extra spending will raise GDP by between 10 and 50 cents; that's the lowest of all the stimulus policies CBO evaluated). If these numbers are roughly right, $24 billion in 2013 foregone stimulus is a very small price to pay for permanent sunset of this part of the Bush tax cuts -- and I say that as a guy who really doesn't like forgoing stimulus, what with all this slack still in the system.
Finally, that big "if" I mentioned above. All of these estimates assume we go off the cliff and don't climb back. If, as Gail Collins imagines it, there's a bungee jump instead of a cliff dive, we can avoid the worst of this.
One hopes that Congress can hammer the kind of compromise that has eluded them thus far -- the one that adds tax revenues to any agreement -- before the end of the year. But if that doesn't happen, a retroactive agreement by the new Congress very early next year could work too.
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
hey when's my Fund Raiser tonight . . hey when's my Fund Raiser tomorrow morning . .
Some may call that a tax increase, but it isn't. It's sunsetting tax cuts (which SHOULD have been allowed to happen in 2010.)
So if we have this previous stream of revenue slated to be reinstated on January 1, 2013, why all the ongoing talk about raising taxes to offset cuts? Does the administration want additional tax income besides the $4 trillion (over the next ten years)?
I despise the Norquist "no new taxes" Republicans, but isn't this sunsetting something beyond their control (unless, GOD FORBID, Romney gets elected)?
Conservative propaganda works much better, unfortunately, partly because liberals are not that adept at lying as conservatives are. But the bottom line is that the public at large just doesn't have a clue what is at stake.
What is clear is that trickle down is only allowing Americans to get pee'd on by the Oligarchy, and the GOP is psychotic! It is time that we all come together despite our differences and vote these traitors to democracy out come November 2012.
Democrats aren't scared that Obama will get reelected; such a claim defies logic. Left wing media is just what extremists call middle of the road media.
http://www.bauerfinancial.com/home.html
But this is the way our DEMs roll- 3rd Way, DNC, if you don't live in the district, take the pain!
Congress will not agree on anything, people in Podunk. USA understand that better than our "leaders". Only 1% of Americans think the debt is problem #1. But the DC/NYC pundits parrot their MOTU , and don't understand 99% of Americans don't care that they exist! And they sense that the feeling is mutual.
Check out: https://docs.google.com/file/d/0B52hHMRyBvEsRmNodmZJMzJZcms/edit
What you will see is a modified H. S. Dent Spending Wave that matches up events with Immigration Adjusted US Births Lagged for Peak Spending. In other words it represents the economy based on your prime spending age of 47.5 years old over time. There you will see the cliff that the CBO is talking about, which indicates to the big multinationals that the US economy won't come back to 2006 levels to some time beyond 2056. Now, since the Spending Wave was created in 1988, business has had plenty of time to adjust its operations to an international operation successful of absorbing the anticipated drop in US consumption. It also makes one wonder if the banks deliberately cashed out the housing bubble with all its fraud due to the anticipated lower revenues expected down the road.