JONATHAN CHAIT AUGUST 20, 2010
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Howard Gleckman reads the CBO mid-session update and sums up where we stand:
On one hand, if we let all the Bush tax cuts expire, allow stimulus to come to an end, and permit domestic spending to grow only fast enough to keep up with inflation, we can bring the federal deficit down to 4.2 percent of Gross Domestic Product in 2012, less than half of this year’s 9.1 percent. Once the economy recovers, deficits would settle in at manageable levels of between 2.5 percent and 3 percent from 2014 to 2020. This scenario, which effectively extends current law, sounds pretty good if the deficit is your biggest worry.
But CBO figures that if we follow that path, the economy would grow by an anemic 2 percent over the next year, and it would be 2014 before the unemployment rate falls to 5 percent from today 9.7 percent. Not so good if your chief concern is fixing the short-run economy.
At the other extreme, we could extend the Bush tax cuts, continue to exempt millions of Americans from the Alternative Minimum Tax, and maintain government spending at relatively high levels. These policies would add between 0.6 percent and 1.7 percent to growth, relative to the tighter fiscal path. As a result, unemployment 15 months from now would be as much as 0.8 percent lower.
The downside, however, is the deficit in 2020 would reach 8 percent of GDP, nearly twice what it would be if the tax cuts disappear and we limit spending. And over the long run, these higher deficits would take a severe toll on the economy.
9 comments
Yes, we are between a rock and a hard place. But we need to worry about the deficit later, rather than now (which doesn't mean that we don't have to worry about it at all). This is still most definitely a time for expansive fiscal and monetary policies. We need to grow the economy as much as possible and get the unemployment rate down as far as possible, as soon as possible.
- liberal reformer
August 20, 2010 at 12:25pm
Chait left out Gleckman's prescription, namely, a middle course of focused tax cuts, short term stimulus, and long term measures (tax increases being one) to address the deficit. It's only two short paragraphs so I'm curious why Chait did it, presenting this as only two options.
- rayward
August 20, 2010 at 12:58pm
Did the CBO predict the current recession? I doubt it. So what do they actually know about what would happen if we did not curtail the deficit until after unemployment goes down, as compared to doing it now. We can measure unemployment to some extent, nothing else is really predictable. I should be dramatically easier to cut spending and raise taxes after unemployment goes below 5%. So why not wait until then? I betting because at that point, the deficit won't be very large, and suddenly the urgency will be gone. The Republicans are using trumped up deficit concerns to advance their agenda, nothing more. Don't fall for it, focus on unemployment.
- vips73
August 20, 2010 at 5:12pm
rayward is right on. Why in !@#$%^& is this an "eithor or" choice, as it seems to be presented. Kinda like either #1 we execute Chait tomorrow or #2 appoint him to replace Clinton as Secretary of State tomorrow. Sounds like a dumb and irrational choice to me .. However, if Chait really thinks we have only two dumb choices on how to proceed on the economy in general, and tax cuts in particular, we are all better off choosing door #1 above. Look for an opening at tnr on Monday?
- drofnats1
August 20, 2010 at 7:55pm
No, we are not between a rock and hard place. The best course is to increase taxes on the high end, where people spend the least part of their income, and spend it for them on valuable infrastructure. That simultaneously restrains the deficit, increases the size of the economy, an produces assets that will support future economic growth. There is persistent confusion, generated by the supply-side nutcases of the right, between the interests of the wealthy and the interests of the country. Unfortunately, even those how seem to understand Keynes have come to accept the equivalence.
- roidubouloi
August 21, 2010 at 1:56pm
At the very minimum, what we ought to be doing is restructuring our tax system right now s0 that, if we were at full employment, we would no longer have budget deficits, meaning that we can eliminate today the structural deficits of the future. If then there is a need to run deficits for the purpose of current fiscal stimulus -- giving the rich T-bonds for their money rather than just taxing it away from them which would be better in my opinion -- that can be done as a temporary tax abatement measure. But the temporary tax abatement ought to be weighted not to the high end but to the low end where it all or most of it gets spent. Better temporarily to reduce payroll taxes than income taxes. This isn't really so complicated once you get past the confusion created by politics and the ideological perversions of the right-wing.
- roidubouloi
August 21, 2010 at 2:01pm
Oh, but we are between that proverbial rock and a hard place. It doesn't mean we can't wriggle out, just that it will be difficult. Roid, the quintessential Enlightenment rationalist, who in this way is rather like our own Jonathan Cohn, always sees the proper way forward and boy does it look good on paper. But the actually-existing world is not paper, and that is where the difficulties begin.
- liberal reformer
August 21, 2010 at 7:35pm
There are difficulties, but they are far more political than technical. The main difficulty is that we are hung with the nutty ideology of the right that prevents us from using the tools we have. Despite that, one should not permit political and ideological humbug to masquerade as fact.
- roidubouloi
August 22, 2010 at 12:24am
I see a third way. Abandon the expensive philosphy that large pools of untaxed income will stimulate the economy. Move toward consumption at the bottom end. Revise the Internal Revenue Code so that it is based on ability to pay and not on rewarding certain behaviors, like buying energy efficient cars, or first time home buyers, or daycare or research or capital gains. Fix those problems some other more efficient way. Lower payroll taxes as much as possible.
- Nusholtz
August 22, 2010 at 9:58am