JONATHAN CHAIT AUGUST 20, 2010
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.