Congressional Budget Office confirms EPI’s findings on the fiscal obstacle course
But, since they have a much larger megaphone than us, it’s useful to use this to reiterate the main points people should know about in discussions over the “fiscal cliff” or, as we call it (for reasons explained below), the “fiscal obstacle course.”
FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond
First, the problem posed by the fiscal obstacle course is that budget deficits are falling too quickly in the next two years, and public debt is not rising quickly enough. This is thankfully becoming a bit clearer in discussions about all of this, but it’s always useful to reiterate. Often the fiscal problem—too often referred to as a looming “crisis”—is (mis)represented as the U.S. economy being poised on some knife-edge, where the (clear and present) danger of overly rapid deficit reduction in the next couple of years must be solved only if the (speculative and not imminent) danger of projected long-run structural budget deficits crowding out private investment (by increasing borrowing costs) is also simultaneously addressed. This idea that the U.S. economy is poised between these two roughly equal dangers is why the assumption is often made that the fiscal obstacle course can only be solved with some “grand bargain” that yes, accommodates some near-term stimulus, but is paired with ambitious policies that will also reduce projected deficits decades from now.
We need to be clear— we are not on any such knife-edge and hence we do not need to strike any “grand bargain.” The actual problem the economy faces today is high unemployment and slow growth, both legacies of the Great Recession and the failure to ever fully solve it, and this problem will be amplified unless we keep fiscal policy from getting more contractionary in the coming year. This means larger budget deficits, period. The theoretical dangers of too-large budget deficits in the future will not materialize until and unless the economy makes a full recovery. So in a sense, those problems will be a luxury to have when they arrive.
Second, the main reason why the “fiscal cliff” is such a terrible metaphor is because the fiscal contraction coming our way is not a monolith, rather it’s the result of several totally separable components. Further, the actual challenge being posed of moderating the pace of deficit reduction can be addressed with policies outside those responsible for the pending fiscal contraction—this is an opportunity to reorient fiscal policy to support jobs, jettisoning ineffective policies in favor of whatever effectively boosts growth. And as the CBO report makes clear (and which we have made clear before), the budgetary impact and the economic impact of several of these components are very different.
To put it simply, the Bush-era tax cuts for high-income households are expensive in budgetary terms, but would present only a minimal drag on economic recovery in the coming year if allowed to expire on schedule. The CBO report implies that their economic drag would be in the minimal range of between 0.1 percentage point and 0.25 percentage points from real GDP growth in 2013, in line with our estimate of 0.1 percentage points from growth. By contrast, take just two policies that are part of a category that we label “ad hoc stimulus” (i.e., fiscal support passed in recent years without much fanfare)—the extension of the Emergency Unemployment Compensation (EUC) program and the continuation of refundable tax credits (i.e., targeted at lower-income households) as expanded by the Recovery Act of 2009. By our estimates, extending these two policies would cost less than renewing the upper-income Bush tax cuts in 2013, yet they would support about five times more jobs.
Far too often, navigating the coming fiscal obstacle course is presented as some bewilderingly complex task that will require a “grand bargain” to make all the pieces fit together. This just isn’t right, and we should instead simply solve the problem we have on hand: sluggish recovery imperiled by smaller deficits in 2013 that are baked into both current law and current policy.