CBO: If nothing changes, we’re in for another recession

August 22, 2012

Usually the release of Congressional Budget Office economic and budget projections is as dull as that phrase makes it sound. But not these economic and budget projections, released today by the CBO. The main takeaway is that if we go over the fiscal cliff — that is, if we let the Bush tax cuts and payroll tax holiday expire while allowing the automatic budget cuts under last summer's debt ceiling deal to take effect — we're going to fall into another recession, with real GDP declining by 0.5 percent in 2013. That's nowhere near the 3.1 percent decline we saw in 2009, but it's a far cry from the already anemic 2.4 percent and 1.8 percent growth rates of 2010 and 2011 respectively, and the 1.75 percent average we're at for 2012 so far.

Doing nothing also leads unemployment to rocket up to 9.1 percent, as the graph below shows. The "projected baseline" is what happens if we do nothing, and the "alternative fiscal scenario" is what happens if current policies are extended. Note that in 2015, in both scenarios, unemployment is still way above its pre-recession level. We're just not growing fast enough to get back to normal:


 Congressional Budget Office

On the other hand, the CBO report also found that doing nothing basically solves our debt problem in the medium term:


 Congressional Budget Office

While reversing the budget cuts and extending tax cuts leads debt to keep growing as a percent of GDP, doing nothing starts a decline that results in a debt-to-GDP ratio of about 60 percent, a level that many analysts consider safe and stable, by the end of the decade.

Fortunately, it's possible for policymakers to address the cliff in a way that prevents economic harm in the short-run without undermining medium-term debt reduction goals. As the Committee for a Responsible Federal Budget shows in this graph, the largest negative economic effect comes from the budget cuts in the debt ceiling deal, whereas the overwhelming share of the deficit reduction benefits of doing nothing come from the expiration of the Bush tax cuts.

This implies that you can put together a deal where policies that keep the economy afloat at lower cost are extended and those whose budget cost outweighs their economic benefits are allowed to expire. For instance, I found using CBO multipliers that letting all the Bush tax cuts expire but extending current spending and the payroll tax holiday reduces GDP by about 1 percent — a big number, but much less than the 3.9 percent decline from doing nothing altogether.

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Dylan Matthews · August 22, 2012

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