On Tuesday, the Congressional Budget Office released its 10-year economic and budget projections. The agency expects a 2013 budget deficit of $845 billion, growth in gross domestic product of 1.4 percent and little or no change in the official unemployment rate from its current 7.9 percent. No one’s jumping for joy at these numbers to begin with, but the report’s details are even more depressing, as they make clear that our nation’s leaders have their economic and budget priorities mixed up.
Let’s start with this graph:
That blue-shaded space between the “GDP” and “potential GDP” lines is what economists call the “output gap” – the difference between what the country could produce and what we’re actually producing. As The Post’s Neil Irwin points out, this number is actually increasing, from $914 billion in the third quarter of 2012 to a projected $1.2 trillion by the end of 2013. To close that gap and get the country back to its economic potential, we need to have at least 3 percent GDP growth — about 1.5 percentage points higher than currently projected. And the sad part is that that additional 1.5 points is staring us in the face.
See, the CBO believes that the fiscal cliff deal and the sequester — which is looking more and more likely either to go into effect, if only by default, or at least be replaced by a similar amount of deficit reduction — will reduce growth by 1.5 percent of GDP. Not all parts of the sequester or the fiscal cliff deal have an equally adverse effect on the economy, of course — ending the Bush tax cuts for income above $400,000 ($450,000 for families) reduces GDP by less than 0.1 percent. But taken together, if Washington didn’t enact these deficit-reduction measures this year, we could be looking at that 3 percent growth we need to get the economy on a truly sound footing again.
Yes, there is a long-term deficit problem. But, as Jed Graham notes at Investor’s Business Daily, an $845 billion deficit would be a decline of 3.7 percent of GDP over the last three years. “Outside of the demobilization from WWII, the only time the deficit has fallen faster was when the economy relapsed in 1937, turning the Great Depression into a decade-long affair. Other occasions when the federal deficit contracted by much more than 1 percentage point a year have also coincided with a recession, including 1960 and 1969… Even if the automatic spending cuts did not go into effect this year, the deficit of 5.5% of GDP would still show by far the biggest three-year improvement since World War II.” (Also, the deficit problem is primarily a health-care cost problem, and health-care spending is slowing.)
And what benefits have we gained? Deficit hawk groups like Fix the Debt don’t believe the deficit is small enough to address their (misplaced) concerns about market confidence in U.S. debt. Interest rates on U.S. debt were already at or near historic lows, which means deficit reduction certainly isn’t immediately necessary. By contrast, that millions of Americans are still unemployed actually is an urgent problem. At a crucial point in the economic recovery, we are chopping our potential growth in half for little or no benefit. The wiser course would be to delay any deficit reduction until the economy has improved. Now is the time to help the economy back to its feet, not to knock it back down.
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