Goldman Sachs chief economist Jan Hatzius / Bloomberg

The Congressional Budget Office has been warning for months that allowing the United States to go over the "fiscal cliff" would endanger the economic recovery. It estimates that the combination of the expiration of the Bush tax cuts, the sequestration cuts and other changes will plunge the nation into a recession, with real GDP falling 0.5 points and unemployment skyrocketing to 9.1 percent (the jobless rate fell to 7.8 percent in September).

But those numbers apparently aren't grisly enough. That's because the CBO assumes that the payroll tax holiday will be allowed to expire at the end of the year in its baseline. So the costs of the fiscal cliff, by the CBO estimate, don't include the costs of letting that tax break expire. As Wonkblog's Suzy Khimm has reported, letting the payroll tax cut expire amounts to an average tax increase of $735 for the middle-income quintile. Using CBO multipliers and the projected cost of renewing the cut, I estimated that extending the payroll tax another year will boost the nation's GDP by 0.66 percent.

Goldman Sachs also makes that estimate in a new research note. Jan Hatzius, the bank's chief economist, projects that letting the tax cut expire would reduce GDP by 0.6 percent. That's the same percentage by which Hatzius projects the Federal Reserve's current easing policy will raise the GDP. So if the payroll tax cut expires, it would undo the work the Fed has done to get the economy back on track.

But it gets worse. All told, Hatzius estimates that fiscal pressures will cut 1.5 percent to 2 percent off GDP in 2013, even if the Bush tax cuts are renewed and the sequestration cuts are forestalled. Let me repeat that: Even if you take the two main elements of the fiscal cliff out of the equation, the other fiscal changes set to take effect next year would cut GDP by up to 2 percent. Those changes include new taxes in the Affordable Care Act, increased eligibility for middle-class households for the Alternative Minimum Tax (which is not indexed to inflation), expiration of unemployment benefits and, of course, the payroll tax cut.

This isn't too far off from the CBO estimates. Using some back-of-the-envelope math, I found that the CBO multipliers put the cost the GDP of those provisions at 1.64 percent. Hatzius is very blunt about what policymakers should take away from findings like these. "We are surprised that neither party has seriously challenged the case for near-term fiscal retrenchment," he writes, noting that "investors are lining up to finance US government expenditure at a real 10-year yield of -0.8%." That is, investors aren't charging the federal government to borrow money. They're paying us to let them give us money. The costs of deficit-spending on things like the payroll tax cut are negative.

"While we agree that the US government will ultimately need to tighten its belt," Hatzius concludes, "a big move in a restrictive direction still looks decidedly premature to us." As Annie Lowrey at the New York Times has reported, it's unlikely policymakers will heed his warning on the payroll tax. If Hatzius is right, the cost of that inaction will be staggering.

Further reading

- Joe Wiesenthal on Hatzius' research note.

- Suzy Khimm on the cost to taxpayers of letting the payroll break expire.

- The CBO's warning on the fiscal cliff.

- Ezra Klein on negative interest rates.

- Annie Lowrey on the dismal chances of renewing the payroll tax break.