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February 06, 2013 9:16 AM The Big Trade-Off

By Ed Kilgore

Anyone not wearing ideological blinders had to read yesterday’s updated economic outlook from the Congressional Budget Office and kinda nod along:

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $845 billion, or 5.3 percent of gross domestic product (GDP), its smallest size since 2008. In CBO’s baseline projections, deficits continue to shrink over the next few years, falling to 2.4 percent of GDP by 2015. Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.

And here’s the flip side:

[U]nder the fiscal policies embodied in current law, output is expected to remain below its potential (or maximum sustainable) level until 2017 (see figure below). By CBO’s estimates, in the fourth quarter of 2012, real (inflation-adjusted) GDP was about 5½ percent below its potential level. That gap was only modestly smaller than the gap between actual and potential GDP that existed at the end of the recession because the growth of output since then has been only slightly greater than the growth of potential output. With such a large gap between actual and potential GDP persisting for so long, CBO projects that the total loss of output, relative to the economy’s potential, between 2007 and 2017 will be equivalent to nearly half of the output that the United States produced last year.
After the economy adjusts this year to the fiscal tightening inherent in current law, underlying economic factors will lead to more rapid growth, CBO projects—3.4 percent in 2014 and an average of 3.6 percent a year from 2015 through 2018….
Nevertheless, under current law, CBO expects the unemployment rate to remain high—above 7½ percent through 2014—before falling to 5½ percent at the end of 2017.

So the smart path ahead would seem to be reasonably clear: short-term stimulus and long-term action to reduce deficits by a combination of new revenues, defense spending cuts, and entitlement spending reductions, with this last component best achievable through health-care cost containment measures.

Instead, we’ve already raised payroll taxes this year on the category of the population whose consumption is most sensitive to tax rates, and we are on the brink of big across-the-board cuts not just in defense spending but in the types of domestic spending (the discretionary accounts) that contribute the least to the deficit problem.

And a big piece of the problem, of course, is that one of America’s two major parties is wedded to the completely destructive idea that short-term spending austerity is the key to long-term growth. So it cannot accept the inevitable tradeoff between short-term deficit reduction and economic recovery that is right there in the numbers for everyone else to see.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • c u n d gulag on February 06, 2013 9:44 AM:

    So, the lessons too many people in DC learned from watching Europe the last few years, and about how we don't want to become Greece, Spain, or Ireland, is that the way to prosperity lies through the exact same "Austerity" programs that tanked those nations economies, and spiralled unemployment upwards astronomically.
    OY!

    In Europe, at least the nations there had some excuse for their own stupidity - the countries in Europe don't have their own individual national monetary units, and are dependent on the Euro.

    Here in the US, we have our own money, and can borrow right now, at virtually no cost - which will lower unemployment, and at the same time, help keep lowering the deficit, as people who will now return to working, and feeding their tax dollars back into the system.

    Only one problem:
    The Republicans need the deficit to grow, and the economy to worsen, or else they have nothing to run on except their native racicm, misogyny, xenophobia, and homophobia - things that the majority of voters rejected in the last national election.

    If not for deficit scolding, and running against a weak economy (that they keep hoping Americans won't remember which party actually caused the deficit and weak economy), the Republicans ain't got nothin'!!!

  • esaud on February 06, 2013 9:50 AM:

    Yesterday Obama was blathering again about a "balanced approach" to deficits. I suppose that is supposed to be appealing to lefties like myself, for whom fairness is an important concern.

    But the deficits were not driven by any kind of balance - overwhelmingly tax cuts went to the wealthy, defense corporations profited by wars. At the same time people like myself near retirement are working only part time, the value of my condo sank, my portfolio is only now getting back to pre-2008 levels.

    And I'm supposed to eat some cuts to social security?

    That's not balance, that like being on a seesaw with an elephant.

  • PTate in MN on February 06, 2013 10:27 AM:

    "one of Americas two major parties is wedded to the completely destructive idea that short-term spending austerity is the key to long-term growth"

    Disagree. I think it is more apt to say that one of America's two major parties is wedded to the idea that austerity is the key to destroying those parts of the federal government that they have always hated--social programs, income tax, regulations, civil rights. These are the guys who think killing the golden goose will make them, personally, richer.

  • Bear on February 06, 2013 10:47 AM:

    What PTate said about that one political party.

    but I don't think the Dems are clear enough about how much demand is sensitive at the lower end of the income spectrum where most of us are. The payroll tax increase probably doesn't sound like much to the six-figure folks but I'm going on my own austerity program because of it. No discretionary spending for me. Basic expenses are now wiping me out.

    The Dems have got to focus on improving the economy or we're never getting out of this hole.

  • Eric Carrig on February 06, 2013 12:41 PM:

    We need to stop thinking in terms of a budget and start thinking in terms of strategy. How do we invest to get better? We should be talking about ways to cut expenses while improving its programs. We should be talking about reducing corporate subsidies and policies that hinder competition. http://www.facebook.com/at10us?ref=hl