Skip to comments.CBO Report: Avoiding the Fiscal Cliff Costs Over $1 Trillion
Posted on 11/15/2012 5:07:58 AM PST by Kaslin
The Congressional Budget Office released their analysis of the group of deficit-fighting policies known as the "fiscal cliff." The big takeaway: completely averting the contraction that would occur in 2013 and 2014 would cost $1.16 trillion - entirely deficit-financed.
There would certainly be some economic benefits to all of this, however. The CBO has a wide range of estimates for the positives - between 0.8% and 5% growth in real GDP, and between 1.1 million and 5.8 million new jobs. There are a lot of caveats here, as it's an incredibly wide range of estimates, but there would certainly be a definite economic upside to averting the fiscal cliff.
However, what the CBO does emphasize is that there will be grave and dire consequences to merely fixing the fiscal cliff without offsets down the road.
Although reducing the fiscal tightening scheduled to occur next year would boost output and employment in the short run, doing so without imposing a comparable amount of additional tightening in future years would reduce the nation's output and income in the longer run relative to what would occur if the scheduled tightening remained in place. If all the policies considered in this analysis were extended for a prolonged period beyond the two years assumed here, federal debt held by the public - which is currently more than 70 percent of GDP, its highest water mark since 1950 - would continue to rise much faster than GDP. Such a path for federal debt could not be sustained indefinitely, so policy changes would be required... Ultimately, the policies assumed in the alternative fiscal scenario would lead to unsustainable federal debt, from both an economic and budgetary perspective.
Given the language coming out of Congress, the White House and the punditocracy, however, it is seeming less likely that legislation will be passed that simply kicks the can down the road and delays the full suite of policies scheduled to take effect. There are a lot of moving parts involved, and it's important to acknowledge which policies will and won't be valuable to the economy.
One of the items at the top of the CBO's analysis is the scheduled cut in defense spending. The Budget Control Act specified that defense spending will be cut by $75 billion over the next two years. While this is a relatively small amount of money compared with the size of the cuts that will be made elsewhere, the CBO writes that the defense cuts will have the largest per- dollar impact on the economy - from between $0.50-2.00 per dollar spent and would cost between 200k-700k jobs. Simply put, averting the planned defense cuts would be the most valuable thing that Congress could do.
Tax cuts are also on the docket. With the Bush tax cuts set to expire and a fight set up on upper-income cuts, the CBO modeled both extending all the cuts and excluding upper-income cuts. Their findings include that tax cuts are less of a boon to the economy on a per-dollar basis than some of the other provisions of the fiscal cliff, but the sheer size of the tax cuts involved create an outsize effect on the economy.
The tax cuts would total $750 billion over the next two years and the CBO's median estimate is that they'd increase GDP by 1.4 percent and create 1.8 million jobs. The high-income cuts that President Obama is fighting against, meanwhile, compose $80 billion of the two-year cost and the CBO estimates they'd have between a negligible effect on employment or create up to 300,000 new jobs. As they write, the high-income cuts are slightly less effective than the package as a whole, but the difference is small:
The difference in the estimated effects of the two sets of policies are small (and therefore are generally not visible in the rounded numbers...) in part because the tax savings on income above the specified thresholds are a small share of the total tax savings under the broader option and in part because high-income taxpayers are presumed to save only a modestly larger portion of reductions in their taxes.
Now, the CBO's estimate of a strong response to upper-income tax changes - 300,000 jobs - is nothing to sneeze at. In the larger scheme, however, the CBO finds that the effects of increased marginal tax rates on upper-income earners are small. This may presage a protracted fight in Congress between Republicans who take a hard line in support of the tax cut and Democrats who have been pushing for increased taxes on high-income-earners going back to John Kerry's presidential campaign.
Another major component of the fiscal cliff is the lapse in a temporary payroll tax cut. Originally passed as part of President Obama's stimulus, the measure was given a one-year extension last year. Extending this payroll tax cut for two years would cause the federal government to forgo $205 billion over the next two years. The CBO finds that this would result in an employment boost of between 300,000-1.3 million jobs - and would be a more valuable boost to the economy per-dollar than the other tax cuts, but not quite as effective as the increased defense spending.
It's important to keep in mind that the CBO's analysis represents a standard Keynesian framework of looking at the issues involved with the fiscal cliff. Their analysis overstates the effects of both the spending and tax provisions relative to a non-Keynesian framework. It does, however, represent a very credible and important part of the analysis involved here that needs to be taken into account. The bottom line: the expiring Bush tax cuts comprise by far the lion's share of the economic effects of policies scheduled to pass at the end of the year, and if the fiscal cliff is averted without offsets - via either revenue raises or spending cuts - or down the road, we'll see an increasingly dire fiscal situation that will have far larger economic effects than a recession.
All Repuboicans have to say is by ending the Bush tax cuts for the rich, Obama is getting his revenue.
Now it is Obamas turn to give up something.
Obama cannot say anything about the Bush tax cuts for the rich because 1) he supported them as both a senator and President and 2) he said they were for the rich. If he says anything different then he lied and ran for on that lie.
I feel like i’m living in an episode of the Twilight Zone.
Avoid the cliff????
Hell, jump in the bus, throw a brick on the accelerator, and go over full speed ahead..
who or what group will get hit the hardest??
Lower income and people under 40, the ones that voted for fubo..
let them eat cake
People cannot max every credit line, continuing to commit to extravagant spending, and then when the money runs out, choose the little tweak that will allow them to expand their lifestyle. Math doesnt work like that.
The citizens of this country have chosen the easy path, and now we are approaching the end of that path. We passed the entry gate to hell some time back.
The harder and more severe the reckoning, the better the chances are of jarring people into reality.
When the lazy bums, who trade their multiple EBT cards for pot, have to beg for a job to eat, then we will have gotten their attention. But weve hit critical mass, and these parasites first reaction is not going to be to seek work. They will first attempt to steal by force the last bit of the Old Republics wealth. Quelling these riots, or suffering the effects, may serve to convert the working-Democrats to reality.
Every American business should just shut its doors. Then we can watch Obama explain the power the Federal government to the masses.
But, I thought the fiscal cliff WAS the "offsets down the road" used to justify increasing the debt ceiling and borrowing another 1 1/2 trillion dollars a year ago.
The GOP needs a new strategy in this budget fight. You cannot negotiate with the other side until a baseline is established, which Obama and the Dems keep moving.
They should have a press conference, GOP House and Senate, and announce they will be happy to work with the other side once a baseline for negotiation is established. That baseline would be a budget passed by the Senate, which has not passed a budget in four years. Once that is done, negotiations can begin. Until then, there is nothing on the table.
That will force Obama and Reid to go on record as either supporting continued trillion dollar deficits, specific spending cuts, specific tax increases, etc. Right now there is no record.
STOP playing defense and force their hand.
We’re going to go over the cliff anyway, might as well get it over with.
We will be paying the long term debt with something like this.
Let’s be honest with ourselves:
Nothing of substance will be done about this. After a period of posturing by both sides, negotiations will effectively re-arrange the deck chairs on the Titanic.
And the band played on...
Cliff doesn’t like to see his name drawn through the mud.
What the author omitted, was that spending cuts should total around $800 billion during the first year. IMO, that’s what most political folks in general are most afraid of. And Congress, in general, won’t let those cuts happen.
obama wants this country destroyed. And obviously so do a lot of others. So letting us go over the cliff is what he really wants. If he can’t have that, he’ll be happy to tax the “rich”. The end result will be the same but it’ll happen a little farther down the road.
And why are the republicans cowards? The only possible explanation is they’re in on it. There is only one party in D.C. It’s caled the “ME” party.
What do you mean “the math doesn’t work”. Didn’t you know that 2 + 2 does not always equal four? And getting beaten 34 to nothing in a t-ball game doesn’t mean you lose.
Send it over the cliff. Millions of new taxpayers will suddenly get interested in how much the govt spends.