Deficit Down; Unemployment Up

February 2nd, 2012 at 7:29 pm

The CBO budget update from the other day makes a good, simple point, one ignored by the austerity merchants: if we try to get rid of the deficit too quickly, we will make the jobless situation worse.

Source: CBO Budget Update, link above.  Def/GDP ratio is for fiscal years; unemployment rates for Q4.

The CBO estimates the path of the deficit if all the Bush tax cuts went bye-bye on schedule at the end of this year (current law baseline; the alternative minimum tax would also whack a lot more middle-income people).  Taxes would go up and the deficit would go down.  But the drag to the still-too-weak economy from the reduction in after-tax income would mean less buying power for a lot of families and that would send the unemployment rate back up past 9% in their model by 2013.

This is very unlikely to happen.  The President plans to let the sun set on the highend tax cuts at the end of this year, while preserving those for households with incomes under $250K.  The highend cuts represent about a quarter of the whole package and they target those who are less income constrained to start with, so I wouldn’t expect them to have anywhere near the effect of the full sunset.

The Bush tax cuts are the main driver of the medium term budget deficit and ultimately, they should all phase out.  But we need to be mindful of the timing.

 

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3 comments in reply to "Deficit Down; Unemployment Up"

  1. the buckaroo says:

    …lots of caveats…smooth sailing if Bush Tax cuts expire, good luck with that. Digesting the data is slow sledding.

    You singing ‘Here Comes the Sun’ are ya?


  2. readerOfTeaLeaves says:

    I do wish that the “Best of CBPP Graphics 2001″, graph 6 had been included with this post.

    That graph always blows my mind, as does #7. To look at those graphs and see how much larger the Bush era tax cuts are than even the (unpaid for) wars in Iraq and Afghanistan always blows my mind.

    http://jaredbernsteinblog.com/the-best-of-cbpp-graphics/


  3. Bumpa says:

    Allow (God willing) the B#%h tax cuts to expire, next get out collective ass out of Afghanistan, use that money to invest in rebuilding jobs and the infrastructure, stabilize the economy at the point Clinton left it to B#%h — then, and only THEN, go after the deficit.

    In other words; 1st, reverse the Republican economic direction and wipe the slate clean. 2nd, Rebuild the foundation (middle class) of the economy (while looking after the poor). 3rd, Don’t listen to any BS coming from the Right.


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