Jun 13, 2012 at 5:36 pm
The ubiquitous economist Mark Zandi from Moody’s.com has been doing yeoman’s work analyzing different outcomes to the fiscal cliff slope we face at the beginning of next year.
Here are Mark’s projections of real GDP growth under three different scenarios:
–Current policy: full can kick—extend all the tax increases and spending cuts;
–Current law: full can crush—all tax increases and spending cuts occur on schedule Jan 1;
–Moody’s baseline: compromise—upper income tax cuts expire, only half of automatic cuts take effect, a few other cats/dogs don’t take effect.
Basically, under the compromise baseline, we achieve about 44% of the deficit reduction that’s scheduled under current law (full expiration, full spending cuts). Most importantly, the sun finally sets on the upper income Bush tax cuts—those to households over $250K. That’s over $900 billion in revenue over 10 years.
Equally important, as you can see from the slight difference between the Moody’s line, in which the high end cuts are gone, and current policy, in which they’re still in play, their absence has very little negative impact on real GDP growth.
OK, you say. But since growth is, in fact, higher under current policy, why not just stick with that?
Good question. Look at the other end of these lines. There you see the current policy GDP falling behind the Moody’s one. That’s because absent new revenues from the upper-end sunset, you’ve got larger budget deficits. As I’ve stressed here at OTE, you want larger deficits in recession, but once the economy’s back on track, they should start coming down. If they don’t, at least as Mark scores it (as does CBO), growth is reduced.
Finally, current law with full expiration of the tax cuts and all the automatic spending cuts is recessionary next year, as it is in CBO’s analysis.
Obviously, these are 10-year forecasts and with all that’s going on out there in the world economy, who knows? But I’m pretty sure Mark’s right about the main points here. A full-can-kick (extending everything) does more harm than good; a full-can-crush does too. The best path both in terms of growth and deficit reduction is to compromise: bid adieu to the upper income cuts and push some of the other stuff back until we’re further out of the economic woods.
Source: Mark Zandi, Moody’s Analytics
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