Fiscal Cliff, Three Ways

June 13th, 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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4 comments in reply to "Fiscal Cliff, Three Ways"

  1. Bumpa says:

    Question: Why the importance given to deficit reduction at this time? I don’t see it as a causing factor in the economic problems we are facing and, certainly not a factor that should be given priority. Better that we focus on 1/ rebuilding the infrastructure, putting people back to work (“creating jobs”) – 2/ develop a national high speed rail system that would rival the best the world has to offer, creating a whole new industry and revitalizing supporting industries – 3/ pull back on our commitment to an unending “war on terror” – 4/ tax the rich. Do these and the deficit will be taken care of. Pay off the deficit without doing these, and we will face an continued and worsening recession.


  2. Fred Donaldson says:

    A good austerity plan would examine why we continue to fund Pakistan, Iraq and Afghanistan with billions annually. The money is either blown to smithereens, stolen by their government leaders, pocketed in obscene profits by contractors, or we get benefits such as being charged $1,500 tolls for trucks to carry supplies and other similar ripoffs.

    It really is time for corporations to pay their way in the global economy, not leave it up to minimum wage payroll tax payers here to shore up their interests in the middle east.


  3. Tyler Healey says:

    “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.”

    Why would growth reduce if we chose to not engage in the disastrous fiscal austerity (deficit reduction) currently being practiced in Europe?


  4. Misaki says:

    >That’s because absent new revenues from the upper-end sunset, you’ve got larger budget deficits.

    This seems to be assuming that interest payments will make up more of tax revenues, and that no tax increases will occur… but… deficit spending will stay constant, meaning that non-interest spending decreases..?

    It is really not clear what assumptions are involved here. If “current law” and “current policy” both ignore the debt ceiling, I am not sure how they end up with lower GDP 10 years from now using current policy.

    Maybe it assumes that social security funds will run out of money and the government won’t borrow to make up the difference? The only other thing I can think of is resource depletion and I doubt they included that in the analysis.

    Job creation without government spending, inflation, or trade barriers, and that would allow more focus on environment issues: http://jobcreationplan.blogspot.com/


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