A Fiscal Cliff Plan that Walks and Chews Gum

July 23rd, 2012 at 3:02 pm

Just a small addition to yesterday’s post about a two-step dance to climb back up the fiscal slope (step 1: go off the cliff to finally kill the Bush tax cuts; step 2: stimulate liberally [sic] in 2013 to avoid contractionary impacts).

Ethan Pollack from EPI drew a picture of the deficit paths under three plans in play here: current policy (full can kick), current law (Bush cuts expire, sequester kicks in), and new plan: eat first, then we talk–or, more technically, current law, but only after a 2013 stimulus package.

I suggested that Ethan simulate a $300 billion stimulus package in FY2013, but two things really matter here.  First, that the stimulus is temporary and second, that once it ends we stick with “current law,” at least on the tax side.  (The spending cuts, as noted yesterday, can and should be done more thoughtfully—we can adhere to the budget caps yet use new revenue to avoid slash/burn.)

Based on those two conditions–and even were we to have simulated a larger 2013 package, or even if we needed a two-year package–the picture would be similar.  The budget deficit would be higher relative to current law for a few years, as it must be given the weak economy.  But then it would basically* settle into the very sustainable path you see at the bottom of the figure, with budget deficits that achieve primary balance (a bit of a holy grail in this biz, that means your tax receipts are paying for current services—though not interest on the debt—and thus the debt/GDP ratio starts to fall).

Some commenters have accused me of parting with my marbles here, and I understand their concern for my mental status.  But who’s to say what passes for an adequate marble supply these days in this town?  There are a lot of people to whom that bottom line looks pretty good, I’d render, and a lot who would love to see some serious jobs programs ASAP.

Unfortunately, not too many of those people are in the Congress.

Sources: CBO, Ethan Pollack (EPI)

*The reason the current-law-with-stimulus line is slightly above the current-law line is due to slightly higher interest payments on the debt from the extra stimulus.

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One comment in reply to "A Fiscal Cliff Plan that Walks and Chews Gum"

  1. davesnyd says:

    All due respect– I think this post is incomplete. I think you need two more graphs:

    (1) GDP as a function of time for the three plans

    (2) Derivative of GDP as a function of time for the three plans

    I suspect what you’ll show is a slower initial increase of the “stimulus” compared to “current policy” but a better long term projection.

    Suspect you’ll see negative GDP growth for the “current law”, at least initially.

    But your current data does not make the case for stimulus– it, instead, supports “current law”.