Graph of the Day: Going Over the “Fiscal Cliff” Would Cause Another Recession
Yesterday, the nonpartisan Congressional Budget Office released their analysis of the upcoming “fiscal cliff” (“taxmageddon,” for those more eschatologically inclined), and the results aren’t encouraging. Unless Congress finds a way to delay the $607 billion worth of tax increases and spending cuts that are scheduled to kick in automatically at the end of this year, the CBO expects the United States will fall briefly into another recession.
That presents policymakers with a dilemma. On the one hand, the expiration of the Bush tax cuts and the payroll tax holiday would generate over $300 billion in revenue next year. Deep cuts to the military budget and to safety net programs would save another $65 billion, shrinking the budget deficit by over 5 percent of GDP. But rapid debt reduction comes at a steep price (as Europe is well aware): the economy would take a sharp downturn, contracting 1.3 percent annualized in the first half of 2013, followed by 2.3 percent growth, for a measly 0.5 percent increase over all. Unemployment would rise above 9 percent, tax revenues would fall, and the government would be forced to increase spending on unemployment insurance, food stamps, and other social programs.
However, if Congress delays these deficit reduction measures in the near-term, the CBO predicts real GDP will expand by a robust 4.4 percent in 2013, and that unemployment will continue its downward trend. Comparable fiscal constraint would still be needed in the medium term (federal debt held by the public is at its highest level since 1950; a matter of bipartisan concern), but policymakers would minimize damage to the economy (and to the individuals, families and businesses that make up economies) by agreeing to tackle deficit reduction only after a meaningful recovery is secured.
Brian Beutler, Talking Points Memo:
Republicans like to portray Democrats as big spenders. But the truth is more complicated. Democratic Congresses were pliant under Reagan and the first Bush, and thus federal spending (particularly military spending under Reagan) grew dramatically. For Bush 41, this trend didn’t hold when he needed it and he lost his re-election bid amid a weak economy.
Working with a Republican Congress, George W. Bush too presided over a major increase in federal spending. This, along with the large tax cuts he passed in 2001 and 2003, exploded federal deficits, but also likely helped him through the economic hard times at the beginning of his first term.
Clinton and Obama, who both lost control of the federal purse strings to an intransigent opposing party halfway through their first terms, were comparatively hamstrung. Politically, this proved to be a much bigger problem for Obama than it was for Clinton — Obama, after all, inherited a historic financial and economic crisis. But Obama’s economy is finally picking up on its own, and just in time. This Congress isn’t about to give him a hand — and, for good measure, thanks to last year’s debt limit deal, Obama’s consigned to a continued downward trend in spending for the next couple of years at least.
Graph of the Day: Is the ‘Great Recession’ Really a Household Debt Crisis?
By Benjamin Landy
“Why is everyone still referring to the recent financial crisis as the ‘Great Recession’?” asks Harvard economist and former IMF chief Kenneth Rogoff, in a recent article for Project Syndicate. “The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold,” he adds. “But the real problem is that the global economy is badly overleveraged.”
Unfortunately, the American household is no exception. While political discourse has been dominated in recent months by arguments over our enormous national debt, climaxing with the tense mid-summer negotiations over the debt ceiling in Washington, the problem of household debt has gone largely unmentioned in the media. Now that is beginning to change, as a consensus develops among economists, pundits, and policymakers that Americans’ paralyzing mortgage and credit card debt is the main factor holding the economy back from recovery.
The facts are these: although household debt peaked at $116,457 per household in 2008—nearly 100 percent of GDP at the time the financial markets collapsed—mortgage and credit debt has decreased merely seven percent as of 2010. The average American household would have to deleverage an additional 97 percent to return to 1976 levels. And while no one is arguing that household debt needs to be at those levels to restart the economy, it is generally understood that consumption will not increase adequately until Americans’ debts are significantly reduced.
When we last experienced a deep recession in 1982, the household debt-to-GDP ratio was about 45 percent, or $17,286. So when the government adjusted its monetary policy, the economy was able to recover quickly. Today, with the average household still holding over $100,000 of debt, a more ambitious program will be required to return demand—and thus unemployment—to pre-recession levels.
Thankfully, a recent New York Times report indicates that the Obama administration may be planning just that. According to the article’s sources, who would not be named, White House officials are currently weighing a variety of proposals to allow millions of homeowners to refinance their homes with government-backed mortgages at current low interest rates of about 4 percent, saving those homeowners $85 billion a year and creating a strong stimulus to the economy.
The Washington Post’s Ezra Klein, for one, is not optimistic that this kind of government-backed refinancing scheme could work in the current political climate, but at least it proves that the administration is paying attention to the household debt problem and trying to come up with creative solutions to stimulate demand. Until we find a way to do that, millions of Americans will remain jobless, and the economic recovery will continue at its anemic pace. At the very least, the administration’s recognition that the “Great Recession” is really a household-debt crisis sends the positive message that Obama’s “pivot” to job creation is more than just hot air.
The music is a little glib, but the message is as timely as ever.
Happy 10th Anniversary, Bush Tax Cuts.
Via Think Progress
The Debt Ceiling: When Raising Taxes is Fiscally Responsibile
By Benjamin Landy
As the debate over the debt ceiling slogs along in Washington, it’s instructive to step back and look at how the federal balance sheet has evolved since the end of World War II. Until the 1970s, tax revenues and spending levels were fairly closely aligned. Significant deficits began to arise in the aftermath of the OPEC oil shocks, which sent the economy into a period of high inflation and low growth. But deficits became much larger during the Reagan administration, caused mainly by his huge tax cuts and escalation of defense spending. Even though he was subsequently forced to raise taxes eleven times, Reagan was still unable to make a dent in the staggering $2.3 trillion debt that the United States accrued during his tenure.
Source: Office of Management and Budget, Historic tables
Large deficits persisted through the George H.W. Bush administration, despite the tax increases he approved. But after the budget deal that Bill Clinton signed into law in 1993 without a single Republican vote in Congress, which included tax increases and spending reductions, deficits began to decline. Aided by a vibrant economy in the second half of the decade, deficits actually transformed into surpluses. Contrary to what supply-side ideology predicted, real GDP growth averaged 4 percent for the rest of the 1990s.
The sizable budget surplus of the Clinton years was intentionally erased by the Bush tax cuts of 2001 and 2003, reducing revenue by at least $2.9 trillion over the last decade, according to a recent Congressional Budget Office report; another $3.5 trillion in lost revenues is attributable to slowed economic growth. The additional cost of two wars and an unfunded Medicare drug benefit combined to create shortfalls that were even wider then during the Reagan era. According to conservative economist Bruce Bartlett, the interest cost on the deficits created by the Bush tax cuts are responsible for increasing the national debt by $3.2 trillion, or “27 percent of the fiscal deterioration since 2001.” With the Great Recession, government revenues have crashed further even as spending on social safety net programs has risen, leading to even deeper deficits.
Still, the GOP continues to hammer away at the same, disproved talking-points. “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue,” Mitch McConnell (R- Kentucky) said last year. “They increased revenue because of the vibrancy of these tax cuts in the economy.” Former Minnesota Governor and Republican presidential candidate Tim Pawlently recently echoed the sentiment: “Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts, or other tax cuts, they always produce an increase in revenue.” But if that were true, you would expect tax revenues to be on the rise. Just the opposite: this year, in spite of some of the lowest tax rates in the nation’s history, the CBO estimates that revenues will be just 14.4 percent of GDP, the lowest percentage since 1950.
Reposted from my Graph of the Day Series at Taking Note.
