Bad News in Two Directions

We take a back seat to no one when it comes to gloominess and doomsaying, but the number-crunching folks at the Congressional Budget Office are almost our equal in that regard.

The putatively non-partisan agency released an update to its “Budget and Economic Outlook” this week, and it can be quickly summarized by saying that the outlook is bleak. There are two forecasts included in the report, and both are quite glum, so the CBO’s outlook could actually be said to be doubly bleak.

After starting off with the sobering statistic that the federal budget deficit for the year will total $1.1 trillion, bringing the federal debt held by the public to 73 percent of the nation’s gross domestic product, the CBO assures policy-makers that all of that stimulus has at least ensured that the “economic recovery” will “continue at a modest pace for the remainder of the calendar year 2012.” This modest achievement will doubtless suffice as vindication for Obama’s more stalwart supporters, but after that the CBO sees trouble in either direction it looks.

The CBO has prepared a “baseline projection” based on the assumption that current laws will continue, meaning that in January all of the Bush era tax cuts will expire, the extension of unemployment benefits and the 2 percent reduction in the Social Security payroll tax also disappear, and a number of mandatory budget cuts go into effect. Under this scenario, the CBO expects that the unemployment rate will climb to 9.2 percent, the gross domestic product will shrink by 2.9 percent, and the situation “will probably be considered a recession.” They add the cheery note that the deficit would likely shrink to 4 percent of the gross domestic product, which could delay the day of fiscal reckoning by a few weeks or so, but it is not clear if that is based on assumption that all the tax hikes won’t actually result in less government revenue and more social spending as a result of all the economic carnage.

It is still possible that the government will act to extend all of the Bush era tax cuts — although the president seems ruthlessly determined to raise taxes on the higher earners, and quite confident that the public will blame the Republicans if everyone’s taxes get raised as a result — so the CBO has prepared an “alternative fiscal scenario” that envisions such an action as well as ignoring the mandatory spending cuts. Under this scenario the country goes another $1 trillion in debt for yet another year, but the economy grows by an unimpressive 1.7 percent and the unemployment rates stays stuck at around 8 percent.

All of which leaves one hoping for some possible third scenario. Ideally it would avoid tax increases and the resulting drag on economic activity, allowing the private sector to spend the available capital more productively than the various “czars” has done the past four years, with the ensuing growth and some well-chosen spending cuts whittling down the debt to manageable levels. The CBO does not speculate about such a course, but we suspect it would lead to a happier future.

— Bud Norman