Jobs > deficit- fiscal cliff report confirms my choice

You might have seen last week that the Congressional Budget Office (CBO) came out with their new budget and economic predictions, and it laid out in stark terms the ramifications of the impending "fiscal cliff." You may remember that the fiscal cliff is the result of the deal reached between Congress and the President to avoid a government shutdown over the country's debt ceiling, and included huge automatic spending cuts in exchange for allowing the debt ceiling to be raised through the end of 2012. For the record, GOP Vice-Presidential candidate Paul Ryan voted for the debt ceiling deal, and U.S. Senate candidate Tammy Baldwin was the only Wisconsin Congress member to vote against it, complaining that the rich and corporate didn't have to pay extra taxes while the deal relied on cuts in domestic programs.

The CBO's news this week would be a good sign if you're into having the deficit be lowered above everything else, as you'll get your wish- the deficit will probably go down. But if you like having a job and being able to pay your bills, you won't like it. I added emphasis from the CBO's report (and here's the whole thing if you want to read the details and numbers) for the big takeaway for me if no action is taken and we come to the fiscal cliff.

The deficit will shrink to an estimated $641 billion in fiscal year 2013 (or 4.0 percent of GDP), almost $500 billion less than the shortfall in 2012.

Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

Because of the large amount of unused resources in the economy and other factors, the rate of inflation (as measured by the personal consumption expenditures, or PCE, price index) will remain low in 2013. In addition, interest rates on Treasury securities are expected to be very low next year.

So the CBO is saying, if you want to withstand another recession, feel free to go over the fiscal cliff. And by the way, the CBO says that recession will hurt some of the deficit reduction effort.

For the period from 2013 to 2016, CBO lowered its projections of nominal GDP, which in turn resulted in a decrease in projected taxable personal income, including wages and salaries (starting in 2014) and capital gains realizations. Those changes led CBO to lower its estimates of receipts from individual income and social insurance taxes over the four-year period by a total of $115 billion.

Hmm, it also strains Social Security and Medicare budgets as a result of fewer people working. If I didn't know any better, I'd swear some people like Paul Ryan would like that, because then it's easier to call it "bankrupt" and then sell it off to financial and insurance companies instead of funding the promises like we have over the last 80 years. But wait, didn't I see Purty Mouth Paulie complaining this week about impending military cuts . You know, the SAME CUTS HE VOTED TO PUT IN PLACE WITH THE DEBT CEILING DEAL?

"The only way we maintain this exceptional nation – this American idea – is because our veterans have time and again, generation after generation, secured it for us," he said. "It's our duty to preserve this legacy, to support our voluntary (military) force of men and women ... and not let them be pawns in a political game." - Paul Ryan, August 23, 2012

No one is more responsible for turning the military into "pawns in a political game" than Paul Ryan clinging to his failed budget ideas. No one. The man has no shame.

However, if following Paul Ryan's "Road to Economic Failure" doesn't sound so inviting, the CBO says there is another way, and I'll emphasize the GDP effects here as well.

CBO has produced projections under an alternative fiscal scenario that incorporates the following assumptions: that all expiring tax provisions are extended indefinitely (except the payroll tax reduction in effect in calendar years 2011 and 2012); that the AMT is indexed for inflation after 2011; that Medicare’s payment rates for physicians’ services are held constant at their current level; and that the automatic spending reductions required by the Budget Control Act, which are set to take effect in January 2013, do not occur (although the law’s original caps on discretionary appropriations are assumed to remain in place).

That set of alternative policies would lead to budgetary and economic outcomes that would differ significantly, both in the near term and in later years, from those in CBO’s baseline:

In 2013, the deficit would total $1.0 trillion, almost $400 billion (or 2.5 percent of GDP) more than the deficit projected to occur under current law.

The economy would be stronger in 2013: Real GDP would grow by 1.7 percent between the fourth quarter of 2012 and the fourth quarter of 2013, and the unemployment rate would be about 8 percent by the end of 2013, CBO projects.

And I think that 8.0% figure is high, because we're at 8.25% right now, and that's 0.8% lower than it was 1 year ago with economic growth similar to what CBO projects for the next year. I'd think it would drop into the mid-to-low 7's, unless CBO is assuming a huge amounts of entrants coming back into the work force (that hasn't happened yet, and with Boomers retiring every year, I think that creates a big offset to new entrants).

And the one concern that comes with high deficits that can hurt growth - higher interest rates as people don't want to buy all our debt - is not projected to occur any time soon.

Despite the surge in federal borrowing in recent years, net interest outlays are projected to hold steady at 1.4 percent of GDP through 2015, primarily because interest rates are expected to remain near historic lows for the next few years. Interest rates are anticipated to rise noticeably thereafter, causing net interest outlays to increase to 2.3 percent of GDP by 2020, CBO projects.

In fact, interest rates have been cut in half in the U.S. over the last 4 years as our deficit has gone up, as shown in this chart.

10 Year Treasury Rate data by YCharts

And at the Federal Reserve's last meeting, the Board members indicated they would continue to act to keep rates low, and possibly jump in with more actions if needed. So this fear of higher interest rates due to high deficits is foolish, and shows that we should be concentrating on continuing to get people back to work over caring about deficits in the short term.

By the way, who's to say that all of the moves in CBO's alternative scenario have to happen? Why can't you mix in tax increases on the rich and raising capital gains taxes, both of which have seemed to limit wage and employment growth more than help it over the last 10 years. I'd argue that this would both lower the deficit AND help employment growth, which also works to drop the deficit. After all, a large reason behind our giant deficit is a lowering of revenues, as a result of lower employment and reduced wages.

Revenues as % of GDP, 1990-2011
1990- 18.0%
1995- 18.4%
2000- 20.6%
2005- 17.3%
2008- 17.6%
2011- 15.4%
2012 (projected)- 15.7%

If we got revenues back to the 18% of GDP we were at in 1990, we'd shave $357 billion off of our deficit for 2012, which would be 1/3 of the deficit right there. So why not shoot for that as a target (and taxing the rich as well as raising the $110,100 cap on Social Security taxes would go a long way toward doing so), combine with some military cuts and minor reductions in other spots, and have our deficit at the reduced levels we'd have under the "fiscal cliff?" And I'd bet we wouldn't go into recession to do this.

So what we should really fear from this week's fiscal cliff is not the deficit that we currently have, it's the recession that would kick in if obsessed with the deficit and went over the cliff. We should instead be encouraging continued government investment and a more progressive tax structure (as I said yesterday, trickle-down doesn't work and inequality is our real economic problem), and that's going to be the way to not only reduce the deficit, but continue our steady climb out of the Bush-era hole that was made from 2007-2009.

Do I think our media will have an honest discussion on this important report with the facts laid out like this? HELL NO. Which is why I have to write it out here.