Wednesday, January 2, 2013

Now, thoughts from the other side of the cliff

I'm not overjoyed with the deal that was hurried through Congress while we were ringing in 2013, but I'll give it a lukewarm "OK." Getting capital gains and dividends slightly higher is a start, as is raising taxes on the Super-rich. I'm even OK with the payroll tax increase, as it'll shore up Social Security, and including a one-year extension of the Farm Bill keeps food prices from going nuts in a few months- both definitely help the everyday person. But I think more could have been done on the loophole side and made the tax code more progressive, and I'm definitely worried about the looming budget cuts and debt ceiling fight that'll hit in March.

I wanted to go back to the CBO's discussion of the fiscal cliff and the effects on the economy, and compare it to where we stand today after this week's votes.

If you remember, the CBO report said if all aspects of the fiscal cliff hit, and were not modified throughout the year, the deficit would be cut by about 40% to $641 billion, but the economy would fall into recession and unemployment would go up to 9.1%. It would also make it likely the U.S. would fall into the cut-recession-deficit-cut-recession-deficit cycle that is currently grinding much of the Eurozone to a halt. Fortunately, it doesn't look like we're heading that way (barring a massive cut in spending).

So let's look at where we ended up instead, and let's use the CBO's scoring for both deficit and GDP for these measures.

The CBO says this deal would add nearly $330 billion to the deficit for 2013, with the split being about $280 billion in tax cuts, and $50 billion in increased spending (mostly through $22 billion in extended unemployment benefits, $10 billion in Medicare payments to doctors, and a 2-month delay in the sequester). It probably means the deficit may get below $1 trillion for next year, but not by that much.

On the flip side, the deal works when it comes to keep the economy going. I'd mentioned before that the CBO report showed lowering taxes on the rich had the smallest bang-for-the-buck when it came to increasing GDP, and that passage also gives you an idea what effect these tax measures may have.
Extending all expiring tax provisions other than the cut in the payroll tax and indexing the AMT for inflation—except for allowing the expiration of lower tax rates on income above $250,000 for couples and $200,000 for single taxpayers—would boost real GDP by about 1¼ percent by the end of 2013. That effect is nearly as large as the effect of making all of those changes in law and extending the lower tax rates on higher incomes as well (which CBO estimates to be a little less than 1½ percent, as noted above), primarily because the budgetary impact would be nearly as large (and secondarily because the extension of lower tax rates on higher incomes would have a relatively small effect on output per dollar of budgetary cost).
So given the $400,000 single/ $450,000 married couple threshhold, we'll put that number in between at 1.35% or so. That same report also gave good marks to the extension of unemployment benefits as a stimulus policy, along with the Social Security cuts (which were not continued).
The estimated economic impact of those policies per dllar of budgetary cost is larger than that of extending other expiring tax provisions and indexing the AMT for inflation because a larger share of the additional unemployment benefits and extended payroll tax cut would be spent by the recipients in 2013. As a result, the short-run increase in aggregate demand and output would be greater.
The unemployment benefits are expected to cost $22 billion this year, and $31 billion if moved into 2014, but a rough estimate also has it increasing GDP by about 0.2% this year.

So put those two items together, and you'd have GDP increased by about 1.55%, and the lack of the sequester for 1/6 of the year and a year of "doc fix" conservatively gives you another 0.25% of GDP. So let's figure about 1.8% of increased GDP over the "totally over the cliff" scenario (which was -0.5% GDP for 2013), and the baseline results for 2013 become:

GDP +1.3%, deficit just under $1 trillion

Basically it would continue where we're at- slow but sure growth, and slow but sure cuts into the deficit. Probably not enough to really get things back into balance, but something we could live through. And the extra progressivity in the tax code could lead to more GDP and profit growth going to middle and lower-income workers, much as it did in the '90s, and much as it hasn't done since the tax cuts for the rich were put in for 2001.

So I'll take this deal for the time being, but I certainly hope it is followed by standing up to the GOPs who will be for March, when the debt ceiling and the automatic budget cuts will have to be dealt with. You know they'll have their eyes on Social Security (even though it's now firmed up with the end of the payroll tax cut) and will try to mess with the Medicare age and level of benefits to our most vulnerable. And hearing President Obama last night erroneously calling the rising cost of Medicare "our biggest contributor to our deficit" set off major red flags to me. Health care costs aren't adding to our deficit- it's the damage from the recession, underemployment, low wages, and historically low tax revenues that don't even reach 17% of GDP.

I'm glad that we took a step toward solving that low-revenue problem by taxing the rich and their capital gains more, and the continued growth should also add to those revenue figures. But there are many other places we can cut or modify that doesn't screw over millions of people who have worked hard,paid into the system and rely on that aid to survive. We can take our small victory for January, but also we should gird for the bigger fight that's coming.

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