CBO: Austerity Will Increase Unemployment, Plunge Economy Into Deep Recession

The CBO has updated its figures for 2013, showing that if we don’t engage in reckless austerity, the economy will continue to recover next year. But if not, well, we would enter a deep, double-dip recession.

The report compares the baseline scenario, in which the Bush tax cuts expire and sequestration spending cuts take effect, with an alternative scenario, in which the tax cuts are extended and the spending cuts deferred. Keeping the Bush tax cuts, deferring the cuts, and maintaining unemployment insurance and current Medicare reimbursement rates would cause the economy to grow at 1.7% but add $400 billion dollars more to the deficit. 

Should we remain on the current course, they estimate that the economy will contract by half a percentage point in 2013 due to diminished government spending. If policymakers cut programs aimed at low and moderate income Americans, it would move our recovery to a recession.

The CBO also charts a route towards reducing the deficit that doesn’t entail painful cuts. From 2014 to 2022, the CBO expect that the deficit will slowly decrease. In addition, the CBO expects that inflation will remain a non-issue through 2014. Are you listening, Bernanke?

How will the deficit be reduced with no action from government? A steady increase in tax receipts. Increased tax revenue will swallow up the historically low interest that we’ll pay on the federal debt debt. Spending is not only good for the unemployed, but it is the best possible avenue towards reducing the deficit. In other words, deficit spending remains not only tenable, but warranted. 

Finally, despite mildly more robust growth, we wouldn’t reduce unemployment to pre-recession levels until after 2022. The dialogue in Washington has been myopically focused on debt and long-term spending, but with little government action the deficit will be reduced. The same can't be said for unemployment:

The establishment will read the CBO's report for its headline numbers -- the deficit will be $1.1 trillion dollars in 2012 -- but ignore its broader implications. Right now, and for the forseeable future, far too many Americans are unemployed or underemployed.

 

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