The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.
The first page of the CBO report conveys the basic message with a single graph. If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.
If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023. An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.
An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013. For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.
Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.
The choice now before Congress is thus very clear: should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?
To me the answer is clear as clear can be. But it will require our national leaders to stand up and be counted. Do enough of them have the political courage to do what needs to be done?
First of all, you want to be careful looking at long-term projections for the CBO. In January 2008 they were predicting 4.8% unemployment in 2013 and *no recession* in 2008-09! About as wrong as could be (Table E-1):
In 2009 they were predicting a full recovery of unemployment in 2011. Again, totally wrong:
It is well known that CBO’s track record for predictions over five years or less have been very, very bad, so forgive us if we don’t put much stock in what they predict for *2023*!
That said, I don’t know of anyone, liberal or conservative, who is calling for an increase in deficits in the short run– and nothing else. Any Keynesian that I’ve ever read calls for increased deficits in the short run, and then significant reduction of deficits as soon as the fed is able to come off the zero bound.
Even the report you cite confirms that that would work (page 3):
“Of course, policy changes of many other sizes and differ-
ent patterns over time are possible, as are combinations of
policies. For example, if policymakers wanted to raise
GNP in the near term relative to projections under cur-
rent law, as well as raise GNP in later years relative to that
same benchmark, they could enact a combination of pol-
icies that increased deficits during the next few years and
decreased them by a greater cumulative amount thereafter
(ultimately leading to less debt than would arise under
*That’s* the Keynesian prescription/prediction, and sure enough, the CBO says that would work reduce the deficit over the long run.
So I would say you have made a straw-man argument here.
Lots of individual economists as well as economic policy institutes have made poor predictions leading upto the financial crisis and during the recovery as well. Congress is going to be making especially important decisions in the next few months and individual members need some guidance in deciding how to vote. The CBO report referenced above makes intuitive sense and attaches quantitative predictions to three particular choices which Congress could make. Basically we can accept greater pain (i.e. slower economic growth) now in order to have a stronger economy in a few years or do just the opposite. The strong temptation will be for Congress to focus solely on the short term. But the country will be better off in a few years if Congress adopts a longer perspective. This is the stark choice the country is now faced with.