Sunday, February 5, 2012

Congressional Budget Office Says Budget Deficit Will Average $310 billion Per Year Over the Next 10 Years – Or It Will Average $1.1 trillion per Year over the Next Ten Years

Or It Might Be Something Entirely Different.

The Congressional Budget Office, referred to as the CBO in Econ-Speak makes regular projections as to the future of the economy.  This thankless task  has fallen upon a group of hapless economists who want the misery of always being wrong.  This is not to say they are wrong because they lack the skills and education necessary to make such a projection.  It is just that it is impossible to make a consistently  accurate projection of economic activity.

The latest CBO set of projections illustrates this quandary that the CBO has found itself in.

Tax increases and spending cuts scheduled to take effect in January 2013 would slow the economy and raise unemployment next year unless policy makers strike a deal to keep those changes from kicking in or offset their impact, the Congressional Budget Office warned.

But while such an agreement would boost the economy in the short term, it also would expand the federal budget deficit over time if not combined with other policy changes, the nonpartisan CBO said. . . .

Taken together, those policies will generate a sharp fiscal contraction," Mr. Elmendorf said. If the tax cuts were extended and the spending cuts reversed, the CBO projected that the economy would grow at a healthier 3% clip in 2013 and the jobless rate would be closer to 8%. But reversing the cuts would produce "unsustainable" deficits in the future, Mr. Elmendorf said.

So if the temporary tax cuts are actually temporary, and if the spending cuts promised in various budget agreements actually take place, then the economy will suffer but the deficit will go down. 

How exactly do the numbers stack up?

Under the first scenario—with Bush-era tax cuts and other measures allowed to expire at the end of this year and the spending cuts left in place— the total federal debt would grow by roughly $3.1 trillion over the next 10 years, the CBO said. But under the second scenario—with tax increases and spending cuts reversed and other temporary policy measures continued—the debt would grow by $11 trillion over that time span.

Of course, long range forecasts like this are very inaccurate.  In fact, given the ignorance of economics and the fact that ideology trumps good policy and quality of elected officials in the U. S. over the past decade it is entirely likely that the worst of both worlds will happen.  Economic growth will slow, tax collections will be even lower, tax cuts that don’t help the economy (like eliminating the estate tax and reducing taxes on interest, capital gains and dividend income, or as we like to call it, the Mitt Romney personal tax cut) and the U.S. will have a stagnant economy with a large budget deficit.

Yep, that sounds like a safe bet.

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