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CBO Warns: President Obama and Congress Risk Triggering Another Recession

Posted By J.D. Foster, Ph.D. On August 22, 2012 @ 3:28 pm In Economics | Comments Disabled

About 1.6 million American jobs hang in the balance. That is the clear implication of analysis contained in the annual budget update by the Congressional Budget Office (CBO) [1].

Along with all manner of dire and dreary budget data reflecting President Obama’s budget and economic policies to date, CBO provides its assessment of what would happen if the President and Congress sit on their respective hands and fail to defuse the threats of Taxmageddon and the fiscal cliff. The answer is fairly simple: recession.

As CBO so diplomatically put it, “such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession.”

Taxmageddon [2] is the $500 billion tax hike slated to take effect on January 1, while the fiscal cliff consists of Taxmageddon plus various spending reductions—among them the sequestration left over from the disastrous negotiations that led to the Budget Control Act in 2011.

According to CBO’s analysis, if Congress defuses Taxmageddon and the fiscal cliff, then the economy will grow at a tepid 1.7 percent in 2013 and the unemployment rate will remain stuck around 8 percent. But if President Obama and Congress play chicken with Taxmageddon and fail to act, then the economy will contract by about 0.5 percent and the unemployment rate will shoot up to 9.1 percent, about halfway back to the peak from the past recession.

Forget percentages—what does this mean in actual jobs lost if President Obama and Congress fail to act? It means roughly 1.6 million more Americans will be out of work—on top of the 12.8 million who already want to work but can’t find jobs.

Just about every relevant school of economics, from the President’s pure Keynesianism to supply-side and neoclassical persuasions, tells much the same tale on net: Raising tax rates on a weak economy produces a weaker economy. It’s not terribly complicated.

The good news is that the House of Representatives has passed a bill preventing a big part of Taxmageddon. The Senate has passed a much less adequate bill. These form the basis of a good final product.

The other good news is that Congress will have time after the August recess to avoid the economic peril that CBO projects. Talk of 2013 and tax reform is dangerous, and waiting on a post-election lame-duck session even more so, as the policy outcome would likely be worse. Both likely assure a recession, for which this Congress and this President will unequivocally be at fault.

President Obama and Congress failed at their summer job [3] of preventing Taxmageddon, but there is still time—just not much.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/08/22/cbo-warns-president-obama-and-congress-risk-triggering-another-recession/

URLs in this post:

[1] budget update by the Congressional Budget Office (CBO): http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf

[2] Taxmageddon: http://www.heritage.org/issues/taxes/taxmageddon

[3] failed at their summer job: http://www.heritage.org/research/reports/2012/05/tax-increase-preventing-taxmageddon-is-congress-s-summer-job

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