Fiscal cliff hysteria is manipulated by self-serving deficit hawks
Dean Baker
guardian.co.uk, Friday 16 November 2012 11.38 EST
Washington elites have spent much of the last three decades getting hysterical about budget deficits, but they are outdoing themselves in the current budget stand-off which they labeled as the "fiscal cliff". Their story is that scheduled increases in taxes at the end of 2012, coupled with mandated cuts in spending, will send the economy tumbling into recession if Congress doesn't take action before the end of the year.
The horror story associated with this 1 January deadline depends on fundamentally misrepresenting reality. There are projections from the Congressional Budget Office and other independent forecasters that show the combination of tax increases and spending cuts would chop more than 3.5 percentage points off GDP growth. This hit would mean a contracting economy and push the unemployment rate back over 10%.
However, the part that is generally downplayed in this genuine horror story, or left out altogether, is that the projection of a recession is not based on missing the 1 January deadline. The projection assumes that the higher tax rates and lower spending levels are left in place throughout the year – a scenario that almost no one considers plausible.
A more realistic scenario would be that Congress and the president will quickly reach an agreement in the new year, extending most of the tax cuts and limiting the decline in spending. This would mean that some people may see some extra taxes deducted from a paycheck or two, but they would get this money refunded to them in subsequent checks. The predicted effect on consumption would be close to zero.
(More here.)
1 Comments:
i agree. There is nothing to fear by letting all Bush-era tax cuts expire AND allow all sequestrations to take effect.
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