Thursday, December 27, 2012

Thelma and Boehner or going off the fiscal cliff

Brad DeLong thinks we're going off the fiscal cliff. Brace yourselves then. What to expect, according to him:
"Running up to the explosion time of the austerity bomb has already reduced likely year-2013 real GDP growth from 3.0% to 2.5%. If no deal is reached until June 30 then our likely year-2013 real GDP growth rate will be -0.5%."
Unless I'm confused those look like the estimates of the Congretional Budget Office (CBO), run by
Douglas Elmendorf. According to the CBO:
"if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013."
So the fiscal cliff, which is more or less a decrease of US$ 600 billions in the projected deficit next year, mostly tax hikes with a modest reduction in spending of about US$ 60 billion (not considering feedback effects caused by increased spending as a result of higher unemployment), will lead to a mild recession.

So not the end of the world, but not good. But better than destroying social security for sure. And yes, by February we'll be talking about the debt ceiling again.

PS: Yep, I know, in the cartoon it is the Aztec Sun Stone not the Mayan calendar.

PS': On the broader problems with the fiscal cliff and why the consensus that we need fiscal adjustment of some sort is incorrect read Jeff Madrick's piece at the NYRB.

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