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CBO is Wrong about the fiscal cliff. House Republicans should Stand Strong.
Howard Richman, 11/9/2012

In 2013, when the "fiscal cliff" kicks in (i.e., the end of the Bush tax cuts and the implementation of the Budget Control Act of 2011), the new fiscal responsibility would move the federal budget toward balance. But the incompetent economists at the Congressional Budget Office (CBO) are trying to panic the House Republicans into abandoning fiscal responsibility.

In an incorrect November 8 report (Economic Effects of Policies Contributing to Fiscal Tightening in 2013), the CBO mistakenly claimed that fiscal responsibility (popularly misnamed the "fiscal cliff") would cause unemployment to spike to 9.1% by the fourth quarter of 2013, specifically:

According to the Congressional Budget Office’s (CBO’s) projections, 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.1 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.

Have they learned no economics from recent history? Don't they understand yet why the stimulus that Congress passed in February 2008 failed? Don't they yet understand why Obama's Recovery Plan of 2009 failed? Unemployment has been declining due to declining wages, not due to government stimuli. That's why the work force participation rate is declining at the same time that the unemployment rate declines.

As my father, son and I have pointed out through worldwide economic statistics, economic stimuli don't much reduce unemployment in trade deficit countries. That's because the stimulus leaks out as a higher trade deficit. Similarly, fiscal responsibility doesn't hurt. Its effects are softened by a lower trade deficit. The resulting unemployment increase would mostly occur abroad, not in the United States.

The real fiscal cliff would be much worse. With budget deficits at unsustainable rates, the national debt would continue to explode. Eventually, the Federal Reserve would be forced to raise interest rates to prevent inflation. The rising interest rates, in turn, would greatly increase the interest component of the federal budget. From then on, either alternative is a disaster: (1) the federal government would default or (2) the Federal Reserve would take the brakes off inflation. In either case, the dollar would collapse, interest rates and import prices would go sky-high, and the U.S. standard of living would hit the bottom with a splat.

In contrast, fiscal responsibility would be relatively painless. If President Obama wants to grow the economy, he could still do so. He could implement Governor Romney's plan to reduce the trade deficits by increasing exports to China while reducing imports of oil from the Middle East. Improving the trade balance would give the U.S. economy a real stimulus. But instead the Obama administration will likely continue to let China keep out American exports and continue to restrict American production of fossil fuels as part of its quixotic quest for green energy.

The House Republicans hold all of the cards in the upcoming negotiations. If fiscal responsibility is achieved, then they will get credit and the Obama administration would be blamed for the austerity and the increased taxes on those who are currently paying no taxes. They shouldn't let themselves be panicked by incorrect CBO reports.

If the House Republicans cave, they would be helping Obama keep his voters off the income tax rolls. They would be continuing the era of spending without taxing. They would be moving the U.S. economy toward the real fiscal cliff. Moreover, they would prove, yet again, that they have no intention of practicing the fiscal responsibility that they advocate.