Bad Economic News: Will It Discredit Austerity Economics?

The Congressional Budget Office is out with a report that should give pause to sponsors of austerity economics and opponents of repealing the Bush tax cuts. 
The report, released today, is the CBO's semi-annual update of economic and budget conditions. Among key projections:
  • "[T]he pace of the recovery has been slow, and the economy remains in a severe slump. Recent turmoil in financial markets in the United States and overseas threatens to prolong the slump."
  • As a consequence, both projected unemployment and economic growth rates will be worse than previously forecast.
  • Unemployment will still be well above 8 percent at the time of next year's election.
  • Growth will be sluggish through 2012. 
The non-partisan experts at CBO warn, "Under current law, federal tax and spending policies will impose substantial restraint on the economy in 2013." In other words, in the short run the policies of cutting the budget will have exactly the opposite effect from the ones the sponsors intend. They will slow growth.
CBO also reports that if the Bush tax cuts are allowed to expire on schedule and other budget cuts on the deficit deal take effect, at the end of 2012, the projected public debt will be a quite manageable 61 percent of GDP in 2021. But if they are not repealed and other reforms are put off, "With cumulative deficits during that decade of nearly $8.5 trillion, debt held by the public would reach 82 percent of GDP by the end of 2021, higher than in any year since 1948."
One part of the report may prove overly optimistic: CBO projects that growth will return to relatively normal levels of 3.6 percent between 2013 and 2016. But given the continuing drag on wages, family incomes, manufacturing, housing, and a fragile banking sector, it is hard to know why growth would suddenly turn upward, especially as budget cuts begin to bite.
The economic takeaway:
  • Austerity will feed on itself.
  • Failure to repeal the Bush tax cuts will only make the fiscal situation worse.
The political takeaway:
  • Expect lousy economic conditions to continue through the election.
  • The winning party next year will be the one that successfully pins the bleak economy on the losing party.
  • Obama has the better hand, but Republicans continue to play a weak hand well. 

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