The CBO has suddenly made everyone Keynesians again

Posted by AzBlueMeanie:

The Congressional Budget Office (CBO) reminded everyone yesterday that on December 31 all of the Bush-era tax rates will expire, as will the Obama-era payroll tax "holiday." At the same time, thanks to the failure of the congressional "supercommittee" last October, $1.2 trillion in automatic budget cuts will kick in, half to come from the military budget, and half to come from domestic programs. the colloquial term for this event has become known as "Taxmageddon." CBO report: Taxmageddon would throw U.S. back into recession.

Steve Benen writes, Maybe we really are all Keynesians now:

Yesterday, the CBO told policymakers that if the deadline comes, tax rates go up, and spending goes down, the deficit will shrink very quickly — but the economy will probably contract and slip into a recession.

And wouldn't you know it, the CBO has suddenly made everyone Keynesians again.

A giant austerity bomb is timed to go off at the beginning of next year, and the threat of significantly higher taxes and lower spending has Republicans running around the Capitol sounding more like John Maynard Keynes than John Boehner.

Automatic, across-the-board reductions to domestic and defense spending, combined with the looming expiration of the Bush tax cuts, will dramatically consolidate the budget in the next calendar year, if Congress does nothing. And despite bemoaning deficits throughout the Obama years, the GOP's suddenly come around to the view that cutting government spending is a job killer.

Republicans have argued, practically every day since Jan. 20, 2009, that there's a "debt crisis" that threatens the very fabric of civilization. This "crisis" will not only crush our children's future, conservatives have argued, the budget shortfall, created largely by GOP policies, is killing jobs and holding back the economy today.

But they don't mean it. If Republicans were sincere about this, yesterday's CBO report would be seen as great news — after all, the automatic cuts and higher tax rates would not only shrink the deficit immediately, it would prevent trillions of dollars in new debt over the next decade.

What's more, as Brian Beutler added, "Conversely, if all of current policy — the Bush tax cuts, the payroll tax holiday, federal spending, etc — is extended, economic growth will boom next year. If Congress picks a middle ground approach — extending the Bush tax cuts but nixing the automatic spending cuts — CBO forecasts modest growth, but no major economic hit."

Door #3 is the Democrats' preferred option, but as Senate Majority Leader Harry Reid (D-Nev.) argued yesterday, such an agreement is almost certainly "impossible" because of the GOP's "blind adherence to tea party extremism."

Responding to GOP demands to immediately extend Bush-era tax cuts, Reid released a sharply worded letter Tuesday saying the right wing's refusal to entertain new taxes would prevent any deal before November. Republican senators have abandoned deal-making for "fear of retribution from tea party extremists," Reid wrote in the missive to Senate Republicans.

Reid said the GOP must accept higher taxes on those earning more than $1 million and corporations, and drop its leading Medicare overhaul proposal, in order to reach a consensus with his party.

"Unfortunately, it appears that Republicans' blind adherence to Tea Party extremism is making it impossible to reach this sort of balanced agreement before the election," he wrote.

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As Republicans argued yesterday, what really matters is the economy, not the debt. Funny, that's what Keynesian Democrats have been saying all along.

I would add a major caveat to the CBO projections: the Euro financial crisis. OECD warns risk of severe recession in 17-country eurozone is rising as it cuts forecasts:

The 17-country eurozone risks falling into a “severe recession,” the Organization for Economic Cooperation and Development warned on Tuesday, as it called on governments and Europe’s central bank to act quickly to keep the [austerity-driven] slowdown from dragging down the global economy.

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The report forecasts Europe falling further behind other countries, particularly the United States, whose economy is expected to grow 2.4 percent this year and 2.6 percent next.

“There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind,” Padoan said.

We have a global economy. Containing this contagion to Europe is highly unlikely, it is certain to have some negative impact on the U.S. and world economies. The G-8 Summit call for Germany to relax its fixation with conservative economics austerity measures and to instead pump stimulus funds into the economy for economic growth (Keynesian economics) may mitigate the effects of the Euro Zone recession.

Just as pumping additional stimulus funds into the U.S. economy would lead to greater economic growth and new tax revenue.