The 2012 deficit will break $1 trillion for the fourth consecutive year. The economy's growth will slow in 2013 as spending cuts take hold. Unemployment will stay above 7 percent through 2015. The housing recovery is locked behind a thick wall of vacancies. Yeah, the Congressional Budget Office's new economic report is kind of a bummer. Here's what it tells us about the economy in 10 big charts.
The CBO's "baseline projection" sounds like a sober prediction. It's not. It's a fantasy. For example, the baseline projects that the Bush tax cuts are will expire next year (not!). For a dose of reality, the CBO also calculates spending and taxing under an "alternative scenario." This is the scenario to pay attention to. It anticipates that Congress will delay both tax increases and spending cuts currently scheduled in the law -- a very reasonable assumption.
What if Congress sat on its hands and let current law rule? The deficit would fall by 60 percent to $500 billion in 2013, and it would stabilize by the middle of the decade. But nobody wants that to happen. Conservatives don't want to raise taxes, and liberals don't want to soak up stimulus by $500 billion in one year. So we'll keep having high deficits through the decade.
What if we let current tax law rule? Our deficits would fall by more than half in the next decade. The dark blue portion of the bars in the chart above represent our deficits if we let the Bush tax cuts expire and enacted the Budget Control Act of 2011 (the debt ceiling deal) along with some other measures. The CBO has seen this movie before, which is why it calculates an alternative scenario where Congress falls prey to status quo bias, year after year.
One last time: Our deficits are scheduled to fall, but they're projected to rise, because CBO is guessing that Congress will continue to delay serious spending cuts and tax increases.
The U.S. economy is projected to play catch-up to potential GDP for the next six years. Potential GDP assumes that the recession never happened and the economy kept growing at full employment and output through the last four years. CBO projects that output won't emerge from the Great Recession's shadow until 2018.
If the Great Recession casts a ten-year shadow over GDP, it will cast an even longer shadow over unemployment, which is projected to remain over 7 percent through 2015 and level off between 5 and 6 percent through 2022. In the middle of the 2000s, by comparison, the unemployment rate fell into the low 4s.
One reason why the Federal Reserve has committed to super-low short-term interest rates over the next three years is that they share the CBO's super-low short-term forecasts for inflation. With high unemployment both in the U.S. and debt crises in Europe, there is less upward pressure on core inflation and on globally determined energy prices.
An area with plenty of vacant homes means is more likely to experience falling prices and slow construction. That's why we're likely to see a spiky housing recovery through this year, with some cities seeing construction roar back long before other metro areas with higher vacancy rates.
Here's how a conservative would explain this chart: "See that dotted line? That's the historical average of federal tax revenue as a share of GDP. And see that CBO baseline projection? That's what happens if we go back to a tax code more like the 1990s. It's WAY WAY higher for a sustained period of time than taxes have ever been. Liberals' social welfare policies rely on an effective tax rate that is historically bizarre and might cripple the economy. That's why you should question their social welfare policies."
Here's how a liberal would explain this chart: "See that dotted line? That's the historical average of federal tax revenue as a share of GDP. But it's not a line of destiny. It's a line of choice. Tax revenue was climbing before 1981, and Reagan cut taxes, and the deficit increased. Tax revenue was rising in 2000, and Bush cut taxes, and the deficit increased. Now it's set to rise again and conservatives are telling us we CAN'T raise taxes. Why on earth not? After all, the economy was awesome in 1998 when tax revenue crossed 20 percent. There's no reason to think we should shackle ourselves to the number 17.9%."
Some people like to say that 47 percent of Americans don't pay federal taxes. What those people are trying to say is that 47 percent of Americans don't pay federal income taxes. Income taxes only make up about 40 percent of total federal taxes. As this chart shows, a roughly equal share of federal taxes comes from payroll taxes, which all working Americans pay.
Tax expenditures -- that is, exceptions and deductions in the tax code for health care and housing and children and so on -- don't count as spending. But what if they did? In 2012, they would add up to more than Medicare, more than Defense, and more than Social Security. We've built a tax code that's as much holes as it is Swiss Cheese. If there was ever a time for tax reform (that raised a bit of money!) it would be now.