CBO to U.S. Economy: You Are *This* Screwed in 2013 If the Sequestration Happens

The budget cuts wouldn't plunge us into a new depression -- just prolong the one we've been in.

This afternoon, the Congressional Budget Office released its latest 10-year outlook on the federal deficit and U.S. economic growth -- an eagerly awaited document that contains the best fiscal soothsaying by Capitol Hill's nonpartisan, in-house think tank. This year, it's another gloomy document, one that shows us continuing to slog through recovery where things actually get a bit worse before they get better.   

But cheer up: These figures are less a projection of what's likely to happen than they are a sneak peak of what lies in store for us if Congress manages to completely bungle its job in the coming months by doing nothing.

The CBO is required to make all of its predictions based on current law. And at the moment, current law includes the sequester -- the $1.2 trillion worth of automatic spending cuts Congress recently post-postponed until March.

Remember how nobody wanted the Bush tax cuts to expire, but CBO had to assume the expiration because it was in the law? Well, nobody wants to gouge the defense budget and domestic programs this year, but because the CBO isn't assume that Congress will revise the cuts. So these figures assume the country swallows that massive dose of austerity in the spring. 

And as it turns out, even in that nightmare scenario, the CBO doesn't see the economy getting much worse than it is today. The sequestration cuts wouldn't plunge us into a new depression -- just prolong the one we've been in.

These four charts essentially capture what the CBO sees ahead for us should the sequester snap into effect. Real gross domestic product growth would fall to about 1.4 percent his year, from 1.9 last year. But then it would bounce back to 3.4 percent in 2014. Likewise, unemployment would edge back up to around 8 percent this year before resuming its decline. At that point we would still be years away from from seeing even 6 percent unemployment. 


Should Washington go on a crash diet, the CBO foresees inflation staying well below 2 percent. Meanwhile, investors, in need of a safe place to park their cash, would likely to continue turning to Treasury bonds, which would keep the interest on our new debt low -- helpful, since even with sequester, we'd still be borrowing hundreds of billions of dollars to finance the annual deficit. Once growth picked up, investors would likely run elsewhere and the government would start having to offer higher rates in order to borrow. 

Here's another way of looking at what our worst-case-future could hold. This chart shows what's known as the "output gap," or the amount of wealth our economy could be producing, and how much it is currently. Ever since the recession, we've been under-performing. With the budget cuts, we'd finally catch up to where we should be by the end of 2017. 


Again, all of this is just soothsaying, the government trying to read its tea leaves. But at least it's a bit of reassurance that if our politicians hand the economy a giant, self-inflicted wound, it won't be fatal -- just painful.