What's not getting as much headline attention is what Brian Beutler points out: The counterproductive obsession with cutting the deficit has worked to do just that but "at the expense of the still-struggling economy":
“[E]conomic activity will expand slowly this year, with real GDP growing by just 1.4 percent,” according to CBO’s projections. “That slow growth reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur-including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will limit businesses’ need to hire additional workers, thereby causing the unemployment rate to stay near 8 percent this year, CBO projects.”The most recent government report puts the official unemployment rate at 7.9 percent. (Critics, including me, have argued since the Bush administration that the official rate severely understates the true unemployment situation.) And while the official rate had fallen to 7.8 percent last September, CBO does not expect it to drop below 7.5 percent before 2015. It has been 70 years since the last time the United States experienced an unemployment rate that high for longer than six consecutive years.
A key reason for failing to reduce unemployment faster is because of fiscal belt-tightening and tax adjustments. That includes the reinstatement of the 2 percent payroll tax cut that affects consumer spending and cuts in government spending. The latter sent GDP growth for the fourth quarter of 2012 into negative territory for the first time in three and a half years, the government reported last week. Most of the reduced spending was defense-related. Read more about the CBO's report below.
"The effects of the housing and financial crisis will continue to fade and that an upswing in housing construction (though from a very low level), rising real estate and stock prices, and increasing availability of credit will help to spur a virtuous cycle of faster growth in employment, income, consumer spending, and business investment over the next few years."But growth in inflation-adjusted GDP isn't expect to bring unemployment down to 5.5 percent until the end of 2017. That would still be more than a full point higher than it was in mid-2007.
For the second half of the coming decade, CBO does not attempt to predict the cyclical ups and downs of the economy; rather, CBO assumes that GDP will stay at its maximum sustainable level. On that basis, CBO projects that both actual and potential real GDP will grow at an average rate of 2¼ percent a year between 2019 and 2023. That pace is much slower than the average growth rate of potential GDP since 1950. The main reason is that the growth of the labor force will slow down because of the retirement of the baby boomers and an end to the long-standing increase in women’s participation in the labor force. CBO also projects that the unemployment rate will fall to 5.2 percent by 2023 and that inflation and interest rates will stay at about their 2018 levels throughout the 2019–2023 period.The CBO report also estimates how big a percentage of GDP the federal debt will be over the next 10 years, setting it for the second half of the decade in the 73 percent range, the highest it has been since 1950.
Of course, all of these CBO forecasts, even the ones for the immediate future, are subject to what could very well be major changes in spending and taxing policies.