The bombshell CBO report and why Obama should be worried

Today, Politico’s Jim VandeHei reports that economic indicators should have Barack Obama worried about his re-election prospects, not more sanguine.  VandeHei relies heavily on this week’s economic and deficit projections from the CBO, but perhaps not heavily enough:

A new CBO report grabbed lots of headlines for projecting the deficit will top $1 trillion this year — making Obama the first president ever to pile up $1 trillion or more every year in office. That’s not great politics. But it’s not even the worst news contained in the CBO report. The unemployment number is.

The CBO projects unemployment will rise, hitting 8.8 percent in the third quarter of the year, the heart of the campaign. That’s terrible politics. Obama advisers have told us repeatedly on background that if unemployment is above 8.5 percent in the final months of the campaign, it will be extremely hard, if not impossible, to win. The advisers say independents will not return to Obama if it looks like economic growth is anemic and uncertain and it looks like his policies did little, if anything, to create new jobs under his watch.

Economists seem divided on the question of whether robust enough economic and job growth can happen in time for Obama to benefit. Some see signs of possibility in holiday sales and consumer spending in some parts of the country. Others see more of the same: a slow slog back. The CBO sees 2.2 percent growth in the quarter ending in September, essentially the same sluggish pace of a year earlier.

All of this is true — and more.  Barack Obama will claim that the same report shows America entering a more rapid pace of economic growth after 2013, with deficits falling to $200 billion and 1.5% of GDP, which is what the CBO report claims … under the assumption that current policies will remain in place.  I walked through those scenarios for The Fiscal Times in my column today, and explained the fantasy that would involve:

The report does project that annual budget deficits will “decline markedly” in the next ten years after this budget cycle, to as little as $200 billion a year and 1.5 percent of GDP, both very manageable levels of deficit spending. How will this miracle occur?  According to current law, which is the only guide that the CBO can use, the Bush-era tax rates will expire across the board, and the Alternative Minimum Tax will not be restrained from reaching far into the middle class.  The latter change will increase the number of American households subject to the AMT from four million in tax year 2011 to thirty million in tax year 2012. If readers can imagine any Congress subjecting middle-class voters to that kind of a tax shock in a single year, then this will sound like very good news indeed. Otherwise, this is an exercise in irony.

That gives one measure of just how seriously Washington takes deficit control. Here’s another: the automatic cuts passed in last year’s Budget Control Act would only deduct $105 billion from the deficit in 2015, while keeping the AMT and rate changes would add $395 billion to the federal government’s coffers.  By 2020, the BCA’s budget cuts only reduce the annual deficit by $137 billion, while the extra taxes add $685 billion to the kitty.  However, if Congress indexes the AMT as expected and extends the 2001/3 tax rates, the deficit picture looks bleak indeed.  It would get only as low as $664 billion in 2015 before nearing a trillion dollars again in 2020, and exceeding it by 2022, even with the minimal cuts in place.

What happens to the economy if Congress allows these massive tax increases to take place?  The CBO expects the economy to grow at a 2.0 percent rate in 2012, about the same stagnation rate we have seen for the past two years.  In 2013, though, with the capital sucked out of the market, the economy will slow even further to 1.1 percent, and for the economy to remain below its potential – until 2018.  Taxpayers and investors will lose ground on taxes and economic opportunity while Washington does nothing to curb spending – the real driver of these deficits.

The rest of the column reviews the track record of the Republican candidates to determine which might do best at accomplishing actual spending reductions in the next four years, so be sure to read it all.  However, the big story from the CBO is just how badly the taxpayer-contribution approach to deficit control would hammer the middle class — from both ends.  Economic growth at stagnation levels means fewer jobs, continued slow demand for housing and a resulting further decline in home values, and an erosion of retirement options.  Heavy taxation, especially through the EMT, means a lot less disposable income and ability to save and spend.  If the middle class thought they were getting squeezed before this, they won’t have seen anything yet.

This is the result of Obamanomics, the result of out-of-control spending from both parties, and the reason that actual spending cuts — not just a reduction in the rate of spending growth — needs to be the central economic argument in this year’s election.  Republicans need to start charting these numbers in digestible form now and start hammering them all the way to the general election no matter who wins the nomination, and activists have to focus on Senate and House races more than ever.

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