Washington's 2012-13 red-ink dilemma

Sunday May 27, 2012 2:48 PM By Alvin Bessent

Photo credit: Robert Lipper | The Capitol Building in Washington, D.C.

Pick your poison: deficits or recession.

That’s essentially the word Congress got Tuesday from the respected, nonpartisan Congressional Budget Office about the difficult trade-offs lawmakers face in formulating the nation’s fiscal policies.

Option No. 1 is for Congress to change nothing in current law. Do that and taxes would soar in January 2013. The Bush tax cuts, the two-year cut in payroll taxes and temporary protection from the alternative minimum tax would all expire. At the same moment, $1.2 trillion in automatic spending cuts over 10 years agreed to during last year’s debt crisis would begin to kick in.

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That combination of tax hikes and spending cuts would trim the budget deficit by $560 billion between fiscal years 2012 and 2013. But it would do dreadful things to the economy. The CBO projects it would contract 1.3 percent in the first half of 2013. In other words the nation would tumble back into recession.

Option No. 2 calls for Congress to extend all the tax cuts and cancel the automatic spending cuts. Then the economy would grow a healthy 4.4 percent in 2013, the CBO says. But deficits and debt would soar.

The moral of the story? Don’t go deep into debt during good economic times to finance tax cuts, wars and new benefits. It leaves too little room to maneuver when times get bad.

But there is a third option. The CBO says Congress could enact a combination of changes in taxes and spending that would widen the deficit in 2013 more than option one and reduce deficits later in the decade more than option two while, hopefully, avoiding another recession.

That sort of nuanced policy makes sense. Unfortunately nuance doesn’t come easily to ideologues, partisans or politicians seeking reelection. And that’s who we have to rely on to make it all happen.

Tags: Congressional Budget Office , federal deficit , Congress , Senate , House of Representatives , Bush tax cuts , payroll tax cut , alternative minimum tax , fiscal 2012 , fiscal 2013 , presidential election , Washington , Capitol