CBO’s Fiscal Prediction Fails the Smell Test

CBO’s Fiscal Prediction Fails the Smell Test

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The Congressional Budget Office predicted back in August that if the country went over the fiscal cliff, the economy would dip into a shallow recession and take about a year to recover. The U.S. economy would shrink about 0.5 percent over the year before bouncing back and growing at a rapid clip of 4.3 percent annually between 2014 and 2017.

However, the Washington Post’s Brad Plumer reports that a new study by the Levy Economics Institute found problems with CBO’s estimate and claims that it is optimistic at best – without providing alternative projections for declining growth next year. 

The authors of the report argue that unless one assumes that U.S. households will start borrowing and spending at an unprecedented rate – which is not likely to happen -- the CBO’s numbers don’t work. The report notes, “households would have to carry more debt than they did at the height of the housing bubble for the CBO’s optimistic growth rates to come true.”

The Levy Economics Institute maps out three post-cliff scenarios here:

Scenario 1 -- There  is an unlikely boom in household borrowing and spending.
Scenario 2 – The Bush tax cuts are extended and households increase their borrowing and consumption at a more realistic rate. Unemployment stays high.
Scenario 3 – Congress enacts a very modest fiscal stimulus. Unemployment goes down just a bit.

The report also predicts that unemployment will remain unacceptably high for an indefinite period unless Congress and the White House agree to avert a year-end confluence of major tax increases and spending cuts. “Based on our results, we surmise that it would take a much more substantial increase in fiscal stimulus to reduce unemployment to a level that most policymakers would regard as acceptable.” - Read more at The Washington Post

MORGAN STANLEY: BULLISH ON THE CLIFF FIX
Investment banking giant Morgan Stanley is confident that the gridlocked Congress will set aside party differences long enough to strike a short-term year-end deal to just barely avoid a crisis. “On balance, probably the only thing about the political outlook that can be forecast with some certainty is continued divided government,” Morgan Stanley’s Wealth Management Committee said Monday. “We think that a majority of incumbent politicians recognize that risk, so regardless of who wins the White House, we expect action to both mitigate and delay higher taxes and spending cuts.” The Wall Street Journal’s Paul Vigna reports that the firm is expecting the existing tax cuts to be extended one more year, and the automatic spending cuts to be eliminated. -  Read more at The Wall Street Journal

MERRILL LYNCH WARNS OF RUDE AWAKENING 
Merrill Lynch analyst Ethan Harris writes that politicians, economists and consumers aren’t as worried as they should be about the massive tax hikes and spending cuts scheduled to take effect at the beginning of next year. “Washington is growing the idea that going over the cliff is good to reset the starting point for negotiations, and that any short-run pain is worth it if it achieves the purely Republican or purely Democratic solution that America needs,” Harris writes. However, “as consumer confidence grows and as the VIX [the Chicago Board Options Exchange Market Volatility Index] and other measures of market risk drop, the risk of a rude awakening rises.”  -  Read more at NASDAQ

‘LONGEST, MOST EXCRUCIATING HOUSING RECOVERY IN HISTORY’
Regardless of how Congress handles the year-end fiscal mess, some experts are predicting that the battered housing market will remain in one of the longest recoveries in housing history.

“Real incomes are not growing. We are at the same level we were in the mid-1990s. The recovery is not sustainable until incomes recover,” said Sam Khater, deputy chief economist for real-estate analytics firm CoreLogic. MSN Real Estate’s Melinda Fulmer reports, “Weak job growth, lousy credit and the large number of buyers with little or no equity could conspire to flatten out the rebound, making this one of the longest, most excruciating recoveries in housing history.”  -  Read more at MSN Real Estate

SEN. WARNER CANCELS FISCAL CLIFF FUNDRAISER
An attempt by Sen. Mark Warner, D-VA, to use the fiscal cliff as a campaign fundraising tool was quickly aborted last Thursday evening. Politico’s Anna Palmer reports that Warner’s office sent out invitations for a “fiscal cliff” fundraiser lunch, suggesting campaign contribution of up to $5,000 to “engage in a conversation with Warner on the fiscal cliff.”  -  Read more at Politico

Brianna Ehley is the former Washington Correspondent for The Fiscal Times. She is currently a reporter on Politico's health care team in Washington, D.C.