CBO analysis of the “fiscal cliff” shows that the economic situation has worsened this year

The Congressional Budget Office warns that U.S. economy will fall into a recession unless Congress acts to avert a series of tax increases and budget cuts due to take effect in January. Absent such action, the “fiscal cliff” (or “Taxmageddon”) will push the unemployment rate up to 9.1 percent by the end of 2013 and produce economic conditions “that will probably be considered a recession,” says the CBO.

This forecast is much more gloomy than the CBO’s last estimate of the impact of the fiscal cliff. In January of this year, the CBO said that the fiscal cliff would trigger a mild recession in the first half of 2013, with the economy shrinking by 1.3 percent. Now it foresees a contraction of 2.9 percent in gross domestic product, “similar in magnitude to the recession of the early 1990s.”

I doubt that the CBO can accurately predict with this sort of precision the effect on GDP of the fiscal cliff. But the revision of its January forecast is telling, as are its reasons for the revision.

The CBO explains that the revision is due, in part, to certain actions by Congress that have made the fiscal cliff even steeper, i.e., extending a temporary payroll tax break and emergency unemployment benefits. It also says, however, that the underlying economy is weaker than previously predicted.

In other words, the economy has not performed as well as expected this year. This reality stands in contrast to claims by Obama and his team that its policies have worked and that things have been moving in the right direction.

This is just happy talk. Most voters surely see through it, intuiting that which the CBO analysis helps confirm.


Books to read from Power Line