Chad Stone is chief economist at the Center on Budget and Policy Priorities.
The Congressional Budget Office issued its analysis of the economic impact of the president's 2013 budget last Friday, generating headlines and press releases that the president's budget would hurt the economy. Unfortunately, too few people asked the critical question, "Compared to what?"
To accept the budget office's analysis at face value, you'd have to think a realistic alternative to the president's budget is one in which policymakers allow all the Bush-era tax cuts to expire as scheduled at the end of the year, sharply reduce Medicare payments to doctors, allow millions more taxpayers to pay the alternative minimum tax, and allow the automatic across-the-board spending cuts that are scheduled to begin in January to take effect.
The Congressional Budget Office followed its customary procedure of constructing a budget and economic outlook based on current law, which includes all the aforementioned policies, and comparing the outlook under the president's budget to that alternative. The office's current-law ("baseline") budget projections show a sharp decline in the budget deficit in 2012-2014, imposing a huge drag on the economic recovery in the short run but, over time, reducing federal debt held by the public as a share of the economy. Due to the short-term drag, the economy slows sharply in 2013 and the unemployment rate does not drop below 5.5 percent until 2020.
Compared with this scenario, the Congressional Budget Office projects that the president's budget would produce larger deficits and debt (see charts). Recognizing the economic stimulus of larger budget deficits in the short run—when the economy still has high unemployment and substantial economic slack—the budget office projects that the president's policies would boost economic growth next year by between 0.6 and 3.2 percentage points and most likely produce more income for U.S. residents in 2013-2017. Larger deficits and higher debt over the longer term, however, reduce incomes below what they would be with smaller deficits and lower debt.
Along with making current-law projections, the Congressional Budget Office sometimes produces an "alternative fiscal scenario" to illustrate the effects of maintaining recent tax and spending policies. As the charts show, projected deficits and debt under this scenario are much higher than current-law projections and, after the first few years, are much higher than under the president's budget. The budget office concludes that, compared with the current-law baseline, the alternative scenario would boost growth in the short term because of the larger deficits but would impose a drag on growth in the longer term because of the higher debt.
The Congressional Budget Office did not discuss this alternative fiscal scenario in its analysis of the president's budget—but it should have. Such a discussion would have shown that the president's budget and the alternative fiscal scenario would produce similar short-term economic performance, but the president's budget would boost economic growth in the longer term compared with the alternative because of its smaller deficits and debt.
Simply put, it's disingenuous to claim that the Congressional Budget Office's analysis shows the president's policies hurt the economy, based on a comparison with an unrealistic current law baseline. Even the House-passed budget of Budget Committee Chairman Paul Ryan—despite its draconian spending cuts—has somewhat higher debt over the next decade than the budget's current-law projections. Compared to current policy, however, the president's budget would boost the economy more in the short run and promote stronger growth in the long run.