CBO: Turns out austerity is bad for the economy

Updated
House Speaker John Boehner, R-Ohio, right, and Rep. Paul Ryan, R-Wis.,
House Speaker John Boehner, R-Ohio, right, and Rep. Paul Ryan, R-Wis.,
J. Scott Applewhite/AP

A new report from the non-partisan Congressional Budget Office adds to the mounting evidence that spending cuts have held back America’s economic recovery. According to the CBO’s budget and economic projections for the next decade, released on Tuesday, middling GDP growth over the past year is partially attributable to “scheduled automatic reductions in federal spending.”

However, the CBO report doesn’t just blame spending-side austerity. It also argues that tax increases on upper income families—a proposal championed by President Barack Obama—will slow growth.

Ever since President Obama won reelection in November, much of the economic debate in Washington has revolved around how best to reduce the deficit while avoiding automatic spending cuts and tax increases such as the so-called “fiscal cliff.” Republicans have typically argued for as many spending cuts and as few revenue increases as possible, while the president has called for a “balanced” approach that combines tax hikes and spending cuts. Both proposals are a form of austerity—and both, according to the CBO, slow down economic growth.

As a result, Gross Domestic Product actually shrank by 0.1% in the last quarter of 2012, the first time that the American economy has definitively shrunk since the financial collapse. Even in those months when GDP has still grown, the CBO estimated that it is significantly below the country’s potential GDP—and likely to remain that way until after 2016.

While few would say that the CBO’s estimates are positive, not everyone believes that GDP is the best measure of an economy’s health. Right around when the 0.1% GDP drop was first reported, the progressive think tank Demos published an essay arguing that GDP measurements omit “the distribution of growth and, as a result, cannot reflect inequality.”

9:03 PM: Edited to reflect fact that effect of tax increases on GDP has likely not yet been felt.

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CBO: Turns out austerity is bad for the economy

Updated