CBO Estimate Shows Economic Growth Is No Panacea

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The Congressional Budget Office has provided an estimate of what the deficit would be if the economy were operating at total capacity. With full utilization of capital and labor resources in the economy, CBO says, the deficit for fiscal year 2012, which began Oct. 1, would be about a third lower than currently projected — or $630 billion rather than $973 billion.

The estimate came in a letter last week to Rep. Chris Van Hollen (D-Md.), ranking member of the House Budget Committee. It underscores an important point for elected officials and the public to keep in mind: That even robust economic growth would not solve all of the nation’s fiscal problems.

But a stronger economy would mean more people working and paying taxes, and less government spending on programs such as unemployment insurance, COBRA and Medicaid.

The White House contends that its American Jobs Act of 2011 will significantly bolster the economy but concedes that hard choices must still be made to deal with our long-term fiscal problems.

The legislation includes $447 billion in an assortment of tax cuts, unemployment benefits, funding to prevent teacher layoffs, and money for transportation and infrastructure projects.

Senate Democrats, who have scheduled a vote on the legislation this week, included a tax on individuals earning over $1 million that would offset the cost of the bill. The Joint Committee on Taxation estimated that provision would raise $453 billion over 10 years, producing a total of $5.7 billion in deficit reduction for the legislation.

External links:
CBO Letter to Rep. Chris Van Hollen: The Portion of the Deficit Due to Cyclical Weakness
Combined CBO and JCT Score of S. 1660, the American Jobs Act of 2011
Concord FAQ: Cyclical vs. Structural Deficits

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