I could not even finish my bowl of raisin bran this morning because of an article in the Atlanta Journal Constitution that attempts to explain the basics of the fiscal cliff. The article includes an error that I know will feed the feeble minds of the anti-tax crowds. For a quick diary about the matter, please jump.
The "'cliff' primer" offered by the AJC is split up into sections headed with rhetorical questions like "What is the fiscal cliff, anyway?" Reading the section entitled "Why would recession happen?" gave me a start. It completely omits the effect of spending reductions on the GDP (and it includes a funny typo):
Why would recession happen? "If the government gets more revenue, people have less money to spend on other things. When taxes go up, the economy does (sic) down." -- Georgia State University economist Rajeev DhawanSo, I just sent this note to the authors of the article... I hope it has some effect.
There is a glaring omission in your article that needs to be corrected in a written column in tomorrow's paper with an equally large headline.
Your explanation of "Why would recession happen?" is only half correct. It omits entirely the effect of reduced spending on the economy. I am not an expert, but it requires very little digging to find that the Congressional Budget Office predicts a 1 & 1/2 percent effect on GDP from the taxation portion of the cliff and a 3/4 percent effect from the spending portion of the cliff. See https://cbo.gov/...
Also, as the CBO notes, the two effects do not work in the same manner:
The estimated economic effect next year of those changes in spending is about half the estimated effect of extending the expiring tax provisions, even though the budgetary impact of the changes in spending is less than one-quarter of the impact of the changes in taxes. The larger “bang for the buck” next year of the spending policies under the alternative fiscal scenario occurs because, CBO expects, a significant part of the decrease in taxes (relative to those under current law) would be saved rather than spent.
Your omission is important, because, as written, your article puts all the emphasis on the tax element, fueling the minds of trickle-down economic theorists who would hold this country hostage to their narrow minded economic thinking.
Please issue a correction as soon as possible.