WASHINGTON-The U.S. economy could be heading toward a significant recession that would drive the unemployment rate up to 9 percent by the end of next year, according to forecasts released Wednesday by the Congressional Budget Office.
The CBO's predictions are based on two events set to occur at the end of this year: the expiration of the Bush-era tax cuts that would raise tax rates for 100 million Americans and the implementation of across-the-board spending cuts totaling more than $100 billion. Combined, the scheduled changes are being called the "fiscal cliff." The CBO said that falling over this cliff would cost the nation 2 million additional jobs next year.
"The stakes of fiscal policy are very high right now," CBO director Douglas Elmendorf said.
Such high stakes are complicated by the upcoming fall political campaigns. Many politicians will likely use the CBO's predictions as fuel for their stump speeches rather than as an incentive to break any Capitol Hill impasse and reach a legislative deal. Elmendorf and other fiscal experts have warned that Washington's inability to reach an agreement on how to handle the country's fiscal crisis is stifling economic growth by creating a climate of economic uncertainty.
"Congress and the president have made matters worse with their incoherent approach to fiscal policy," writes Patrick Louis Knudsen, a budget expert at The Heritage Foundation.
The CBO also announced that 2012 would mark the fourth consecutive year of trillion-dollar-plus annual deficits. This year's $1.1 trillion deficit will be $49 billion higher than the January estimate made by the CBO. The public debt of $11.3 trillion is nearly three-fourths the size of the entire economy and is at its highest level since the Korean War.
Meanwhile, the year's federal spending of $3.6 trillion is almost one-fourth the size of the economy. Spending will continue to climb, the CBO predicted, hitting $5.97 trillion by 2022-a figure that would far outpace federal revenue.
President Obama had pledged that the trillion-dollar stimulus package passed by Congress in 2009 would prevent the nation's unemployment rate from going above 8 percent. But, according to Wednesday's CBO report, unemployment will remain above 8 percent for the rest of 2012.
Republicans are arguing that the CBO's new forecast means Congress should extend the expiring Bush tax cuts for all income levels. Republican presidential candidate Mitt Romney supports a one-year extension of the tax cuts. Democrats favor extending the tax cuts just for families earning less than $250,000 annually.
While this deadlock over the tax cuts has clear battle lines, the two parties have not presented substantive offers on how to handle the pending automatic spending cuts that were created last year after lawmakers failed to reach a bipartisan debt-reduction agreement.
In the face of the government's economic problems, the Senate has gone more than 1,200 days without passing a budget. That sends a "sad, but clear message of fiscal irresponsibility," said House Budget Committee member Tim Huelskamp, R-Kan.
The CBO forecast comes one day after an industry-sponsored report suggested that government regulations might have reduced U.S. manufacturing output by as much as $500 billion this year.
The report, commissioned by the Manufacturers Alliance for Productivity and Innovation, found that the Obama administration has imposed an average of 72 regulations on manufacturers each year. Former President George W. Bush established 45 new regulations per year. The number of major federal regulations expected to have an economic impact of more than $100 million has gone from 27 per year under President Bill Clinton to 44 per year under Obama.
Social issues may be grabbing the headlines this week, thanks to the controversy over U.S. Senate candidate Todd Akin's comments on rape and abortion. But these new studies suggest that taxes, federal spending, deficits, and budgets will command the center stage for this fall's campaigns and beyond.
In fact, Romney used the CBO's new data to reassert his campaign's economic theme and pivot away from the media's recent focus on Akin.
"President Obama, bless his heart, has tried to substitute government for free people and it has not worked and it'll never work," Romney said on Wednesday during an appearance in Bettendorf, Iowa. "He said he'd cut the deficit in half. He doubled it. He said he'd get people good jobs. Instead, we've gone 42 straight months with unemployment over 8 percent, 23 million Americans out of work or stopped looking for work. It's inexcusable."