CBO Demands a Leap of Faith on the Fiscal Cliff | John H. Cochrane | Cato Institute: Commentary

CBO Demands a Leap of Faith on the Fiscal Cliff | John H. Cochrane | Cato Institute: Commentary: "If the government borrows $1 billion and spends it, the CBO will project that this action raises gross domestic product by $1.5 billion. Government workers are counted as “producing” what they cost, so borrowing money to keep them employed generates the same GDP as building a bridge. If the government just gives the money to people, this also raises the CBO’s GDP estimate. Reducing government spending and transfers has the opposite effect."

"What will be the effect of curtailing 99 weeks of unemployment insurance? To the CBO, it will reduce GDP because would-be beneficiaries will consume less. A standard economic analysis predicts that it will have the opposite effect, increasing GDP and bringing down unemployment. That’s because unemployment insurance means some people choose to stay unemployed rather than take lower-paying jobs, or jobs that require them to move."

"To the CBO, tax increases and spending cuts have about the same effect. In my analysis, higher tax rates are more damaging than spending cuts. To me, a revenue-neutral tax reform that took in the same amount of money at much lower marginal rates would be a boon. It would have little effect at all in the CBO’s analysis."