Economists Say a ‘Cliff’ Recession Could be Devastating

Economists Say a ‘Cliff’ Recession Could be Devastating

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Back in August, the Congressional Budget Office predicted that if lawmakers failed to reach a deal that would avert massive spending cuts and tax hikes set to take place early next year, the economy would tumble into a shallow recession. Now, economists are calling the CBO's predictions optimistic and caution that going over the cliff could do much more harm to the economy than many realize.

Reuters' Jason Lange reports that economists at the International Monetary Fund and in academia are suggesting that the economic contraction in 2013 would be "double" the one-half of one percent decline projected by CBO.

"You can take that 0.5 percent contraction and double it," said Barry Eichengreen, an economist at the University of California, Berkeley. Eichengreen explained that fiscal contractions become greater when interest rates are very low, as they currently are. "When rates are higher, central banks can easily lower them to provide a counterweight to austerity. But when rates are near zero, as they are in the United States, it's harder to ease the pinch," Eichengreen said.  -  Read more at Reuters

Peter Hooper, chief economist of Deutsche Bank AG, believes that annual U.S. economic growth could actually reach 3 percent if Congress and the White House can reach a year-end deal on taxes and spending.

"This is an economy that has been laying the foundation for a considerably stronger performance," Hooper told Bloomberg's Jeff Kearns on Sunday. "What has the potential to drive it a good deal more rapidly is a lot of pent-up demand that's been built up by a period of very sluggish, by historical standards, recovery from a very deep recession."  -  Read more at Bloomberg

Laurence Fink, Chief Executive of BlackRock, an international asset management firm, told reporters last week that the United States will be at risk of  another credit rating downgrade – like the one Standard & Poor’s imposed  after the near disastrous debt ceiling talks in the summer of 2011 -- if the fiscal cliff is not avoided.
"If our behavior shows we cannot address the fiscal cliff, and Congress shows little bipartisanship, there is a very strong risk of downgrade to the U.S. credit rating," Fink said.  -  Read more at Reuters

ECONOMISTS FEAR TAX HIKE MORE THAN SPENDING CUTS   Some economists argue that allowing the Bush-era tax cuts to expire at the end of the year would be more damaging to economic growth than allowing major defense and domestic spending cuts to kick in automatically next January. According to an informal survey by The Hill, economists said the increased marginal income tax rates would cause up to 40 percent of the economic slowdown if lawmakers and the White House can reach an agreement. Conversely, they attribute 20 percent of the slowdown to reductions in government spending.

"This assessment mostly reflects the amount of money the higher taxes would take out of the economy compared to the lower spending. Returning marginal income tax rates to where they were in the Clinton administration would take a bit more than $200 billion out of the private sector, while the sequester would require a cut of about $100 billion in 2013 government spending," The Hill’s Pete Kasperowicz reports.  -  Read more at The Hill

SURPRISE! THE NEW YORK TIMES ENDORSES OBAMA   The “paper of record” endorsed President Obama for reelection on Sunday, saying the president would be in a better position to shape a “grand bargain” than his Republican opponent Mitt Romney, who they said would "eliminate any hope of deficit reduction that included increased revenues." The Times said the president will be aggressive with Republicans going into negotiations over ways to avert a year end fiscal catastrophe, "even if it meant calling their bluff, letting the Bush tax cuts expire and forcing them to confront the budget sequester they created."  -  Read more at The New York Times

THE REAL SURPRISE: THE DES MOINES REGISTER ENDORSES ROMNEY  For the past 36 years, which included 9 presidential elections, the Des Moines Register endorsed Democratic presidential nominees.  Not this time. The paper says it broke rank because of the economy. The editorial, which was highly respectful of President Obama, laid out this argument: “Our discussion repeatedly circled back to the nation’s single most important challenge: pulling the economy out of the doldrums, getting more Americans back in the workforce in meaningful jobs with promising futures, and getting the federal government on a track to balance the budget in a bipartisan manner that the country demands.

“Which candidate could forge the compromises in Congress to achieve these goals? When the question is framed in those terms, Mitt Romney emerges the stronger candidate.”

REMEMBER THE DESPERATION SURROUNDING THE FARM BILL?  -  Congress adjourned without addressing the drought or renewing the five-year farm legislation, much to the chagrin and anger of farm states. But House Majority Leader Eric Cantor, R-Va., hinted last week that renewed farm legislation might be considered as part of major fiscal cliff legislation after the election.  The Hill's Erik Wasson reports that many close to the issue don't believe that the farm bill will be brought up as a separate bill and will instead be folded into compromise legislation to avert the fiscal cliff. 

"Both sides of the aisle have made it clear to me that the only way it will be passed is as part of the fiscal cliff bill, if there is one,” a farm lobbyist said.  -  Read more at The Hill

For more news surrounding the fiscal cliff, follow us on Twitter at @Twitter/ FiscalCliffNote

Brianna Ehley is the former Washington Correspondent for The Fiscal Times. She is currently a reporter on Politico's health care team in Washington, D.C.