Tags: Moodys | Fiscal | Cliff | Economy

Moody’s Zandi: Resolve ‘Fiscal Cliff’ Threat and Economy Will Really Recover

Thursday, 05 Jul 2012 09:32 AM

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A congressional decision to delay the timing of tax hikes and spending cuts at the end of the year could lead to more lasting recovery, says Mark Zandi, chief economist at Moody's Analytics.

On Dec. 31, the Bush-era tax cuts and other tax holidays expire at the same time automatic spending cuts kick in.

The combination of the two, known widely as a fiscal cliff, could seriously derail recovery and throw the country back into recession by some estimates.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Congress must act by delaying the timing of the tax hikes and spending cuts or making other adjustments, such as making tax breaks permanent.

That may be easier said than done given the level of finger-pointing and brinkmanship that took place in 2011, when lawmakers waited until the last second to raise the debt ceiling and narrowly avoided throwing the country into default.

"This economy can gain traction and really swing into full gear if we just nail down what we're going to do about the fiscal cliff and attaining fiscal sustainability," says Zandi, according to the Christian Science Monitor.

That's a big "if," if recent history is a guide, the newspaper adds.

Even high-profile policymakers have called on Congress to reform tax and spending policies to spur more robust recovery, including Federal Reserve Chairman Ben Bernanke.

While the Fed has taken steps to stimulate the economy via interest-rate cuts and large-scale asset purchases from banks that flood the financial system with job-creating liquidity, Congress must act now to streamline deficits without derailing growth.

"I'd be much more comfortable," Bernanke told lawmakers recently, if "Congress would take some of this burden from us and address those issues."

Brinkmanship over the debt ceiling bruised the economy by all but hampering hiring and crushing consumer confidence.

At the end, Congress agreed to lift the country's borrowing limit, avoiding default in the process, but attached to that lawmakers agreed to cut spending to narrow deficits, installing automatic spending cuts to kick in Dec. 31 should they fail to agree to trim spending themselves via bipartisan talks.

Some estimate the fiscal cliff will siphon $4 trillion out of the economy over the long term if Congress fails to act.

"It is critical to remove the uncertainty created by the 'fiscal cliff' as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery," the International Monetary Fund says in its annual health check of the U.S. economy, Reuters reports.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did




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