Harvard's Feldstein: Fixing Fiscal Cliff May Not Avoid Recession

Tuesday, 20 Nov 2012 06:28 PM

 

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Harvard University economics professor Martin Feldstein said the U.S. economy may fall into a recession next year even if Congress and President Barack Obama avert the full brunt of the so-called fiscal cliff.

“You are perilously close to the edge of another recession even if we don’t go over the fiscal cliff,” Feldstein said in a Bloomberg Television interview from New York. The end of payroll tax cuts will reduce gross domestic product by about 1 percentage point in 2013, and other tax increases and spending cuts may bring “over 2 percent of GDP tightening,” he said.

Feldstein was less optimistic than Federal Reserve Chairman Ben Bernanke, who said a fiscal agreement “could help make the new year a very good one.” Feldstein was one of two economists to question the central bank’s leader after his prepared remarks Tuesday to the Economic Club of New York.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible.

The fiscal cliff refers to the $607 billion of tax increases and spending cuts that will kick in automatically next year unless Congress acts. The Congressional Budget Office said in an Aug. 22 economic report that fiscal tightening of that magnitude could cause a recession.

With the economy growing at less than a 2 percent rate, that may be too small of a cushion to withstand fiscal tightening resulting from a budget agreement, Feldstein said.

In response to Feldstein’s questioning about the impact of a budget agreement, Bernanke said “there’s a range of possibilities” for outcomes of the fiscal negotiations, though “some plausible scenarios” would result in “relatively contractionary fiscal policy overall.” The Fed chief said “what I’m particularly concerned about is that we avoid the full force of the cliff.”

Broadcast Interview

Feldstein, in his broadcast interview, urged that Congress not raise tax rates and work to increase revenue by restricting so-called tax expenditures: deductions and credits written into the tax code for such things as mortgage interest and investments in renewable energy.

The economist agreed with Bernanke’s assessment that inaction on the fiscal cliff poses a “substantial threat” to the recovery.

“The fiscal cliff would be a disaster,” he said. “As Ben said, and as the Congressional Budget Office said, that would push the economy into a serious recession.”

The economy expanded at a 2 percent annual rate in the third quarter, though economists from Goldman Sachs Group Inc. and Barclays Plc expect that to be revised to close to 3 percent because of inventory accumulation and improvements in international trade. Growth was 1.3 percent in the prior quarter.

Feldstein, 72, is a former president of the National Bureau of Economic Research and a member of the NBER committee that declared the recession ended in June 2009. He formerly served as chief economic adviser to President Ronald Reagan.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible.

 

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