Morici: Budget Deal Could Send Jobless Rates Over 10%

Wednesday, 05 Dec 2012 01:49 PM

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Unemployment rates will top 10 percent next year if President Barack Obama succeeds in pushing through a budget deal combining stimulus programs and tax cuts, said Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland.

Congress and the White House are working on a 2013 spending package and failure to agree on a fiscal framework will allow sweeping tax breaks to expire at the end of the year at the same time automatic public spending cuts kick in, a combination known as a fiscal cliff that could push the country into a recession if left unchecked by policymakers.

A deal may involve extending tax breaks for some, but letting them expire for the wealthy, which will narrow deficits if spending cuts follow, Morici points out.

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

“[S]ome temporary tax cuts, such as reduced social security payroll taxes and elements of the Bush tax cuts benefiting high-income families, will likely lapse, and some combination of savings in entitlements and defense spending will be accomplished,” Morici wrote on his blog.

“The package that emerges will likely cut the annual deficit by about $250 billion.”

However, calls for fiscal stimulus measures championed by the White House in some areas of the economy coupled with spending cuts elsewhere could hamper the one thing constantly missing in U.S. recovery — demand.

“Economists agree that inadequate demand for what Americans make is holding back growth and jobs creation, and President Obama wants $50 billion in new stimulus spending,” Morici wrote.

“However, the combination of higher taxes, reduced entitlement and domestic spending and some additional public works projects would reduce the budget deficit and domestic demand by about $200 billion in 2013,” he added.

“This would curb GDP growth by about 1 or 2 percentage points, and could raise unemployment to about 10 percent.”

True recovery, Morici points out, must come with sweeping energy reforms and trade policies, namely by drilling more at home and getting China to strengthen its artificially weak currency.

“At about $500 billion, the trade deficit is almost entirely attributable to the gaps in trade with China and on oil,” Morici wrote.

“Confronting China more forcefully about its undervalued currency and other mercantilist practices and opening up more offshore and Alaskan oil reserves for development could cut the trade deficit in half, jump start robust growth and create 5 million new jobs and offer the opportunity for more substantial deficit reduction.”

The Bureau of Labor Statistics will release its November jobs report on Friday and many are worried Superstorm Sandy will skew the numbers.

The ADP National Employment Report revealed the U.S. private sector added a net 118,000 payrolls in November, less than forecasts compiled by Bloomberg and Reuters, both of which predicted a gain of 125,000 new jobs.

“Superstorm Sandy wreaked havoc on the job market in November, slicing an estimated 86,000 jobs from payrolls,” Mark Zandi, chief economist of Moody’s Analytics, which helps manage the report, said.

“The manufacturing, retailing, leisure and hospitality and temporary help industries were hit particularly hard by the storm. Abstracting from the storm, the job market turned in a good performance during the month.”

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

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