Pimco’s El-Erian: Economic Benefits of Cliff Deal Are ‘Mixed’

Wednesday, 02 Jan 2013 09:59 AM

By Nancy Stanley

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While the fiscal cliff deal makes political sense, the “economic benefits are mixed, at best,” says Mohamed El-Erian, CEO of fund giant Pimco.

“The political attractiveness of the deal comes from the fact that both parties, and virtually every faction within each party, can claim at least a partial victory,” he wrote in an article for Fortune.

However, “the economic attractiveness of the deal is much more problematic.”

While the deal avoids some of the tax hikes and spending cuts that would have led the country into a recession, it does not address what the country needs to keep the United States on the path to economic recovery.

“The hard-negotiated political compromise does little to address the consistent headwinds that undermine growth, hold back corporate investment and dampen job creation,” El-Erian said.

The compromise delays the uncertainty regarding employment, he noted, and many of the longer-term budgetary issues are not settled, he noted.

For instance, increasing the debt ceiling was omitted from the deal and the sequester, or spending cuts, was delayed by two months. Therefore, Congress and the White House will be coming back to the bargaining table in a few weeks.

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“In addition to temporarily covering the mess it created for itself 18 months ago, Congress has come up with more excuses to postpone really tough decisions on urgent economic and financial priorities for the nation,” El-Erian wrote.

“[T]he benefits will only prove durable and meaningful if the nation's overall economic context is addressed in a more comprehensive manner that improves economic growth and creates jobs,” he added. “For that, we need a much more visionary, responsible and functional Congress.”

The deal will add nearly $4 trillion over a decade to federal deficits, according to the Congressional Budget Office, assuming taxes would otherwise have risen on taxpayers at all income levels rather than just those with incomes over $400,000, The Associated Press reported.

In addition, 77 percent of American households will face higher federal taxes in 2013 under the agreement, the AP noted citing Tax Policy Center estimates.

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