NYT: Economy Will Slow Even if US Doesn’t Go off the Fiscal Cliff

Monday, 31 Dec 2012 10:58 AM

By Michael Kling

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Even if Washington reaches a last-minute deal to avert the fiscal cliff, experts predict the economy will still slow substantially in the first half the 2013.

Although attention has focused on extending the Bush tax cuts for wealthier Americans, ending the payroll tax cut and the extended unemployment benefits will smack down economic growth, according to The New York Times.

If the payroll tax returns to 6.2 percent, 2 percent higher than the 4.2 percent rate in 2012, the economy will feel the impact, experts warn.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

Nigel Gault, chief U.S. economist at IHS Global Insight, predicts an increase in the payroll tax will slow economic growth from 2 percent to 1 percent in the first quarter off 2013, according to The Times. That compares with 3.1 percent growth in the third quarter of 2012.

Observers had initially though Congress would keep the lower payroll tax, but they now believe it will rise to the higher rate.

Economists warn that the fiscal cliff's spending cuts and tax increases will prompt a recession in 2013. Gault, The Times reported, predicts the economy will contract by 0.5 percent.

"If we have a recession, it's unforgivable," Bernard Baumohl, an economist at the Economic Outlook Group, told The Times. "For the first time in modern history, we will have a self-inflicted recession in the U.S."

In addition, expiration of the extended unemployment benefits for over 2 million long-term unemployed are set to expire on Jan. 1, delivering another blow to the economy.

"Both the payroll tax increase and the change in unemployment benefits would hit hand-to-mouth consumers hard," Vincent Reinhart, chief U.S. economist at Morgan Stanley, told The Times. "This has consequences for the whole economy."

The political uncertainty has slowed economic growth for the fourth quarter of 2012 from between 2.5 and 2 percent to less than 1 percent, Reinhart estimates, according to The Times. Uncertainty has also prevented unemployment from falling from 7.7 percent to about 7.4 percent.

For a worker earning about $50,000, expiration of the payroll tax cut would equal a reduction of approximately $19 a week in their paycheck. For the entire economy, it means about $112 billion less in 2013, The Christian Science Monitor reported.

“It’s money taken out of the economy that is not available to be spent,” Roberton Williams, a senior fellow at the Tax Policy Center in Washington, told The Christian Science Monitor.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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