Blinder to Congress: 'Far Too Much at Stake' to Go Over Fiscal Cliff

Wednesday, 05 Dec 2012 09:51 AM

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Congress should work out a deal now to avoid the fiscal cliff, even if it means kicking tough decisions down the road, or it risks tipping the economy into a recession and sending unemployment rates to 11 percent, said Alan S. Blinder, a Princeton economist and former vice chairman of the Federal Reserve.

Private and public institutions alike have warned that a failure to avoid the fiscal cliff — a series of expiring tax breaks and inbound spending cuts due to take effect at year-end — could siphon around $600 billion out of the economy next year alone, which would contract the country’s still-weak gross domestic product and wipe out what little improvements that have taken place in the labor market so far.

Taxes have served as a hurdle to avoiding the cliff, with the White House insisting that tax breaks expire for wealthy Americans, a proposal Republicans reject, opting instead for keeping low taxes in place for everyone but capping deductions to free up revenue.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Some Democrats, such as former presidential hopeful Howard Dean, have suggested the country should go over the cliff, as doing so would force strong policy responses needed to restore fiscal health.

Bad idea, Blinder writes in an open letter to Congress appearing in The Wall Street Journal.

“If you take between 3 percent and 4 percent of total spending out of an economy, a recession is very likely to follow. People like me won’t lose their jobs, or even take a pay cut. Neither will you — at least not until the next election,” Blinder wrote.

“But millions of Americans will, and that’s the main point. Millions of jobs will be destroyed, incomes and wealth will fall, and businesses will fail in droves — all because a bunch of politicians couldn’t agree.”

A typical recession pumps up unemployment rates by 3 percentage points, according to Blinder, which would bring the unemployment rate to around 11 percent next year.

Last year, the country criticized congressional Republicans for refusing to lift the debt ceiling, which would have thrown the country into default.

“But now, talk of deliberately going over the cliff seems to come also from the Democratic left. Please don’t listen to either. There is far too much at stake,” Blinder said.

The consequences to such a plan would be lasting, similar to a move carried out by the Carter administration to curb inflation via rolling out credit controls, which slowed the economy for some time afterward thanks in part to the psychological damage such a policy inflicted on the country.

Meanwhile, don’t look for drastic or short-term fixes — just reach a deal.

“Reaching a full ‘grand bargain’ within weeks is a nice dream, but it’s probably just that — especially if the deal requires significant revenue from tax reform,” Blinder wrote.

“Although both parties agree that our tax code is a national disgrace, fixing it is both technically demanding and politically contentious. The Reagan-era tax reform took more than two years to work out. Meanwhile, the fiscal cliff looms just weeks ahead and may already be undermining growth. You need to act soon.”

Compromise should involve raising the debt ceiling now before it approaches anew and agreeing on broad budgetary outlines that avoid the cliff — kicking the can down the road is okay to a degree, provided specifics and filling in the blanks do, in fact, come later, Blinder added.

“A skeleton plan like that leaves many blanks to be filled in, so you’ll still have plenty to argue about. But please hurry. We want you home for Christmas.”

President Barack Obama, in the meantime, remains steadfast that taxes must rise for the wealthy.

The White House has said the Bush-era tax cuts should not be extended for households bringing in $250,000.

“We have the potential of getting a deal done,” Obama told Bloomberg.

“We’re going to have to see the rates on the top 2 percent go up, and we’re not going to be able to get a deal without it.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

© 2014 Moneynews. All rights reserved.

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