Tags: Fiscal Cliff | Harris | GDP | BofA

BofA's Harris: Fiscal Cliff Could Shave 2 Points from GDP

Wednesday, 12 Dec 2012 08:39 AM

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A compromise that steers the country away from the fiscal cliff would likely result in tax and spending reforms that shave 2 percentage points off the country’s gross domestic product (GDP) through a period lasting a year or more, said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch.

The White House and Congressional Republicans continue to negotiate ways to avoid the fiscal cliff, a combination of tax hikes and deep government spending cuts due to kick in simultaneously at the end of this year.

The nonpartisan Congressional Budget Office has warned the economy could contract 0.5 percent in 2013 if lawmakers and the White House fail to strike a deal.

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

The Bush-era tax cuts are due to expire, though President Barack Obama wants to extend them for all save the top 2 percent of U.S. earners.

Also due to expire are a 2 percent payroll tax holiday and extended unemployment compensation all at a time when automatic spending cuts mandated by the Budget Control Act created in 2011 that raised the debt ceiling take effect.

A deal would likely involve higher taxes on the wealthy, an end to some tax write-offs and benefits as well as spending cuts, which will drag on the economy even if a recession is avoided.

Meanwhile, businesses have begun throttling back plans to expand and hire to see how policymakers avoid the cliff, which has already dampened GDP mainly due to tax uncertainty.

When all is said and told, the country will likely have lost 2 percentage points to growth from about midway 2012 through 2013.

“We think there will be a series of modest tightenings that will cumulatively add to about 2 percent of GDP. Now, I think the economy is already hurting from the cliff,” Harris told reporters on a conference call unveiling 2013 forecasts.

“But I would say that starting from the summer of this year and then continuing well into next year the cumulative lost GDP to the economy from the fiscal shock is about 2 percentage points. That’s our bottom line of the cliff.”

While the country has known about the cliff for some time, the president and Congress are only taking it far more seriously now, as few wanted to go near tax and spending reforms in an election year.

Some lawmakers and even Treasury Secretary Tim Geithner have suggested Jan. 1 can come and go without a deal and the issue can be addressed in 2013 by putting one another’s feet to the fire or punting on deadlines as tax hikes and spending cuts take root.

Even talk of such a strategy can damage the economy.

“The most important thing we can get out of this would be common sense. And what does that mean? That means … don’t go over the cliff, don’t do everything at the last second and phase in whatever austerity you are going to do,” Harris said.

The U.S. economy is still rather weak and any plans to raise taxes or cut spending shouldn’t take effect at the same time, especially when nerves are on edge.

“There is no benefit of playing games of chicken. All it does is scare people. It doesn’t improve the outcome. Going over the cliff doesn’t improve the outcome,” he stated.

“There’s a myth in Washington that it is not a big deal to go over the cliff, that it is a slope. It is a big deal, because once you go over the cliff you are sending a message that you are taking brinkmanship to new levels and you are telling the markets that you are comfortable using nuclear options in your policy discussion.”

Negotiators must go slowly.

“I don’t think we should raise upper-income tax rates, close loopholes, do big spending cuts all right away on Jan. 1. I think there should be a phase-in period for that.”

Going over the cliff, however, remains a very real possibility.

“They are probably going to go to the very last second, play the game of tough negotiator, not going to give an inch, wait for the other guy to give in. I think there is a decent chance we are going to go over the cliff, and I think it is going to take until the spring to resolve everything,” Harris predicted.

“They will probably have a period of small decisions.”

In the report, BofA Merrill Lynch analysts expect the global economy to grow 3.2 percent next year led by China and the United States.

Once the United States resolves its fiscal cliff, the economy will finish out 2013 growing 2.5 percent.

While Wall Street may be on edge, one survey shows Main Street is rather hopeful for a bright 2013.

Some 43 percent of Americans surveyed by the TD Ameritrade brokerage firm said they were optimistic about 2013 and feel the economy is improving, twice as many as said so last year, CNNMoney reported.

“I think people are sensing that the worst is over, especially in terms of the job and housing markets,” said J.J. Kinahan, chief derivatives strategist at TD Ameritrade, CNNMoney added.

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

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