Blue skies and greener pastures await the U.S. economy in the coming years if the government gets serious about tackling the fiscal issues hampering recovery, said Mark Zandi, chief economist at Moody’s Analytics.
First, the government must steer the country away from a fast-approaching fiscal cliff — a combination of expiring tax breaks and inbound cuts to government spending that will take effect at the same time after this year closes.
The nonpartisan Congressional Budget Office estimates that the economy could contract by 0.5 percent next year if the economy rolls over the cliff.
Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation
Lawmakers have been largely unwilling to address tax and spending issues in an election year, but if they roll up their sleeves and agree to both immediate and lasting fiscal reforms that narrow deficits without threatening growth, the economy will improve.
“I am meaningfully optimistic about the economy in the second half of the decade,” Zandi said at a conference in Philadelphia, according to The Wall Street Journal.
“[But] we need to solve a number of fiscal issues pretty quickly after the election.”
Failure to deal with the cliff could bruise the country’s creditworthiness — Moody’s Analytics is the research arm of the Moody’s Corp. and does not participate in credit ratings decisions.
“Either the Treasury will default on the nation’s debt… [or] perhaps the Treasury will decide to not make a Social Security payment or only half a payment,” Zandi said.
“It’s pretty clear that if we can’t come up with a credible path to sustain ourselves, we’ll be downgraded.”
Solutions to the fiscal cliff must include plans to narrow longer-term deficits as well.
The U.S. debt-to-gross domestic product ratio currently stands around 75 percent, well above a norm of about 35 percent to 40 percent.
“We have to address that, but it’s very, very doable,” Zandi said, The Journal added.
Meaningful fiscal reform could spark more robust economic growth by around 2014 or later, when growth could double to 4 percent from today’s rates of around 2 percent.
“I don’t think we’re going to go anywhere fast for the next six to 12 months,” said Zandi.
“But we can [tackle] this in a way that we can easily digest it.”
CEOs are urging Congress to steer the economy away from the fiscal cliff.
While many are optimistic Congress will strike a deal and avoid disaster, uncertainty alone surrounding the cliff is weighing on recovery, as businesses are putting off plans to expand and hire because they don’t know what they will be paying in taxes next year.
“We have the threat of going into a recession in the first quarter,” BlackRock CEO Laurence Fink, according to Bloomberg.
“This is a very uncertain moment.”
Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation
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