Tags: Kashkari | fiscal | cliff | avoidable

Pimco's Kashkari: Recession Avoidable if Congress Behaves

Sunday, 28 Oct 2012 12:39 PM

Lawmakers can steer the economy away from a recession next year even by striking even a less-than-optimal agreement that averts the fast-approaching fiscal cliff, but brinkmanship and bickering could mean otherwise, said Neel Kashkari, head of global equities at fund giant Pimco.

At the end of this year, tax cuts expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the country into a recession next year if left unchecked by Congress.

Estimates from the nonpartisan Congressional Budget Office reveal that failure to deal with the fiscal cliff could contract the economy by 0.5 percent in 2013.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Some estimates see the fiscal cliff wiping $750 billion out of the economy next year alone and $7 trillion over a decade.

Even partially delaying tax hikes and spending cuts could still keep the economy on course toward growth.

“Our base case scenario is that roughly two-thirds of the fiscal cliff will end up getting deferred. So if the total dollar value ends up being about $700 billion, we think about $450 billion of that will get kicked the can down the road for six months or a year and $200-$250 billion will end up still hitting the economy,” Kashkari told CNBC.

“Our outlook for the U.S. economy is one of muted growth, but strong enough growth that the $200-$250 billion of fiscal drag should not tip us into recession. So that’s our base-case scenario, but there’s a lot that can go wrong.”

Politics can go wrong.

Businesses today are putting expanding and hiring on hold because they don’t know what they will be paying in taxes next year, which weighs on recovery, yet lawmakers have largely avoided touching tax and spending issues in an election year.

Should brinkmanship resembling the finger-pointing that took place during the 2011 debt-ceiling debacle return when lawmakers do address the cliff, even more businesses might put plans on hold and possibly tip the country into contraction or close to it out of fear and uncertainty alone.

“The part that’s really hard for us to quantify is how much damage Democrats and Republicans will do to the economy with their brinkmanship and their fighting. Just like a year ago,” Kashkari told the network.

“We didn’t default on the debt. They raised the debt ceiling. That was the right thing to do, but their fighting did real damage to the economy because it kept businesses and individuals on the sidelines. That’s the part we’re really afraid of right now.”

One study reveals that fears surrounding the fiscal cliff alone are dragging on U.S. economic growth months before the event arrives.

A National Association of Manufacturers (NAM) report reveals that that fears pushing businesses to the sidelines will shave 0.6 percent off the country’s gross domestic product by the end of 2012.

“The fiscal cliff has forced manufacturers to plan for a future in which business is down and their tax bills are up,” NAM CEO Jay Timmons said in a statement.

“Manufacturers have had to put off plans to expand and hire new workers to protect themselves against an increasingly negative business climate — resulting in slowing economic growth and job loss in the manufacturing community.”

Failure in Congress to act could inflict major damage.

“If we fall off the fiscal cliff, another recession is almost guaranteed, and we will see 6 million more people out of work. Manufacturers will lose the workers needed to drive American innovation, and the industry may suffer an irreparable setback,” Timmons said.

The U.S. gross domestic product (GDP) grew 2 percent in the third quarter of this year, according to advance estimates released by the Commerce Department, outpacing many expectations.

Experts hope growth will offset any headwinds stemming from the fiscal cliff.

“Strong GDP growth in the second half of this year is important given the pending government spending cuts in 2013 and the continued need for new job creation,” said Brian Hamilton, CEO of Sageworks and an expert on privately held companies, according to ABC News.

“Unemployment figures remain relatively high, at 7.8 percent, and private company sales growth has slowed in 2012 from 2011, indicating that there are still mixed signals for the health of the U.S. economy.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Lawmakers can steer the economy away from a recession next year even by striking even a less-than-optimal agreement that averts the fast-approaching fiscal cliff, but brinkmanship and bickering could mean otherwise, said Neel Kashkari, head of global equities at fund giant Pimco.
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