Tags: Blinder | US | fiscal | Cliff

Former Fed Official Blinder: U.S. Headed for a ‘Fiscal Cliff’ Next Year

Monday, 19 March 2012 01:37 PM

Princeton economist and former Federal Reserve Vice Chairman Alan Blinder says the United States is cruising toward a 2013 "fiscal cliff."

"As tax cuts expire and spending falls, the economy will be hit with a 3.5 percent decline in gross domestic demand," Blinder writes in The Wall Street Journal.

Blinder says a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013 — unless Congress takes action to avoid it.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

“And if you're like me, the phrase ‘unless Congress takes action’ sends a chill down your spine — especially since the cliff came about because of Congress's past inability to agree,” says Blinder.

If the House and Senate don't act in time, the Bush tax cuts will expire, the temporary payroll tax cut will end and unemployment benefits will be severely curtailed — all on January 1, 2013, Blinder notes.

Moreover, $1.2 trillion worth of automatic, Congressionally mandated cuts are headed our way starting January 15, 2013, and the formula Congress adopted aimed half the cuts straight at the Pentagon.

The resulting fiscal contraction — consisting of both tax increases and spending cuts — would be in the neighborhood of 3.5 percent of gross domestic product, all at once.

“That's a big fiscal hit, roughly as big as what a number of European countries are trying to do right now, though with limited success and with notable collateral damage to their economies,” says Blinder.

“An abrupt fiscal contraction of 3.5 percent of GDP would be a disaster for the United States, highly likely to stifle the recovery.”

Federal Reserve Chairman Ben Bernanke also recently warned that the U.S. recovery could come off the rails in 2012 if Congress failed to take action to address a "massive fiscal cliff" of tax increases and spending cuts due to kick in early that year.

"I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date," he told Congress late last month.

The Jacksonville Daily News reports that the 2011 Budget Control Act includes across-the-board cuts, to all departments equally if Congress can’t design and pass a budget that more specifically outlines cuts totaling $1.2 trillion over the next 10 years.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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Monday, 19 March 2012 01:37 PM
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