Economists Urge Action on Fiscal Cliff, Say Hiring Stalled by Lack of Confidence

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By Chris Opfer

Lawmakers must take action to avoid the looming fiscal cliff and reach a long-term path toward economic stability before businesses will boost hiring, two leading economists said at a Dec. 6 hearing before the Joint Economic Committee.

“You've got to nail this down. Uncertainty is killing us,” Mark Zandi, chief economist of Moody's Analytics, told the committee, referring to ongoing negotiations to avert the more than $700 billion in automatic government spending reductions and tax increases scheduled to take effect Jan. 1.

“It hasn't affected hiring and layoff decisions yet, but it will when we get into next year,” he added.

Zandi and Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute, agreed that allowing the spending cuts and tax hikes to occur would likely result in a recession. The combination of increased revenue and declining expenditures would significantly reduce the federal deficit, but it would also shrink gross domestic product and drive up the unemployment rate, according to the economists.

While they debated whether certain short-term measures, such as emergency unemployment insurance benefits and the current payroll tax holiday, should be extended, Zandi and Hassett said that the country's leaders must agree to a long-term approach to fiscal sustainability before business will be confident enough to increase activity and hiring.

“The best possible thing we can do right now for unemployed Americans is fix our big problems,” Hassett said. “If all of a sudden America's businesses had clarity about what the future will look like … the sigh of relief rally … would dwarf anything you might get from tinkering with UI benefits or payroll taxes,” he explained.

No Agreement on Taxes, Spending
The best way to fix those problems--particularly the appropriate blend of revenue increases and spending cuts--remains the subject of much debate.

Republican committee members, including Vice-Chairman Kevin Brady (R-Texas) and Michael Burgess (R-Texas), took aim at the Obama administration's proposed fiscal cliff plan for failing to make sufficient spending reductions, while raising marginal tax rates for the country's wealthiest individuals.

“President Obama has the responsibility to propose a real, bipartisan plan to avert the fiscal cliff that can in fact pass the House and Senate,” Burgess said, adding that the president's current plan is “offering Republicans a deal they cannot accept.”

Meanwhile, Committee Chairman Bob Casey (D-Pa.) supported increasing marginal taxes for persons in the top income bracket (above $250,000 income for married couples), arguing that lower taxes for these individuals will not stimulate economic growth.

On Dec. 5, Casey announced the introduction of legislation that would extend the 2 percent payroll tax holiday through next year and provide a tax credit for small businesses that hire additional workers.

In addition to the economic uncertainty associated with the cliff, Zandi and Hassett also said that lawmakers must address federal debt as it approaches a legally mandated $16.394 trillion ceiling.

Calling the current deficit out of control, Hassett argued that a fiscal cliff agreement should weigh heavily in favor of spending cuts, rather than tax increases.

Zandi, who said lawmakers should consider scrapping the debt ceiling altogether to avoid political bickering and uncertainty associated with it, proposed a more balanced approach to reducing deficits, focusing equally on tax increases and spending cuts.

Slope, Not Cliff
Lawmakers on both sides of the aisle may have a little more time to work out an agreement than some expected.

While the tax and spending changes are scheduled to go into effect on the first of the year, Zandi said that lawmakers could extend negotiations into early February before markets begin to decline and business confidence erodes.

“[P]olicy makers should not rush to reach a deal before the end of the year, unless it adequately addresses the fiscal cliff, the debt ceiling, and fiscal sustainability,” he said in written testimony.

Zandi and Hassett warned against simply “kicking the can” by extending current policy and putting off by a few months to a year a decision on both the fiscal cliff and the debt ceiling, arguing that this move would simply delay dealing with the overarching fiscal sustainablity issue and indicate that lawmakers are unable to address it.

Rather, lawmakers should focus on reaching a long-term agreement in order to stoke confidence among employers, according to Zandi.

“We've made a lot of progress since the great recession and if we nail this down we'll be off and running,” he said about the ongoing negotiations. “We'll create a lot of jobs and unemployment will be moving south in a very consistent way.”

By Chris Opfer

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