Economists Plead for a Major US Debt Deal

CAPITOL HILL — Two of America’s top economists say a debt reduction deal that avoids massive automatic tax hikes and spending cuts would boost the U.S. economy, but only if the deal genuinely addresses the nation’s severe fiscal woes.  The analysts testified before the Joint Economic Committee, comprised of lawmakers from both houses of Congress.
Moody’s Analytics economist Mark Zandi says the drama and uncertainty surrounding U.S. debt negotiations are harming a fragile economic recovery.  He had a simple message for lawmakers:

“You have got to nail this down [forge a debt deal].  Uncertainty is killing us,” Zandi said. He said a far-reaching debt deal would boost America’s economic engine. “If we nail this down, we will be off and running.  And we will create a lot of jobs and unemployment will be moving south in a very consistent way.”

Agreeing with Zandi was economist Kevin Hassett, who served as an advisor to former Republican presidential contender Mitt Romney.

“The best possible thing we could do right now for unemployed Americans is fix our big problems,” Hassett stated.

President Barack Obama and congressional Republicans have been unable to narrow partisan differences on tax revenues and spending cuts required for a debt reduction package.

Zandi says, if the final choice is between a weak package that delays tough choices or stepping off the so-called fiscal cliff, he would choose the latter option. “I would not come up with a deal unless it is a really good deal before the end of the year.  I would take it in to next year, if that means you are going to get a better deal,” he said.

“Taking it into next year” means allowing a severe austerity plan of automatic, across-the-board tax hikes and spending cuts to take effect - until a better package can be enacted.

While such an outcome would give an unwelcome shock to the U.S. economy, Zandi argues short-term pain is worthwhile if it generates the political will in Washington to correct America’s long-term fiscal imbalances.

Kevin Hassett makes a similar argument about the utility of budget battles surrounding the federal debt limit, which will have to be raised early next year.

“Each time we go through that, we bear a negative short-run cost.  But I would just like to add that if that is what it takes to get spending under control, then we have to concede that, in the long run, there is a benefit," Hassett explained. "Which is that we do not have these massive deficits that are crowding out long-run economic growth.”

President Obama has said he has no desire to see America step off the fiscal cliff.  But White House officials say they are prepared for that possibility if debt negotiations fail.

The annual federal deficit exceeds $1 trillion, and America’s national debt exceeds $16 trillion.

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