Ex­perts split on tax-cut deal; in­vestors fear widen­ing deficit

The Washington Times Weekly - - Politics - BY PA­TRICE HILL

Pres­i­dent Obama’s tax-cut com­pro­mise with Repub­li­cans should pro­vide a pow­er­ful boost to the econ­omy next year by putting a lot of ex­tra cash in con­sumers’ pock­ets, and was cheered on Wall Street on Dec. 7.

But global in­vestors, wary that the deal would add nearly an­other $1 tril­lion to the na­tional debt, drove up in­ter­est rates on wor­ries about the $1.3 tril­lion deficit fur­ther widen­ing un­der the deal.

“It will be good for the econ­omy next year,” said Mark Zandi, chief econ­o­mist at Moody’s An­a­lyt­ics, one of many econ­o­mists who called on Congress to ex­tend the Bush tax cuts and emer­gency un­em­ploy­ment ben­e­fits to pre­vent a re­trench­ment in the econ­omy at the turn of the year.

Mr. Zandi es­ti­mated that the deal could cause an ac­cel­er­a­tion of growth to 4 per­cent next year and help cre­ate 1.6 mil­lion jobs, draw­ing the un­em­ploy­ment rate down from 9.8 per­cent to 8.5 per­cent by the end of the year.

John E. Sil­via, chief econ­o­mist at Wells Fargo Se­cu­ri­ties, said the deal’s two-year ex­ten­sion of the Bush tax cuts should “re­duce un­cer­tainty” among in­vestors and busi­nesses about the level of taxes in the next two years, en­abling them to plan ahead to hire new work­ers and make in­vest­ments.

Mean­while, the ex­tended un­em­ploy­ment ben­e­fits and tax cuts for in­di­vid­u­als — in­clud­ing a $120 bil­lion cut in So­cial Secu- close to their pre­vi­ous lev­els.

The prices on Trea­sury bonds fell sharply, how­ever, in an­tic­i­pa­tion of the on­slaught of new debt cre­ated by the deal, caus­ing the yields on 10-year Trea­sury notes to jump to 3.13 per­cent from 2.93 per­cent.

The prospect of fur­ther ex­plod­ing the deficit is “ut­terly ex-

“While other coun­tries con­sider ways to live within their means, Washington is in­tent on de­vis­ing ever more cre­ative ways to de­lay the day of reck­on­ing,” said Peter Schiff, pres­i­dent of Euro Pa­cific Cap­i­tal. “Un­for­tu­nately, by ex­pand­ing govern­ment and in­creas­ing debt, the plan puts us far­ther than we have ever been from a real re­cov­ery.”

rity taxes paid by peo­ple earn­ing less than $105,000 — will pro­vide “a much-needed boost to per­sonal in­comes” and should boost con­sumer spend­ing, he said.

Wall Street ini­tially ap­plauded the deal, with stocks ris­ing across the board at the open of New York trad­ing. But by the end of the day, stocks had fallen back as­per­at­ing,” said Maya MacGuineas, pres­i­dent of the Com­mit­tee for a Re­spon­si­ble Fed­eral Bud­get, es­pe­cially as it comes on the heels of rec­om­men­da­tions two weeks ago by Mr. Obama’s own deficit com­mis­sion for a $4 tril­lion re­duc­tion in fu­ture deficits to stave off a debt cri­sis.

“This feels more than a bit sur­real,” she said. “There is prob­a­bly a le­git­i­mate case to be made that the econ­omy needs more stim­u­lus now,” she said, but “the crit­i­cal ob­jec­tive is to pair any stim­u­lus for the short­term with a cred­i­ble plan to re­duce the debt in the medi­u­mand long-term.”

Peter Schiff, pres­i­dent of Euro Pa­cific Cap­i­tal, said the plan will lead to higher deficits and in­fla­tion while do­ing “noth­ing to help the econ­omy” be­cause an ex­cess of debt is the root cause of the econ­omy’s col­lapse.

“While other coun­tries con­sider ways to live within their means, Washington is in­tent on de­vis­ing ever more cre­ative ways to de­lay the day of reckon- ing,” he said. “Un­for­tu­nately, by ex­pand­ing govern­ment and in­creas­ing debt, the plan puts us far­ther than we have ever been from a real re­cov­ery.”

But Jerry Jasi­nowski, econ­o­mist and for­mer pres­i­dent of the Na­tional As­so­ci­a­tion of Man­u­fac­tur­ers, said the plan’s em­pha­sis on spurring the econ­omy now, at the ex­pense of fu­ture deficits, is “ap­pro­pri­ate” since a re­ver­sion back into re­ces­sion next year would only make the deficit prob­lem big­ger.

A grow­ing econ­omy gen­er­ates the rev­enues the govern­ment needs to close the bud­get gap, while a shrink­ing econ­omy de­prives the govern­ment of rev­enues and widens the bud­get gap through in­creased use of un­em­ploy­ment ben­e­fits and other so­cial safety-net pro­grams.

“The only sure­fire so­lu­tion to our eco­nomic and fis­cal quandary is eco­nomic growth” — some­thing both Repub­li­cans and Democrats in­creas­ingly re­al­ize, Mr. Jasi­nowski said.

“At this crit­i­cal junc­ture, tax in­creases would throt­tle the frag­ile re­cov­ery,” he said. “As long as un­em­ploy­ment re­mains near 10 per­cent, se­ri­ous progress in re­duc­ing the deficit will re­main out of reach.”

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