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Key economist: Failure to raise debt ceiling will cause serious damage
The economist Mark Zandi is cautiously optimistic about the economy — as long as policymakers come together on a deal to raise the debt ceiling.
Zandi said Tuesday that he expected the pace of economic growth to quicken throughout the year, rising from the current clip of roughly 2 percent to nearly 4 percent by year’s end.
But, the economist added, if Congress fails to raise the $14.3 trillion debt ceiling by the Aug. 2 deadline, his forecast would be “blown out of the water.”
“Even if Congress and the administration reverses themselves days later I think the damage will have been serious and we'll probably be thrown into a recession,” Zandi said at a breakfast sponsored by The Christian Science Monitor, later adding that he expected the markets to start getting nervous if a deal is not put into place by the second or third week of July.
That said, Zandi expressed confidence that such a doomsday scenario would be avoided, saying it was a good sign that Democrats and Republicans had essentially agreed to reduce the deficit by roughly $4 trillion over about a decade.
“The discussion in Washington has changed dramatically,” Zandi said. “I mean, it’s no longer a question of should we address entitlements — it’s no longer a question of do we need to reduce spending in the future.”
The two GOP lawmakers had been taking part in negotiations led by Vice President Biden that dissolved last week due to a stalemate over whether immediate new tax revenues should be part of any deal to raise the debt limit.
At the breakfast, Zandi added that the 2012 presidential election should be something of a referendum on the exact breakdown of the agreed-upon $4 trillion figure, meaning officials should come to a deal that would raise the debt ceiling enough to push it past next November.
That would mean a debt-ceiling hike of around $2 trillion. Republican lawmakers have said they will only raise the limit that much in a deal that included more than that amount in spending cuts.
Zandi also appeared to side with Democrats on what seems to be some of the key sticking points – asserting that he believed tax credits and deductions could be eliminated to help reduce the deficit and that “from an economic perspective” tax expenditures and government spending were no different.
In fact, Zandi said he believed enough corporate tax breaks could be eliminated to both reduce rates and pay down some of the deficit.
Democrats are currently pushing to eliminate certain credits and deductions used by the oil-and-gas industry and tax breaks for corporate jets, among other so-called tax expenditures, in any debt-ceiling deal.
But Senate Minority Leader Mitch McConnell (R-Ky.) declared on Monday, before meeting with the president, that tax increases should be off the table, while also pushing for a cap on future spending.
For his part, Zandi said he was a fan of mechanisms that would implement across-the-board deficit cuts if certain budget targets are not met in the next several years. But he said that sort of trigger should employ both spending cuts and the scrapping of tax expenditures.
“It’s not necessary,” Zandi said, but “a budget mechanism would be nice.”
The economist also blamed the recent underwhelming economic growth on cyclical forces, such as the spike in oil prices and the Japanese earthquake.
On the heels of the Labor Department’s disappointing jobs numbers for May, Zandi also said that certain stimulative measures could be needed if the economy is only adding around 125,000 jobs a month later in the year.
Those measures might include an extension of the current payroll tax holiday for employers and extra aid to state and local governments, Zandi said, though he was also skeptical of the benefits of extending payroll tax relief to employers.
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