Economist Zandi: 15 percent chance of going over fiscal cliff

Economist Mark Zandi of Moody's Analytics said Tuesday he believes there is a 15 percent chance Congress will let the country go over the "fiscal cliff" after the November election, leading to a new recession.

Zandi, who was an adviser to Sen. John McCain's (R-Ariz.) 2008 presidential campaign and later backed the 2009 Obama stimulus package, said there is a 30 percent probability that Congress will simply extend current tax and spending policy to avoid the cliff. 

In a report published by Moody's Analytics, Zandi gives a greater than even chance — 55 percent — that Democrats and Republicans come together to form a compromise.

The fiscal cliff refers to a series of automatic policy changes set to go into effect in early 2013 in which the Bush-era tax rates expire, as do lower estate and gift taxes. Automatic cuts of $109 billion are set to hit, doctors payments will be slashed by Medicare and the Alternative Minimum Tax will affect more middle-income taxpayers. On top of this, a temporary payroll tax cut is scheduled to end.

If the nation goes over the fiscal cliff, Zandi predicts it will result in a 2.8 percent decline in real gross domestic product and cause unemployment to increase from 8.1 percent to 9.2 percent.

He warns that the rate could go much higher given the fragility of the economy.

Zandi notes that in the second scenario, of extending current policy, there will be no improvement on the long-term finances of the United States, and credit agencies, including Moody's, would likely downgrade the U.S. debt rating. 

Moody's Analytics is a separate division from Moody's credit rating agency.

The U.S. economy is already suffering the effects of the fiscal cliff as businesses face uncertainty, the Federal Reserve said this month.

This spring, Sen. Patty Murray (D-Wash.), a member of leadership, threatened to go over the cliff temporarily to force Republicans to accept a deficit deal that includes tax increases. 

She argued that once the Bush era rates end, Republicans will not be violating the Americans for Tax Reform no-tax-increase pledge as keeping the higher taxes on the wealthy in place would not be technically an increase at that point. 

Some have seen Murray's remarks as a hardball negotiating tactic.

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