Transcript: Testimony of Dr. Mark Zandi on the fiscal cliff before the Joint Economic Committee
Edited by Jenny Jiang
Testimony of Dr. Mark M. Zandi, Chief Economist at Moody’s Analytics, on the fiscal cliff before the Joint Economic Committee on Dec. 6, 2012:
Thank you, Senator. I want to thank you, Dr. Burgess, and the rest of the committee for the opportunity here. It’s really an honor to be with Kevin, a good friend of mine.
Let me say that the remarks are my views and they don’t represent the views of the Moody’s Corporation. They’re my personal views.
Lawmakers have to resolve – to quickly resolve 3 issues.
First is the fiscal cliff – scaling back the cliff so that it’s manageable.
Second, raising the Treasury debt ceiling, which as you know is becoming an issue fairly soon.
And third, achieving long-term fiscal sustainability. That is, deficit reduction, tax revenue increase, spending cuts that allow the nation’s debt to GDP ratio to stabilize by the end of the decade.
Those three things need to be done now.
In terms of the fiscal cliff, by my calculation, if policy is unchanged and we go over the cliff and there’s no change after that, the hit to GDP in 2013 will be 3.5%. So the economy is growing 2%, subtract 3.5%, and that is a severe recession.
I think the CBO [Congressional Budget Office] and other modelers like myself are probably underestimating how severe it would be because confidence is very, very weak and I think businesses, consumers, and investors would pull back, and it’s unclear how the Federal Reserve will respond to this. So we need to scale back the cliff.
I think at the very minimum, the cliff needs to be scaled back so that it’s only a hit to GDP of 1.5% at most. That, in my view, is the fiscal speed limit.
If you have cuts and tax increases that have more of a drag than that, then it becomes counterproductive and that the economy will weaken and the budget situation will deteriorate.
We’re seeing the limits of fiscal drag in Europe. Currently, they are pulling back on some of the fiscal drag.
I would argue that we should smooth in the fiscal drag even more. I would make policy changes so that next year the hit to GDP is half the speed limit – something like 0.6% to 0.7% of GDP. That would be consistent with extending the current emergency UI [unemployment insurance] program and some form of the payroll tax holiday.
In terms of the debt ceiling, that – at minimum – needs to be increased until the other side of the election. It would be nice to extend it past the next presidential election. It would be even nicer than that to get rid of it altogether.
You know, I think there’s an anachronistic law that is a problem – creates a great deal of uncertainty. And we can see, it could do a lot of damage to the economy.
There’s a lot of reasonable proposals that are being considered to eliminate the debt ceiling and I think they should be carefully considered.
But this is, at a very minimum, we should push this to the other side of the election. We don’t want to address the debt ceiling on a regular basis. It’s doing a lot of damage to confidence.
And most importantly, in terms of fiscal sustainability, by my calculation, we need deficit reduction in the next 10 years of about $3 trillion. And to get there, I think a balanced approach would be:
* $1.4 trillion in tax revenue – half of which would come through tax reform, half of which would come through higher tax rates;
* $1.2 trillion in cuts to programs – Medicare, Medicaid, Social Security and other budget items;
* And that would leave you with approximately $400 billion in net interests savings.
So if you do the arithmetic $1.4 plus $1.2 plus $400 billion gets to $3 trillion.
I think it is appropriate to throw into the mix the spending cuts that were implemented as part of the Budget Control Act – the caps to discretionary spending, which are worth about $1.1 trillion.
If you add it all up, if you go down the path that I just articulated, the spending cuts would be to revenue increases would be 2 to 1.
I think that’s appropriate and I think that’s very consistent with Simpson-Bowles. I think that’s in the spirit of Simpson-Bowles and would be a good goal to achieve. And I think it’s doable, both from an economic perspective and a political perspective.
Finally, let me say you’ve got to nail this down. Uncertainty is killing us. It’s hurting business investment. You’ve shown a very nice chart about that.
It hasn’t affected hiring and layoff decisions yet but it will. If we get to next year and we get to February and we haven’t nailed this down, the economy will begin – and investors will bail – and the economy will begin to struggle.
But if you address this problem reasonably gracefully, I think the fundamentals of this economy are in very good shape. We’ve made a lot of progress since the Great Recession, and if we nail this down, we’ll be off and running, and we’ll create a lot of jobs and unemployment will be moving south in a very consistent way.
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