MyCentralJersey.com

Economists Warn Going Over The 'Fiscal Cliff' Could Spark Recession

Risk of recession if no deal in Washington

MyCentralJersey.com — Wednesday, December 19, 2012

By Michael L. Diamond

Samia Bahsoun (second from right), CEO of S2 Associates in Spring Lake, speaks at an Asbury Park news conference organized by New Jersey Citizen Action. With her are (left to right) Eileen Shrem, an insurance agent from Bradley Beach, Laura Cartwright, a district representative from U.S. Rep. Frank Pallone's office, Corinne Horowitz, a business rep with the New Jersey Main Street Alliance, and Peter Travers, an organizer with New Jersey Citizen Action. / BOB BIELK/STAFF PHOTOGRAPHER
Samia Bahsoun (second from right), CEO of S2 Associates in Spring Lake, speaks at an Asbury Park news conference organized by New Jersey Citizen Action. With her are (left to right) Eileen Shrem, an insurance agent from Bradley Beach, Laura Cartwright, a district representative from U.S. Rep. Frank Pallone's office, Corinne Horowitz, a business rep with the New Jersey Main Street Alliance, and Peter Travers, an organizer with New Jersey Citizen Action. / BOB BIELK / STAFF PHOTOGRAPHER

Think careening off the fiscal cliff would be a perfectly fine alternative to the budget prescription your side opposes?

Don't.

Not only would the economic recovery stall from a sharp rise in taxes and cuts in spending, but also it would be further weighed down by fear and uncertainty among businesses and consumers, economist Joel Naroff said.

"That's the real risk in all of this," Naroff said. "It's not just the numbers from the cuts and the tax increases."

President Barack Obama and House Republicans traded volleys again on Wednesday, labeling each other as the obstacle to reaching an agreement that would head off the severe austerity measures set to begin in January.

It brought them a day closer to the proverbial "fiscal cliff." Workers' income taxes would rise to Clinton-era levels. Government spending would be slashed by almost $500 billion. Defense contractors would face cutbacks. Doctors would be reimbursed less from Medicare. The will-they-or-won't-they-reach-a-deal cycle would continue.

And the economy could tumble into another recession, mirroring missteps the federal government made in the 1930s that prolonged the Great Depression, Naroff said.

At issue is how to rein in the federal deficit, which has topped $1 trillion for four consecutive years and forced the government to borrow money to fill the gap.

Obama during the presidential campaign said he wanted to maintain current tax rates for the middle class and raise them on single taxpayers with annual income of more than $200,000 and married taxpayers with annual income of more than $250,000. He also supported ending some corporate tax breaks.

Republicans have opposed his plan. They want to maintain existing tax rates and instead reduce the deficit by cutting spending, in part through reductions in entitlement programs such as Social Security and Medicare.

On Wednesday, New Jersey Citizen Action, a consumer advocacy group, urged lawmakers to go with Obama's position. Business owners at a news conference in Asbury Park organized by the group said those measures would allow the government to make investments in the nation's roads, schools and bridges, keep money in the pockets of the middle class and spark consumer demand.

"What will not get us (to a stronger economy) is to continue catering to the ultra-rich and cutting social programs," said Samia Bahsoun, chief executive officer of S2 Associates International, a telecommunications consulting firm in Spring Lake.

Not everyone thinks the nation can simply return to the 1990s tax rates and emerge unscathed.

"It was a boom economy back then," said Philip Kirschner, president of the New Jersey Business and Industry Association, a business lobby group. "Here the economic mantra has always been, don't raise taxes during a recession or weak recovery like this."

"To think you're going to take hundreds of billions of dollars out by raising taxes and not have an impact is just naive. It will have an impact, and I think a lot of people want to avoid that," Kirschner said.

Both sides agree that the uncertainty surrounding the deficit talks has consumers and businesses, not so much in a holding pattern, but reluctant to take risks. It caused Wells Fargo economists to forecast the nation's economic growth would be just 0.7 percent for the fourth quarter.

Yet if the end result of the posturing isn't an agreement, the economy could be in for a prolonged slump, Naroff said.

The good news?

"If we reach the fiscal cliff, negotiations will definitely continue because the public will go bananas," Naroff said.

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