With economic growth still sluggish, efforts to rein in federal deficit spending should be delayed until the U.S. is better positioned to handle a contraction in government spending, according to Citigroup Inc.’s Peter Orszag.
President Barack Obama and the Republican majority in the House of Representatives, both returned to office by voters yesterday, must now address more than $600 billion of federal spending cuts and tax increases that will kick in automatically at the start of next year unless Congress acts, a problem known as the fiscal cliff.
“What we should be doing is another round of infrastructure spending and tax cuts coupled with deficit reduction,” Orszag said in an interview today on Bloomberg Television’s “Surveillance” with Tom Keene and Sara Eisen. “We can at least avoid doing too much harm by making sure any fiscal austerity we enact, it doesn’t really take effect immediately.”
Orszag, also a Bloomberg View columnist, is vice chairman of corporate and investment banking at Citigroup and is a former director of the Office of Management and Budget in the Obama administration.
The 1983 bipartisan agreement on reforming Social Security, which raised the retirement age while also pushing out the increase until 2000, should serve as a model for fiscal agreements now, Orszag said. “That’s exactly what we want today,” he said. “No immediate fiscal austerity; do it with a delay.”
Congress created the spending cuts in August 2011 as part of an agreement to raise the federal debt ceiling and reduce future budget deficits. Falling off the cliff would probably reverse U.S. economic growth and put the world’s largest economy back into recession, the nonpartisan Congressional Budget Office said on Aug. 22.
The negotiations over deficit and debt reduction have highlighted the parties’ differences over the size and role of the government, without producing an accord.
Republicans have said they’ll resist tax increases and defense cuts to avoid hurting the economy. Democrats support increased taxes for high earners. President Barack Obama has said he will veto any bill that extends the tax cuts for high- income taxpayers.
“If you do too much spending cuts and too much revenue raising” it will put continued economic growth at risk, Orszag said.
Most estimates of the impact of an agreement on the fiscal cliff suggest it would slow expansion by 1 percent to 1.5 percent of the U.S. gross domestic product, Orszag said.
“That’s probably not sufficient to undo the progress we’ve been making on housing and the momentum the economy has,” Orszag said. “It would be better not even to do that. It would be better to put in place specific gradual steps that take effect not in 2013.”
The economy had been showing signs of improvement heading into the election. The U.S. economy expanded at a faster-than- forecast 2 percent annual rate in the third quarter, up from a 1.3 percent pace for the period from April to June, the Commerce Department said Oct. 26.
Housing starts climbed in September to the highest level in four years. With the latest gains, companies now have added 4.97 million workers to payrolls since the economy stopped hemorrhaging jobs in February 2010. Retail sales in August and September registered the biggest back-to-back gains in almost two years. The Standard & Poor’s 500 Stock Index is up 75 percent since Obama took office.
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