“The best policy is clearly to enact some sort of stimulus today and also make a long-term and credible commitment to deficit reduction over the long haul,” said Adam Looney, senior fellow at the Brookings Institution and a former economist in the Obama White House. “If you look at the short-term stimulus, the high-end tax cuts don’t have much of an effect on the near-term economy, but they have a lot to do with deficit reduction.”
Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former Obama administration economic adviser, argues that this opportunity to stabilize the nation’s long-term borrowing is too important to pass up, even if it puts a bit of a drag on economic growth in the short term.
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‘Fiscal cliff’ calculator’: What it will mean for me
“If all you cared about was very near-term growth, then kicking the can and adding some stimulus might sound good to you,” he said. “But we actually have an opportunity to improve our fiscal outlook without hurting the near-term economy, and we shouldn’t let it slip by.”
Another potential risk of a deal that involves only raising taxes on the wealthy and freezing tax rates for the middle class is that it might not include raising the debt limit. Republicans say they will agree to a plan to raise the debt limit only as part of a broad agreement on deficit reduction — not simply as part of a deal to extend the middle-class tax cuts.
Obama, addressing business leaders Wednesday, warned against this approach, reminding them of what happened when Republicans demanded deep spending cuts in exchange for raising the debt ceiling in the summer of 2011.
“Most of you were involved in discussions and watched the catastrophe that happened in August of 2011,” Obama told the business leaders. “There’s no uncertainty like the prospect that the United States of America, the largest economy that holds the world’s reserve currency, potentially defaults on its debts, that we give up the basic notion that the United States stands behind its obligations. We can’t afford to go there again. And this isn’t just my opinion. It’s the opinion of most of the folks in this room.”
Michelle Girard, an economist at RBS, said a deal that avoids the fiscal cliff but does not resolve the debt limit will have limited benefit.
“Any agreement that would get us over the fiscal cliff has to include a debt-limit increase. Otherwise, we’re going to be right back with a similar type of situation in another two months,” she said. “In that sense, the market will continue to be skeptical of promises of future agreements. It doesn’t really remove any uncertainty in the near term.”
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