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Ameriprise Financial, Inc. : Q&A with Sr. Economist Russell Price on the deal to avoid the fiscal cliff

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01/03/2013 | 12:57am CEST

01/02/2013Russell Price

Does the fiscal cliff legislation passed by Congress provide some certainty with regards to the economy for both consumers and businesses?

Russell Price: This was a disappointing deal no doubt, but it is at least better than no deal at all. It removes a lot of the uncertainty as it pertained to potential near-term hits to economic activity, and that should be a benefit to business investment spending and consumer confidence over the near-term. However, the sharp discord that has developed in this process creates new concerns for what may yet come under the pending debt ceiling debate. I don't think we will see consumer or business confidence improve nearly as much as we could have had we seen a more balanced deal. 

If Congress had set in place the framework for a comprehensive long-term deal on the federal budget, it could have been a strong economic stimulus in and of itself. Business and consumer confidence could have been significantly enhanced, even by an agreement in principle, but this opportunity seems to have been flatly squandered.

Does the fiscal cliff deal do anything to help the economy?

Price: The economic implications of this deal are fairly consistent with my prior economic expectations. I still expect activity will start the year very weak as consumers readjust to higher payroll taxes, but we should see momentum slowly build throughout the year. 

Overall, combining the deal that was reached, with expectations for some modest spending cuts to eventually be implemented under the delayed sequestration, I still see fiscal policy considerations as likely to shave about 1.0 percent from U.S. GDP this year. Overall, I see total real GDP growth in a range of 2.0 to 2.25 percent. Growth prospects could have been materially better if a rational long-term budget deal had been reached.

I do not see the increase in personal income tax rates for higher-income Americans as likely to have a material impact on economic activity.

Even though lawmakers got some things done, they still punted on a few items. Are we going to be looking at another "fiscal cliff" in two months when the debt ceiling needs to be raised?

Price: Unfortunately, this process is far from over. The cliff deal averted the economic consequences of a lurch forward in income tax rates, but the manner in which it was handled, with virtually no real spending cuts, almost guarantees a nasty fight over the debt ceiling. It simply did not have to be this way.

It may seem counterintuitive, but a commitment to material long-term government spending cuts could have a very positive benefit on economic growth prospects. We could see fiscal problems grow materially direr in the next several years unless we take greater care to adjust the budget forecast now.

What are the prospects that a rational, long-term deal actually gets done? 

Price: We made some modest headway on the revenue side of the equation in this cycle. And we should yet see some additional revenue enhancements from cuts in deductions and credits and the like. The real heavy lifting still left on the table, however, is spending cuts. Unfortunately, Washington does not have an encouraging track record when it comes to the type of spending reforms that are an absolute necessity under current budget projections.

Ultimately, I think we will see some further progress on the deficit. However, the target for cuts of $4 trillion over 10 years that most forecasters, and indeed even President Obama, once seemed to endorse, may now be an overly optimistic goal. 

Will this have an impact on Europe and Asia?

Price: The deal that was reached does not do anything to materially hinder U.S. economic prospects over the near-term in my view, but neither does it do anything to enhance growth prospects either. The slow recovery we seem to be witnessing in China, Europe, and many other regions of the world should thus continue.

Is there any good news, other than this package, that you think will arise in the foreseeable future?

Price: There are certainly a few tangible positives that should be noted in this deal. It makes the Bush-era tax cuts permanent for most income levels, and it provides a permanent fix for the inflation indexing of the Alternative Minimum Tax (AMT). 

Additionally, if it is at all possible to find a positive note out of all our current government budget problems, it is that the necessity of crafting a long-term solution that reduces our government deficits over time is now front and center. Policymakers know it, as do most Americans. Government debt and deficit problems are one of the last vestiges of the Great Recession still hindering our ability to resume a solid long-term phase of expansion. If we make the proper long-term adjustments now, the economy could be on the verge of a sound, long-term recovery.

Are there other potential hindrances to economic growth on the horizon, other than the debt ceiling debate?

Price: Unfortunately, there are a number of important issues that were simply kicked down the road by the cliff agreement. The sequestration cuts called for under the Budget Control Act were delayed by two months, and thus these cuts now seem destined to become part of the debt ceiling debate. 

We were hoping for a fairly decisive battle in the war over long-term fiscal policy but what we got was just a costly skirmish that still leaves a lot of issues unresolved. 

Important Disclosures:

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

© 2013 Ameriprise Financial, Inc. All rights reserved.

Kathleen McClung
Manager, Media Relations
[email protected]

Q&A with Sr. Economist Russell Price on the deal to avoid the fiscal cliff
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