ATHENS, Ga. — As federal lawmakers fret over how to reach a spending agreement before plunging over the “fiscal cliff” – a slate of spending cuts and tax increases set to take effect Jan. 1 – Wells Fargo Senior Economist Mark Vitner warned Monday the economy might also crash into a wall.
The shadow of the cuts, which the Congressional Budget Office warned could lead to another recession, means businesses are acting cautiously with plans for growth, Vitner told members of the Georgia Legislature meeting at the University of Georgia for a briefing before the Jan. 14 start of the 2013 legislative session.
Vitner used the analogy of driving through a town’s known speed trap and the motorists don’t know the speed limit. In that case, it only makes sense to hedge closer to 15 mph than 35.
After the motorists are out of that danger, though, it also makes sense for them to speed back up, he said.
“Once the fiscal cliff gets into the rearview mirror, I think we’re back at 2.5 percent (economic growth), which is what we were at before,” he said. “Maybe it will be even higher because housing is starting to pick back up.”
The economist agreed with U.S. Sen. Saxby Chambliss that President Obama will win out in the negotiations and let the tax cuts pushed by President George W. Bush expire for those making more than $250,000 each year. If Obama and the Republicans in the House of Representatives don’t reach an agreement, Vitner predicted, two rounds of credit-rating cuts are coming for the nation.
Leaders need to solve the debt crisis in coming years, he said.
The higher the deficit-to-spending ratio gets, he said, the greater chance of long-term stagnation. It isn’t something Vitner thinks should occur overnight, though.
“If we were to balance the budget tomorrow ... it would be horrendous,” he said.
The stimulative monetary policies being exercised by the Federal Reserve gave him pause and reason enough to predict inflation creeping up.
“It’s not going to be crazy, bring-a-wheelbarrow-to-the-grocery-store inflation, but it will be a bit more than people are used to, which can be a real problem in an economy where we’re just not growing too fast,” Vitner said.