While federal lawmakers fret over how to reach a spending agreement before
plunging over the "fiscal cliff" -- a slate of spending cuts and tax hikes 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 prior to 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.
But once you're out of that danger, it also makes sense 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," Vitner said. "Maybe it will be even higher because housing is starting to pick back up."
The economist also 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 for the United States.
Leaders need to solve the debt crisis in coming years, he said.
"At best, we have four to five years to deal with that issue. Maybe three or four," he said.
The higher the deficit-to-spending ratio gets, the greater the chance of long-term stagnation. But it also isn't something Vitner thinks should happen overnight.
"If we were to balance the budget tomorrow ... it would be horrendous," he said.
The stimulative monetary policies being exercised by the Federal Reserve also 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.
The ongoing issues with European economies and the euro also will contribute to sluggish growth, he said, as they have less money to invest. But Georgia, Vitner added, is fortunate that its major transcontinental trading partners are in Asia.
Distributed by MCT Information Services
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