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Harvard University Economist Martin Feldstein on the risks of a recession even if the fiscal cliff is avoided.
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Meanwhile if you think we've seen the worst of this economy think again another recession could be just around the corner regardless.
The congress solves the fiscal -- crisis or not one of the country's top economist Martin Feldstein of Harvard University joins me now it's great to have you on the show.
Good to be back with you.
Are you war with Ben Bernanke -- -- economic club and Yorker went to questioners talking to mr.
Bernanke he is been very vocal.
I had his call for congress to fix the fiscal -- you're a little more negative.
Than your colleague a mr.
Bernanke why is that.
Well what he said was in this was correct that if we go -- the fiscal cliff.
The economy woods dropping to a recession.
And that the -- does not have the ability to stop that.
Now the question is what if we don't go over the fiscal cliff but some of the other things that are being talked about like the president's plan what would happen then.
If the president's plan.
Raising taxes on high income individuals.
Cutting deductions for high income individuals.
Raising the corporate tax rate.
A long list of that sort.
Eliminating their payroll tax holiday.
That would take about 2%.
Out of GDP next year.
And we're struggling to reach 2% so we would basically be on the edge of an economic downturn.
So far we're gonna we're we're -- better why can't you say well recession I don't know what happens right now we're we're sure to go into a recession if we go over the cliff and don't turned around quickly.
But even if we don't -- if we have something like the yeah.
Obama plan.
We could easily slide into recession.
It's not a guarantee it's not nearly as much as going over the -- But it basically would offset the very weak growth less than 2% growth that we're having now.
Do you agree with the FOMC's estimate of GDP growth for 2013.
Because again Ben Bernanke -- their very optimistic about the economy they say tuna -- 3%.
For next year -- means you grew without overall assessment of the economy tickets.
I I think it's possible but I think it's hard to see how we get there.
I mean this year from from the end of last year to the end of this year we're going to be under 2%.
And we got to balance recently because.
Defense spending at the end of the fiscal year.
Perked up a little bit.
Exports were surprisingly strong would you look ahead to 2013.
Where's the strength gonna come from.
-- souls have maintain their spending only by driving down they're saving rate.
To just a little over 3%.
So there's not a lot more to come there and household incomes are falling in real terms -- lower now than a year ago.
So I think it's going to be very hard even without a and new fiscal.
Hit to the economy even without that it's going to be hard to have 2% growth next few you know -- -- you mentioned the payroll tax cuts it seems that that no one really wants to extend that at this point that that is gonna.
I'd go way on January 1.
We think that's right you what -- that data GDP.
Well it's a big number it probably about three quarters of a percent.
Permanently.
Coming out of the after tax incomes of households -- most of that would be subtracted from spending.
So what may be 1% even -- pay when you got 2% growth -- JP in this country it it couldn't 1% of the consumers everything that this economy.
Well as 70% of this economy and so if you do that and you do some other things in the name of avoiding the fiscal cliff.
Boy we are gonna be right on the edge of an economic downturn.
-- let me ask you something do you advise.
Ronald Reagan.
If Ronald Reagan were alive today and he was facing the fiscal -- what do you think he would do.
-- -- did in 1986.
He sat down with Tip O'Neill.
And they agreed.
That they could have very substantial reduction in tax rates across the board.
But particularly middle and high income tax rates and offset that was based broadening.
And the result of that was taking the top rate down from 15% to 28%.
28%.
The impact of that was to have significant increase in taxable income.
People.
Choosing to take more of their compensation in the form of taxable income cutting back on there.
Tax expenditures on their deductions and exclusions.
And working more so I think that's what Ronald Reagan would do if he were here now -- While certainly leadership is going to be act case all of this out -- -- stating that they see you for coming on the show -- to -- -- Good being -- you.
