For Immediate Release
October 26, 2012
Contacts: Neil Tickner, 301 405 4622 or email@example.com
UMD Study: Fiscal Cliff Could Trigger Deep Recession, Fear of Cliff Has Cut GDP Already
COLLEGE PARK, Md. - The so-called "fiscal cliff" has already begun dampening the U.S. economy - even before it officially kicks in - and by year's end will have cut 2012 GDP an estimated six-tenths of one percent, says a new study conducted by researchers at the University of Maryland's Interindustry Forecasting Project (Inforum).
The study, called Fiscal Shock: America's Economic Crisis, is one of the first to look beyond the first year effects of the combined federal spending cuts and tax increases. It projects an escalating impact into 2014 and beyond, as "multiplier" effects of fiscal contraction kick in.
At its worst, the study says that, compared to a baseline forecast of moderate growth, six million jobs could be lost. The unemployment rate could reach 11 percent, and real personal income could drop nearly 10 percent.
"The fiscal cliff could produce a steeper growth drop than other predictions suggest," says study author Jeff Werling, Inforum executive director at the University of Maryland. "One of the most important lessons learned since the financial crisis is that when consumers are bent on reducing debt burdens, and short term interest rates are stuck at zero, then fiscal multipliers are particularly large. We saw this with the positive effect of the stimulus program through 2010, and we certainly have noticed this with the disastrous austerity programs across Europe."
The study, conducted by Inforum with the support of the National Association Manufacturers, predicts the likely outcome of so-called "Sequestration" - automatic, across-the-board, federal defense spending cuts required by Congress, along with the expiration of a number of tax cuts.
"The mere anticipation of the fiscal cliff has already hurt the economy, and the meter is running," Werling adds. "Going over the cliff would completely undermine the fragile recovery and the effect would snowball at least through 2014. Full recovery could take up to a decade. Our numbers suggest that failure to reach a resolution will have a deeply punishing effect on the nation."
Key study findings:
Werling urges a so-called balanced approach to avoiding further pressures as the economy nears the fiscal cliff. The key, he says, is to absorb cutbacks more slowly.
"It is clear that resolving the federal deficits will require both significant discretionary spending cuts and revenue increases that accompany tax reform," Werling explains. "Ultimately we will have to restructure entitlement programs as well. But such measures can and must be accomplished steadily and gradually over time so as not to unduly harm near term economic growth."
He adds: "Instead, we have engineered a fiscal train wreck that would have enormous consequences to economic growth now and into the future. We need to change course as soon as possible."
Inforum was founded 45 years ago in the Department of Economics and is dedicated to improving business planning, government policy analysis and the general understanding of the economic environment.
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