Failure to Extend Tax Cut Would Hurt U.S. Growth, McCarthy Says: Tom Keene

Failure to extend a payroll tax cut and long-term benefits for unemployed Americans into 2012 may reduce economic growth next year by as much as 1 percentage point, economist Ward McCarthy said today.

The House of Representatives returns to Washington today to either change a Senate bill extending the tax cut through February or seek a House-Senate meeting to resolve differences. The showdown is the latest in a series of standoffs, including a debt-ceiling debate that led to a credit-rating downgrade in August and caused consumer and business confidence to sink.

“If congress fails us again, then we could suffer similar consequences,” McCarthy, chief financial economist at Jefferies & Co., said on Bloomberg Radio’s “Under Surveillance” with Tom Keene. “Part of that are the direct effects but part of that also are the psychological effects.”

Following Standard & Poor’s downgrade of the U.S. in early August, sentiment plummeted and economic data, including payrolls and manufacturing, pointed to an economy on the verge of another recession. The recovery regained momentum in ensuing months, helping gross domestic product expand at a 2 percent annual rate in the third quarter, up from 1.3 percent in the previous three months.

“On both the monetary- and the fiscal-policy side we should continue to try to provide stimulus to the economy, so we can get the unemployment rate down and get people back to work,” said McCarthy. “I do think the Fed will continue to be aggressive.”

House Bill

The latest version of the bill passed by the Republican- controlled House would cut the maximum length of unemployment benefits to 79 weeks from 99 weeks and impose a gradual reduction to 59 weeks.

Economists surveyed by Bloomberg News in early December forecast the world’s largest economy will grow 2.1 percent in 2012 after expanding 1.8 percent this year.

“Typically the economy grows as fast as consumers are willing to spend, and consumers are strapped right now,” said McCarthy. “It’s going to take some more time, probably a three-year time horizon” before the economy fully recovers, he said,

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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