Simpson, Bowles See Recession, Inflation Without Budget Action

U.S. lawmakers must take steps to address $7 trillion in “economic events” next year or the economy may go into recession, the co-chairmen of President Barack Obama’s fiscal commission said on CNN.

Automatic tax changes and cutbacks to federal spending mandated by Congress as part of last year’s agreement to raise the federal debt limit may affect as much as 2 percent of the U.S. gross domestic product next year, co-chairman Erskine Bowles said on CNN’s “Fareed Zakaria GPS.”

Economic events occurring next year include the expiration of tax cuts instituted by former President George W. Bush and changes to the Alternative Minimum Tax and payroll tax deductions. The automatic spending cuts, mandated by Congress as part of an agreement last year to raise the federal debt limit, are “senseless, mindless,” said Bowles, who was chief of staff to former President Bill Clinton, a Democrat.

“If we have a negative effect on 2 percent of GDP, we’ll be right back in recession,” Bowles said. A report issued May 22 by the Congressional Budget Office said the U.S. was approaching a “fiscal cliff” that may lead to recession without action by federal lawmakers.

Without congressional action, increased inflation and interest rates will hurt the middle class, said former Representative Alan Simpson, a Wyoming Republican and co- chairman of the committee.

“You know who will get hurt the worst when interest rates go up and inflation kicks in? The little guy,” Simpson said in the interview, to be broadcast today.

‘Ripped to Shreds’

The Simpson-Bowles plan issued by Obama’s fiscal commission advocated a series of spending cuts and tax increases to balance the budget. The plan was never adopted nor openly endorsed by the president. The House voted down the plan, with Republicans saying it had too many tax increases and not enough spending cuts.

Obama couldn’t have provided more public support for the plan or “he would have been ripped to shreds” by Republicans and his own Democratic Party, Simpson said.

“If he’d have embraced it, the Republicans en masse in the House would have rejected it,” while Democrats would have criticized changes to Medicare, Simpson said. “So either way, he’s going to get hammered. So he is playing the waiting game.”

Lame Duck

Simpson and Bowles are currently working with 47 senators of both parties and members of the House to reach an agreement on a new plan to improve the U.S. economy, Bowles said. An agreement is possible during the lame duck session following the November elections, he said.

“It doesn’t have to be exactly what the Simpson-Bowles plan has but it’s going to be a balanced plan,” Bowles said. “If we don’t, then I think you will see the markets really take an adverse look at the country. I think you’ll see us lose another downgrade in our credit.”

Last year’s Budget Control Act, which followed debate over lifting the federal debt ceiling, set up an automatic spending- reduction process for across-the-board cuts called sequestration, which would be made equally from defense and non- defense spending beginning in 2013.

Sequestration is would cut $1.2 trillion over nine years from the federal deficit. About $110 billion will need to be sequestered next year, with half from defense accounts and half from all other spending, unless Congress and the president agree to stop it.

To contact the reporter on this story: Carol Wolf in Washington at cwolf@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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