Sandy, the Atlantic superstorm that hit the Northeast U.S. last week, may lead to a congressional compromise that would avoid the fiscal cliff, said Jeremy Lawson, senior U.S. economist at BNP Paribas SA.
The U.S. is facing more than $600 billion of federal spending cuts and tax increases that will kick in automatically at the start of next year unless Congress acts.
Congress created the spending cuts in August 2011 as part of an agreement to raise the federal debt ceiling and reduce future budget deficits. Hitting the cliff would probably reverse U.S. economic growth and put the world’s largest economy back into recession, the nonpartisan Congressional Budget Office said on Aug. 22.
“Neither party really wants to see tax increases,” Lawson said in an interview with Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance” today. “Hurricane Sandy provides maybe a mechanism by which they can sort of fall back, compromise, find a way to sort of push the cliff off.”
Lawson also said that “hopefully,” once the election results are clear, Congress and the president can reach a longer-term agreement over deficit and debt reduction.
“Sandy may provide a soothing balm to political discord over the fiscal cliff regardless of who wins the presidency,” Lawson said in an Oct. 31 report. “The hurricane provides cover for both Republicans and Democrats to compromise, avoid the fiscal cliff, and perhaps even provide aid to states to repair damaged infrastructure.”
“The worst thing that can occur is if we just have a cliff event every year,” Lawson said on Bloomberg TV today. “So for example, we get beyond 2013, and we have another fiscal cliff event in 2014, that’s where a grand bargain comes into play, and to get a grand bargain the president needs to lead and that’s what we really need from each candidate, depending on who wins.”
The negotiations over deficit and debt reduction have highlighted the parties’ differences over the size and role of the government, without producing an accord.
Republicans have said they’ll resist tax increases and defense cuts to avoid hurting the economy. Democrats support increased taxes for high earners. President Barack Obama has said he will veto any bill that extends the tax cuts for high-income taxpayers. His Republican challenger Mitt Romney has said he plans a cut in taxes for everybody, paired with unspecified curbs on tax breaks.
Steve Schmidt, chief strategist for Republican presidential candidate John McCain’s 2008 campaign, said it is “impossible to predict” what impact the hurricane will have on the presidential race or on the broader political debate over government spending. He called any connection between the disaster response and broader Republican criticism of the size of government “specious.”
Sandy, which moved along the East Coast for five days before slamming into the mid-Atlantic coast on Oct. 29 caused as much as $50 billion in economic damage, according to Eqecat Inc., a provider of catastrophic risk models. The U.S. death toll now stands at more than 100.
The storm may reduce gross domestic product by as much as 0.2 percentage point this quarter, said Mark Vitner, a senior economist at Wells Fargo & Co. in Charlotte, North Carolina.
The U.S. economy expanded at a 2 percent pace in the third quarter, to an inflation-adjusted $13.6 trillion, after climbing 1.3 percent in the prior quarter.