President Obama’s tax-cut compromise with Republicans should provide a powerful boost to the economy next year by putting a lot of extra cash in consumers’ pockets, and was cheered on Wall Street on Tuesday.
But global investors, wary that the deal would add nearly another $1 trillion to the national debt, drove up interest rates on worries about the $1.3 trillion deficit further widening under the deal.
“It will be good for the economy next year,” said Mark Zandi, chief economist at Moody’s Analytics, one of many economists who called on Congress to extend the Bush tax cuts and emergency unemployment benefits to prevent a retrenchment in the economy at the turn of the year.
Mr. Zandi estimated that the deal could cause an acceleration of growth to 4 percent next year and help create 1.6 million jobs, drawing the unemployment rate down from 9.8 percent to 8.5 percent by the end of the year.
John E. Silvia, chief economist at Wells Fargo Securities, said the deal’s two-year extension of the Bush tax cuts should “reduce uncertainty” among investors and businesses about the level of taxes in the next two years, enabling them to plan ahead to hire new workers and make investments.
Meanwhile, the extended unemployment benefits and tax cuts for individuals — including a $120 billion cut in Social Security taxes paid by people earning less than $105,000 — will provide “a much-needed boost to personal incomes” and should boost consumer spending, he said.
Wall Street initially applauded the deal, with stocks rising across the board at the open of New York trading. But by the end of the day, stocks had fallen back close to their previous levels.
The prices on Treasury bonds fell sharply, however, in anticipation of the onslaught of new debt created by the deal, causing the yields on 10-year Treasury notes to jump to 3.13 percent from 2.93 percent.
The prospect of further exploding the deficit is “utterly exasperating,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, especially as it comes on the heels of recommendations last week by Mr. Obama’s own deficit commission for a $4 trillion reduction in future deficits to stave off a debt crisis.
“This feels more than a bit surreal,” she said. “There is probably a legitimate case to be made that the economy needs more stimulus now,” she said, but “the critical objective is to pair any stimulus for the short-term with a credible plan to reduce the debt in the medium- and long-term.”
Peter Schiff, president of Euro Pacific Capital, said the plan will lead to higher deficits and inflation while doing “nothing to help the economy” because an excess of debt is the root cause of the economy’s collapse.
“While other countries consider ways to live within their means, Washington is intent on devising ever more creative ways to delay the day of reckoning,” he said. “Unfortunately, by expanding government and increasing debt, the plan puts us farther than we have ever been from a real recovery.”
But Jerry Jasinowski, economist and former president of the National Association of Manufacturers, said the plan’s emphasis on spurring the economy now, at the expense of future deficits, is “appropriate” since a reversion back into recession next year would only make the deficit problem bigger.
A growing economy generates the revenues the government needs to close the budget gap, while a shrinking economy deprives the government of revenues and widens the budget gap through increased use of unemployment benefits and other social safety-net programs.
“The only surefire solution to our economic and fiscal quandary is economic growth” — something both Republicans and Democrats increasingly realize, Mr. Jasinowski said.
“At this critical juncture, tax increases would throttle the fragile recovery,” he said. “As long as unemployment remains near 10 percent, serious progress in reducing the deficit will remain out of reach.”