- The Washington Times - Tuesday, November 30, 2010

The important Christmas spending season got off to a promising start this weekend, but the lame-duck Congress and President Obama would play the Grinch if theyre unable to agree on extensions of unemployment benefits and the Bush-era tax cuts.

Although retailers report that consumer spirits are up and shoppers are in more of a buying mood after two years of dismal Christmas sales, analysts say yanking the critical supports out from under consumers will trigger big setbacks in the economy in coming weeks.

“The hit to personal income - and even more importantly to consumer confidence - could make for a tough holiday season,” said Mark Zandi, chief economist at Moody’s Analytics, who estimates that every $1 spent on unemployment benefits generates about $1.61 in economic growth.

This week, people who have been out of work more than six months start losing their extended unemployment benefits if Congress does not renew them. By Christmas, nearly 2 million people will have lost this primary source of income, the Labor Department estimates.

While a few people would go out and find jobs if they lose the benefits, Mr. Zandi said, most of those collecting checks will be unable to find work because there simply aren’t enough jobs.

A group of 30 prominent economists, including former Federal Reserve Vice Chairman Alan Blinder and Nobel Prize winner Joseph Stiglitz, wrote political leaders Tuesday urging the extension of unemployment benefits, noting that it is a “sensible” way to maintain spending in the economy and it would add to the deficit only temporarily until people find jobs.

The average unemployment check of about $300 is usually spent right away on groceries, gasoline and other necessities, providing an immediate cash infusion of about $5 billion a month for the economy.

Republicans have held up the legislation, insisting that it be offset by cuts elsewhere in the budget.

While the expiration of jobless benefits this week poses an obstacle for the economy, a far greater threat looms at the beginning of 2011 when $200 billion worth of tax cuts expire and tax rates revert to levels that prevailed in the 1990s.

Economists say that setback would be so great that it could throw the economy back into recession.

Mr. Zandi said it would be a “serious misstep by the Obama administration and Congress” to let all the tax cuts expire, but investors and businesses are worried that the deep divide between Democrats and Republicans on the issue will keep them in gridlock.

“The uncertainty over how all this will work out is already weighing on business investment and hiring, and if policymakers fail to act in the next few weeks, it could very well undermine confidence enough to derail the recovery,” he said.

Mr. Obama wants to make the tax cuts for households earning less than $250,000 permanent, while Republicans are holding out for an extension of all the tax cuts, including those for wealthier people.

David A. Levy of the Jerome Levy Economics Institute said the still-weak economy would reel from a massive increase in taxes early next year, despite a recent pickup in consumer spending and sentiment that bodes well for the holiday season.

He is assuming that political leaders know they have to avert an economic disaster and will agree to at least temporarily extend the Bush tax cuts and “fix” the alternative minimum tax that hits upper-income taxpayers. But if they don’t, that would “kill the expansion,” he said.

“Government fiscal policy is the biggest swing factor in the outlook” for the economy and the turmoil in Washington has been befuddling economic forecasters everywhere, he said.

“Across the country, emotions about the economy and economic policy are running high, heating up a political process that is already so turbulent and so swamped with misunderstanding, misinformation and disinformation that one might as well try predicting the results of the lottery.”

The economy could hang in the balance for months next year if a Republican-dominated Congress and Mr. Obama get into a monumental tug of war over the budget and taxes that leads to government shutdowns and other disruptions, he said.

Besides the Bush tax cuts and unemployment benefits, an array of measures that are important for the economy are due to expire in coming months, Mr. Levy pointed out, including Mr. Obama’s $50 billion making work pay tax credit and about $50 billion of state aid originally included in the $814 billion stimulus bill.

Jeffrey Nichols, senior economic adviser at Rosland Capital, said markets the world over are closely watching the political maneuvering over the Bush tax cuts and measures to bring down the burgeoning federal debt, and will react to any adverse developments.

While a “sensible compromise” would be to extend the tax cuts for all but a few top-income taxpayers, he said, that outcome is far from certain.

“Failure to extend the Bush tax cuts will raise taxes at just the wrong time, taking money and spending power out of the household and small-business sectors,” he said. “Fiscal restraint at this juncture could easily backfire, reversing or slowing the hoped-for economic recovery.”

But global investors are worried that political leaders will not act in the best interests of the economy, leading to “dysfunctional government that is incapable of dealing effectively with America’s serious economic problems,” he said.

They will have to be convinced that Washington is capable of taking bipartisan action, as promised by leaders at the White House on Tuesday.

“Unbridgeable philosophic differences on the role of government suggest that the ship of state will remain rudderless - at least with respect to fiscal policy - until the next federal elections in two years,” Mr. Nichols said.

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