Bank of America sees US double-dip danger from `fiscal chicken'
Tuesday, August 24, 2010 at 08:41AM Ethan Harris, the bank's chief North American economist, said early data for August suggest that "an already weak recovery is getting weaker" with a rising risk of a relapse into recession, yet the two parties seemed determined to outbid each other with austerity measures.
"Politicians are clamouring for quick action, not to stimulate a dangerously weak economy, but to bring down the budget deficit. We strongly support efforts to bring down the deficit, but only once the economy is on a healthy growth trajectory," Mr Harris said.
The Democrats want to see an end to the Bush tax cuts for the wealthy: the Republicans want to cancel infrastructure projects designed to keep the building industry alive, arguing that it crowds out private enterprise
"We don't find either view compelling," Mr Harris said. "The longer this game of chicken goes on, the bigger the risk of an economic accident.
"The most pressing concern to us is that absent new legislation, all of the Bush tax cuts expire at the end of this year. We estimate that would represent a 2pc hit to household income. If such an increase were not reversed, we believe it could trigger a double-dip recession."
Bank of America said campaign populism was causing Washington to drift into the worst possible mix of policies: premature tightening without any credible plan for long-term control of entitlement spending, where the real threat lies.
The Congressional Budget Office estimates that fiscal policy will swing from boost equal to 2pc of GDP (annualised) earlier this year to a withdrawal of 2pc by late next year, without a change of policy.
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