Experts on US economy

CNC report from Washington
Added On January 21, 2013

A day of festivities, parades and fancy dress ball marks the beginning of Barack Obama's second four-year term as America's first black president.

However, a still-weak economy at home continues to dominate Obama's attention.

He faces tough opposition from Republicans who are determined to shrink the government and reduce taxes.

Experts say that many of the old economic challenges the president faced in the first term ... still are present today.

Congress will pick up negotiations on the country's fiscal crisis and raising the debt ceiling again later this month.

Obama has said he won't allow Republicans to hold the nation's economy hostage and will not negotiate.

A failure to reach an agreement could leave the government without money to pay its debts and lead to the first-ever U.S. default or a government shutdown. 

An expert from New York University says he is not confident that another showdown between Democrats and Republicans over how to rein in the government deficit can be avoided.

"We're really not, and that's for two reasons: One, we now are in a model of brinkmanship where they really don't care about finishing it until the last minute, they are willing to see markets go down a bit before that. They are willing to go past deadlines now they weren't before. The other problem is, President Obama said that he is not going to negotiate about the debt ceiling. If that's true, I don't really see how it gets raised other than he's just simply try to ignore it legally, pretend that it's not binding, go to the courts and just simply try to work around it. If he's refusing to negotiate on the point either he's going to eventually have to cave in or we're clearly going to have an impasse."

Foudy's colleague Larry White also says the Obama administration and Congress need to find a way to put an end to seemingly limitless borrowing.

"It's a question: Do we find the means of raising the revenue or are we going to do it with debt. For now, we can continue to borrow, but we can't continue to do that indefinitely. The music has to stop at some point."

Professor White says the debt crisis will require additional tax hikes.

"Either we're going to have to accept the idea of higher income taxes for a much broader part of the population with people with incomes from 30,000 dollars up rather than 450,000 dollars up or we have to find an alternative source of taxation, for example a value added tax which is essentially a consumption tax. It would be an alternative, it would have to be in addition to what we are doing now because it just has to be extra sources of revenue. There is just no avoiding it."

Tax increases and spending cuts should be phased in gradually as the U.S. economy is still weak and unemployment still above 7 percent.

"We have still a soft economy that needs stimulus. But for the longer run we have to get our fiscal house in order, we must either modify what we're expecting government to do. I don't think that's a realistic possibility. We can help a little bit at the edges, with social security, with Medicare, but primarily we have to find a way for taxing ourselves to avoid the long-run expansion of debt and I think the value added tax is the best alternative there."

White believes that it is wishful thinking that taxing the rich or closing loopholes in the tax code alone will resolve the U.S. fiscal crisis.

"It's such a difficult thing but the long-run success of the United States as a major economy in the world as continuing as a major political entity in the world depends on our being able to find a political solution here. I wish I could be more optimistic."

Thomas Cooley, former Dean of NYU Stern School of Business, says the US economy is still fragile, a return to strong GDP growth will hinge on a long-term solution of the fiscal crisis.

"Although we have problems, I tend to think that most of them are structural, we're not producing the right kind of workers and that is going to hold us back from resuming robust growth for a while. But once we deal with that, once we deal with the problems in our educational system and produce a better educated, a better adapted work force, then we will be able to resume our historical rates of growth."

He expects sluggish growth could continue at least into the first quarter of next year.

"One of the things that's been low in recent months is investment in new capital equipment and that's the engine of future growth. And to the extent that that's retarded by uncertainty about how politicians are going to address the fiscal problems which are genuine fiscal problems and they're large, I think that's unfortunate for the U.S. economy."

Michael Lillard, Managing Director Prudential Fixed Income, says the country's budget crisis will continue to weigh down the economy.

SOUNDBITE (ENGLISH) MICHAEL LILLARD, Managing Director Prudential Fixed Income:
"We think the budget battles are going to continue. We see a continued cloud hanging over the U.S. economy coming out of Washington as we go through small deals with lots of brinksmanship, basically both sides blaming each other ending up with little fixes that have to be reviewed and revisited again."

Experts indicate in light of the ongoing fiscal issues in Washington, companies will remain conservative, and will hold back cash reserves instead of launching aggressive hiring.

SOUNDBITE (ENGLISH) MICHAEL LILLARD, Managing Director Prudential Fixed Income:
"That keeps a cloud over the economy. That offsets in our mind a lot of the positive data that we've been seeing in the U.S. economy lately that sort of leaves us in a GDP view of about 2 percent in the U.S. Europe clearly in a recession, we see that continuing, stronger growth on the EM side (emerging markets), maybe about 5 percent there, overall global growth at around 3."

Beyond the economy and the budget, experts also indicate that two social issues will be a focus at the start of the president's second term: immigration and gun control.