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'Cliff' Outcome Could Alter US Standard of Living: Economist

Friday, 28 Dec 2012 | 1:07 PM ET
Washington Gets Down to the Wire
Can anything be done to prevent going over the "fiscal cliff?" Ed Lazear, Hoover Institution senior fellow, breaks down all the possible scenarios.

If a deal on the "fiscal cliff" is managed in haste and there are long-lasting adverse effects, the overall outcome could dampen U.S. economic growth long-term, former George W. Bush economic advisor Ed Lazear told CNBC on Friday. He served the administration between 2006 and 2009.

"This is the kind of thing that's really quite serious in terms of its impact on standard of living in the long haul and we really need to get right," said Lazear on "Squawk on the Street." "It's not the kind of thing we can do in the next couple of days."

There are only days left before the year's end, when a series of tax hikes and spending cuts kick in without government intervention. President Barack Obama and Congressional leaders will meet at the White House Friday afternoon in a last ditch-effort to reach a deal.

But Lazear said a deal of this magnitude is too important to rush. "It's unfashionable to say that the best we can hope for is kicking the can down the road," Lazear said. "But I think that is the right course at this point. I'd much rather see us postpone and get through the next few months and then do the right thing in the long run for the economy."

Lazear also warned that going off the cliff and staying there would hamper economic growth and job creation for months. "I would estimate in the short-run it would probably cost us up to about to a point of GDP, which is half a million jobs," Lazear said. "In the long run, it could cost us a half of percentage point of growth every year."

With the economy only growing about 2 percent, U.S. economic growth could be cut in half, he said.

(Read More: 'Cliff' Deal Would Send Stocks Up Like a Rocket: Acampora)

'Fiscal Cliff': The Dividend Effect
Thomas Fanning, Southern Company CEO, discusses how an increase in dividend taxes will impact his utility company.

Taxes on capital gains and dividends also need to be kept low, the economist said, since capital can move easily across international boundaries.

"If we increase our capital gains taxes and if we increase the taxes on dividends, I fear that could have a pretty significant detrimental impact on investment and on cap-ex in general," Lazear said. Cap-ex or capital expenditures often include various business investments.

The issue of dividend taxes is also important to the utility industry. Thomas Fanning, Southern Company chief executive, told CNBC's "Squawk Box" on Friday dividend and capital gains tax rates should be kept the same and as low as possible.

Low tax rates help U.S companies compete globally. "We know that we compete in the global economy," Fanning said. "When we look at the tax policies of Japan, China, Brazil, other people we're competing with in a global economy we need to keep those rates low. Keeping the rates low encourages businesses to commit to long-term capital expenditures, grow jobs, and grow personal income."

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