Economy 'In a Deep Hole, Crawling Along': Feldstein

The economy is doing “terribly” and may not reach 2 percent growth this year, Martin Feldstein, former Council of Economic Advisors chairman under President Reagan, told CNBC’s "Closing Bell."

Martin Feldstein

“We are in a deep hole, we are crawling along,” the advisor to the Romney campaign said.

In the past, Feldstein had said the U.S. would be “lucky” to achieve we had 2 percent real economic growth this year.

“We’d be very, very lucky if that happens,” he said Wednesday. “We’re much more likely to be well short of 2 percent growth when we really need several years of 4 percent growth if we’re ever to get back to anything like full employment.”

Bond-buying from the Federal Reserve is not going to be effective in reviving the economy or sparking hiring. “The message we got in Jackson Hold, is Ben Bernanke would like his colleagues to do more and they probably will do more but it won’t have much impact at all on the economy,” Feldstein said.

Wall Street too is expressing considerable skepticism that the Fed's actions will do much good to bring down the unemployment rate, according to the latest CNBC Fed Survey.  (Read More:Markets Doubt More Fed Easing Will Boost Hiring: Survey.)

The key to getting the economy moving again is the fiscal outlook, both in the short and long term, Feldstein said.

“If people think taxes are going up, they’re going to hold back on spending, business are going to hold back on hiring and investing,” Feldstein said. That’s both the near term fiscal cliff, when a host of tax cuts expire and spending cuts kick in at the end of the year, and the long term tax consequences of not addressing entitlements.

One way of addressing the fiscal issues would be through tax reform, Feldstein said. “We could have lower tax rates and pick up some revenue if we’re prepared go after all the government spending that is done through so called tax expenditures that are built into the tax code rather than the ordinary government outlays.” (Read More:Romney’s Tax Plan Leaves Key Variables Blank.)

Whether Congress deals with the fiscal cliff could depend on the election, Feldstein said. “If President Obama gets reelected, my friends tell me their strategy would be to let the fiscal cliff occur and pick up the pieces afterward,” he said.

But he warned, “These games of chicken can easily go wrong and we could end up with a much worse economy.”