Alan Blinder Warns of U.S. Fiscal 2013 Cliff

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The U.S. economy could be headed toward a fiscal cliff if a few underlying issues go unaddressed, former Federal Reserve Vice Chairman Alan Blinder said Monday.

Federal government spending cuts set to go into effect January 2013 — half of them directed toward the Pentagon — would cause GDP to contract by as much as 3.5 percent.

“Across-the-board is a blunt instrument,” Blinder said on “The Kudlow Report.”

Blinder said that he expected Congress to reprioritize the targets of those spending cuts, but he saw another challenge ahead.

“How are you going to get members of Congress to agree on a list?” he said.

Blinder authored a Wall Street Journal op-ed piece, titled “The U.S. Cruises Toward a 2013 Fiscal Cliff,” in which he argued: “It is next to certain that nothing will be done about the fiscal cliff during the election season. In fact, some Republicans are now threatening to renege on the spending cap for fiscal year 2013 that they agreed to last summer. In the absence of progress between now and Election Day, Congress will have about eight weeks left — including Sundays, Thanksgiving, Christmas and New Year's Eve — to either (a) find a solution to the long-running fiscal battle or (b) kick the can down the road again.”

Blinder, who is an economics professor at Princeton University, said he didn’t actually believe the Pentagon would actually take such a hit, but said the budgetary decisions needed to be tackled sooner rather than later.

Blinder also said that it would be tough to cut off unemployment benefits entirely in one fell swoop, even after two years of assistance.

“You have a huge need to prop up demand, you have huge humanitarian needs,” he said. “You alleviate a whole lot of hardship.”

But just dropping programs on the federal level wasn’t necessarily the answer.

“I think shifting it to the states is a terrible, terrible idea,” he said.

Tax reform was necessary, Blinder said, ideally with a nonpartisan, practical approach to increase revenues. But even this was not a cure-all.

“If you look at the whole budget picture and think you’d be able to solve it with nothing but tax increases, the answer is no,” he said.

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"The Kudlow Report" airs weeknights at 7 p.m. ET.

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