Taxes and the U.S. deficit, China, QE II and the crisis in Euroland were some of the topics that T. Rowe Price Vice President and Chief Economist Alan Levenson touched on at a breakfast for the news media in New York on Wednesday.
Since taxes are scheduled to rise unless Congress acts by year-end, Levenson (left), noted the dilemma the U.S. government faces. A reporter asked: Is it more beneficial to the economy if the cuts are kept in place for everyone for another couple of years, adding about $3 trillion to the deficit over 10 years, but potentially enabling more spending now as we try to recover—or is it better to let some or all of the cuts expire and reduce the deficit starting now?
We “need higher tax revenue,” he says, “the sooner we raise rates or cut the budget, the smaller the increase needs to be. As a macro economist this is not a political view. We don’t want to raise income taxes when we want to support consumer spending, but marginally higher rates [would] have a relatively small impact on someone who makes $100 million a year—[so] two or tree percentage points—it’s not going to change their spending.” Levenson says he would support keeping the rates as they are for all but those making “$1 million or higher in income,” and recommends that the added tax revenues from those higher earners “be put into infrastructure or something that would have a higher multiplier effect,” on the recovery.
GDP, Unemployment, Inflation
Levinson forecasts a lower unemployment rate in the months ahead, falling to 8.6% in 2011, with real GDP rising to 2.8%, a tad higher than his 2.4% estimate for 2010. He’s not overly concerned about inflation or deflation, at this point.
On the housing front, Levinson noted that mortgage lending, in fact lending standards in “all categories, are getting easier,” he says, “though still tight, and mortgage standards are tightening again.” There’s a “smaller cohort of qualified buyers than three years ago.”