Bank of America economist warns 'game of chicken' could hit economy

24 August 2010

Bank of America's chief economist Ethan Harris has criticized the Democrats and Republicans for playing political games over how they want to deal with the US economy.

He stated that the proposed austerity measures of both parties are equivalent to a "game of chicken" that may well lead to an "economic accident".

While the Republicans want to cancel various infrastructure projects to bring down the budget deficit, the Democrats are looking to turn back tax cuts for the rich which were first introduced by the Bush administration, reports the Telegraph.

But the Bank of America official said: "We don't find either view compelling.

"The most pressing concern to us is that absent new legislation, all of the Bush tax cuts expire at the end of this year."

Mr Harris stated that the bank forecasts this will hit household income by around two per cent.

"If such an increase were not reversed, we believe it could trigger a double-dip recession," the analyst said.

Mr Harris said that while Bank of America is in favor of bringing down the deficit, the economy should first be allowed to return to a "healthy growth trajectory".

Bank of America said lessons should be learnt from what happened in Japan in the 1990s when taxes were raised before the recovery was strong enough – a move which arguably contributed towards the country's economy going into deflation.

Nobel Laureate economist Paul Krugman is another voice arguing against austerity measures, stating that many experts view the idea as a "huge mistake" which is likely to result in the US undergoing a prolonged slump.

Earlier this month, Ed McKelvey, senior US economist for Goldman Sachs, warned that there is a 25 per cent to 30 per cent chance of the US slipping back into recession.

He said that signs of slower growth have multiplied, raising fears that this scenario could occur, reported Bloomberg.

By Gary Cooper

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