The U.S. economic outlook:The Great Recession and anemic recovery

The U.S. Economic Outlook:The Great Recession and anemic recovery

Andrew FieldhouseFederal Budget Policy Analyst

Economic Policy Institute

August 8, 2012

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Stages of the Great Recession

• U.S. housing bubble implosion: Decreased residential

investment, home equity wealth effects

• Recession: Decreased nonresidential fixed investment,

layoffs, rising unemployment, commercial real estate bust

• Financial crisis: Consumer and business credit contraction

(liquidity trap), stock market slide, non-residential financial

asset wealth effects

• State & local govt. budget crises: Falling property, income, &

sales tax receipts, balanced budget amendments force deep

cuts to employment & public services, tax hikes

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American Reinvestment and Recovery Act (ARRA)

• Turned around GDP and employment growth

• Averted a much deeper recession / depression

• Was far too small to fill the shortfall in demand

($821 billion 10-year cost smaller than one-year shortfall)

• As ARRA expenditures and tax cuts have wound down,

the economic recovery has stalled

Bottom line: Growth has been and will be determined almost

exclusively by fiscal policy - conventional monetary policy

has been maxed out since December 2008, limited impact of QE

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Consequences of failure to address jobs crisis

• Low inflation, low interest rates

-Too much slack in labor market for wage inflation

-Too much excess savings for government crowding out

• Increased income inequality

-Too much slack in labor market for real wage increases

• Long-term economic scarring

-Decreased potential output, capital erosion, wage scarring

• Big cyclical budget deficits

-Output gap accounts for roughly one-third of budget deficit

• Near-term deficit reduction is largely to entirely counterproductive

-Fiscal multipliers increase with the output gap

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Economic outlook remains bleak

• European recession and financial crises pose serious

headwinds to global economic growth (-2ppt for U.S.?)

• Federal fiscal policy has turned contractionary (ARRA,

ad hoc stimulus wind down), state & local remains so

• The “fiscal cliff” (i.e., current law fiscal trajectory) is

projected to induce a U.S. double-dip recession

• The Federal Reserve has little scope for further

monetary policy accommodation (QE3 in September?)

• Bottom line: U.S. faces years of slow GDP growth,

jobless recovery, big budget deficits, & downside risks