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

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

  1. 1. The U.S. Economic Outlook:The Great Recession and anemic recovery Andrew Fieldhouse Federal Budget Policy Analyst Economic Policy Institute August 8, 2012 1
  2. 2. 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 2
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  14. 14. 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 stalledBottom line: Growth has been and will be determined almostexclusively by fiscal policy - conventional monetary policyhas been maxed out since December 2008, limited impact of QE 14
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  21. 21. 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 21
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  28. 28. 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 28

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