More Worries About the Economy
Martin Feldstein sounds worried:
What's Happening to the US Economy?, by Martin Feldstein, Commentary, Project Syndicate: The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data. ...
Monetary and fiscal policies cannot be expected to turn this situation around. The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero; but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds â€" so-called "quantitative easing" â€" at the end of June.
Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce ... fiscal deficits...
So the near-term outlook for the US economy is weak at best. Fundamental policy changes will probably have to wait until after the presidential and congressional elections in November 2012.Note his warning, in particular, that immediate deficit reduction will be contractionary. Congress is taking a big risk by reducing the deficit just as the recovery starts to wane, and it is playing with fire by toying with defaulting on the debt if the two sides cannot come to an agreement over raising the debt ceiling.
Federal Reserve governor Sarah Raskin also sounds worried, and seems to be one of the few Federal Reserve Board members willing to "underscore" the employment part of the dual mandate (in this regard, I think the Fed is primarily worried about inflation, asset bubbles are not its only or its main concern):
Fed's Raskin Paints Grim Picture of Recovery, by Luca Di Leo, Real-Time Economics: Federal Reserve Board governor Sarah Raskin Wednesday painted a grim picture of the U.S. economy and signaled support for the central bank's easy-money policies aimed at boosting jobs.
In a speech to the New America Foundation, Raskin said the jobs market is actually in worse shape than what's indicated by the headline 9.1% unemployment rate. ...Raskin told the audience "we should pause to underscore the promotion-of-maximum-employment imperative of the Federal Reserve's dual mandate." ...
Though statistics show that about 13.9 million Americans were out of work in May, an additional 8.5 million workers had to settle for part-time jobs or were forced to cut back on their work hours, Raskin said.
"It is necessary for the strength of our nation's recovery that low- and moderate-income Americans be able to more fully participate in the economy," the Fed official said. ...I think Feldstein's right about further easing, that won't happen unless the outlook darkens considerably, and even then there's no certainty that the Fed will take action. I also think he's right about fiscal policy, it stands to make things worse.
Let me also note the IMF's recent forecast:
...The I.M.F. foresees a much less happy and prosperous future for the United States. The fund, in its annual report on the American economy, said growth will not top 3 percent through 2016:
2011: 2.5 percent
2012: 2.7 percent
2013: 2.7 percent
2014: 2.9 percent
2015: 2.9 percent
2016: 2.8 percent
Those are abysmal numbers that imply that the United States has no imminent prospect of recovering the losses sustained during the recession...All signs are pointing to a very slow recovery, a heightened chance of a double dip, and little chance that policymakers will do anything about it.
Let's hope the signs are wrong.
