THE U.S. ECONOMY AFTER THE ELECTION:

PARADOXES AND POSSIBILITIES

Tara M. Sinclair George Washington University

November 12, 2012

Eliot Society Breakfast

Weidenbaum Center on the Economy, Government, and Public Policy

How Bad is the Economy?

Economic Outlook in 3 Parts

1. Where are we?

2. Where are we going?

3. 3 paradoxes and possibilities.

1. Where are we?

2. Where are we going?

Median Forecasts - Survey of Professional Forecasters

Real GDP Growth

Unemployment Rate

PCE Inflation Rate

2012 2.2% 8.1% 1.7% 2013 2.0% 7.8% 2.0% 2014 2.7% 7.4% 2.2% 2015 2.9% 6.9% n/a

Summary of the Basic Outlook • GDP growth rate returning to

average. • Unemployment rate slowly

returning to average. • Inflation remains subdued. • Labor markets remain

troubled.

3. Paradoxes and Possibilities

3 Paradoxes and Possibilities

• Productivity

• Policy

• Profligacy

(Labor) Productivity

Remember the Loom?

The Impact of Productivity Gains

• May have contributed to the slower labor market recovery

• Cheaper goods • Continued concerns about inequality • New jobs should eventually come

(Monetary) Policy

The Impact of Loose Policy

• Should stimulate consumption and investment in the short run

• But, households have less incentive to save

• And, there is some concern that the Fed’s ‘exit strategy’ may not work in time to prevent inflation

(Government) Profligacy

How did we get into this mess? • We have a long-run fiscal problem.

o “America taxes itself like a small-state economy, and spends like a big state one.

o Add in an ageing population, and it is going broke.”

• The Economist, November 10th, 2012

• Congress has made it into a near-term potential fiscal crisis. o Debt ceiling o Fiscal cliff

“The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”

Budget Control Act of 2011

• Purpose: reduce the deficit. • Created: o“Supercommittee”

o“Fiscal Cliff”

Tax Increases

• End of temporary payroll tax cuts • End to several tax breaks for businesses • Increases in both the amount of the alternative

minimum tax (AMT) and in the number of people paying it

• Tax increases for higher income individuals to help pay for the Affordable Health Care Act.

Spending Cuts

• Sequestration: across-the-board 10 percent cut in discretionary spending in the budget.

• Affecting more than 1,000 government programs, including defense and Medicare.

• No cuts in Social Security, federal pensions or veterans' benefits.

Impacts on the Economy • CBO projects that current law will result in a

recession in 2013. • Just removing the spending cuts without another

plan in place could result in a debt crisis if the markets worry that the government may not be able to service the debt.

• There may be additional negative effects from the uncertainty the negotiations have created.

• The debt ceiling needs to be raised again, perhaps earlier than anticipated.

• We still have to face the coming obligations of Social Security, and, in particular, Medicare…

Bernanke’s Prescription • “The most effective way that the Congress could

help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.” o Ben Bernanke’s Senate Testimony July 17, 2012.

Progress? • Based on most macroeconomic indicators, the

economy is in a slow but steady recovery. • Productivity gains should help us in the longer term. • Monetary policy is currently helping the recovery,

but there are some concerns about the long-term impact.

• The fiscal cliff is manmade, but is now a serious problem.

• Other threats are always looming, but for now the outlook is cautiously optimistic.

Questions and Comments? Thank you!!

Bowles-Simpson • President Obama's bipartisan fiscal commission in

2010 produced a ‘Grand Bargain.’ • The original Bowles-Simpson plan would reduce

deficits by at least $4 trillion over 10 years by cutting defense and discretionary spending, curbing federal entitlement costs and reforming the tax code.

• “Fixing the debt must be phased in gradually to protect the fragile economic recovery, improve economic growth and prosperity, and protect our most vulnerable.”