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America needs faster growth, not big deficit cuts
By Laura Tyson |
February 5, 2013, Tuesday
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Print Edition
Print Edition
THE United States continues to recover from its deepest economic slump since the Great Depression, but the pace of recovery remains frustratingly slow. There are several reasons to anticipate modest improvement in 2013, although, as usual, there are downside risks.
Prolonged recession or a financial crisis in Europe and slower growth in emerging markets are the main external sources of potential danger. At home, political infighting underlies the two greatest risks: failure to reach a deal to raise the debt ceiling and an additional round of fiscal contraction that stymies economic growth.
Since 2010, tepid average annual GDP growth of 2.1 percent has meant weak job creation. In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in GDP growth. But the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has meant a much higher unemployment rate for a much longer period.
Weak aggregate demand is the primary culprit for subdued GDP and employment growth. The 2008 recession was triggered by a financial crisis that erupted after the collapse of a credit-fueled asset bubble decimated the housing market.
Private-sector demand contracts sharply and recovers only slowly after such crises. The private-sector financial balance swung from a deficit of 3.7 percent of GDP in 2006, at the height of the boom, to a surplus of about 6.8 percent of GDP in 2010 and about 5 percent today. This represents the sharpest contraction and weakest recovery in private-sector demand since the end of World War II.
Large losses in household wealth, deleveraging from unsustainable debt, weak wage growth, and a decline in labor's share of national income to a historic low have combined to constrain consumption growth.
Spending less
Another factor holding back recovery has been weak growth in spending on goods and services by both state and local governments, and more recently by the federal government. The fiscal trends for 2013 are mixed, but negative overall.
The American Taxpayer Relief Act - the tax deal reached in early January to avoid the "fiscal cliff" - shaves about US$750 billion from the deficit over the next 10 years and could take a percentage point off the 2013 growth rate.
Spending cuts and revenue increases that have been legislated since 2011 will reduce the projected deficit by US$2.4 trillion over the next decade, with three-quarters coming from spending cuts, almost exclusively in non-defense discretionary programs. Based on current economic assumptions, the US needs about US$4 trillion in savings to stabilize the debt/GDP ratio over the next decade. It is already three-fifths of the way there.
The so-called sequester (the across-the-board spending cuts scheduled to begin in March), would slash another US$100 billion this year and US$1.2 trillion over the next decade. Although it could stabilize the debt/GDP ratio, the sequester would be a mistake: it fails to distinguish among spending priorities, would undermine essential programs, and would mean another significant dent in growth this year.
Moreover, despite the warnings of deficit alarmists, the US does not face an imminent debt crisis. It is time to refocus. The US needs a plan for faster growth, not more deficit reduction.
Evsey Domar, a legendary growth economist (and one of my MIT professors) counseled that the problem of alleviating the debt burden is essentially a problem of achieving growth in national income. We should heed his wisdom.
Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
Prolonged recession or a financial crisis in Europe and slower growth in emerging markets are the main external sources of potential danger. At home, political infighting underlies the two greatest risks: failure to reach a deal to raise the debt ceiling and an additional round of fiscal contraction that stymies economic growth.
Since 2010, tepid average annual GDP growth of 2.1 percent has meant weak job creation. In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in GDP growth. But the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has meant a much higher unemployment rate for a much longer period.
Weak aggregate demand is the primary culprit for subdued GDP and employment growth. The 2008 recession was triggered by a financial crisis that erupted after the collapse of a credit-fueled asset bubble decimated the housing market.
Private-sector demand contracts sharply and recovers only slowly after such crises. The private-sector financial balance swung from a deficit of 3.7 percent of GDP in 2006, at the height of the boom, to a surplus of about 6.8 percent of GDP in 2010 and about 5 percent today. This represents the sharpest contraction and weakest recovery in private-sector demand since the end of World War II.
Large losses in household wealth, deleveraging from unsustainable debt, weak wage growth, and a decline in labor's share of national income to a historic low have combined to constrain consumption growth.
Spending less
Another factor holding back recovery has been weak growth in spending on goods and services by both state and local governments, and more recently by the federal government. The fiscal trends for 2013 are mixed, but negative overall.
The American Taxpayer Relief Act - the tax deal reached in early January to avoid the "fiscal cliff" - shaves about US$750 billion from the deficit over the next 10 years and could take a percentage point off the 2013 growth rate.
Spending cuts and revenue increases that have been legislated since 2011 will reduce the projected deficit by US$2.4 trillion over the next decade, with three-quarters coming from spending cuts, almost exclusively in non-defense discretionary programs. Based on current economic assumptions, the US needs about US$4 trillion in savings to stabilize the debt/GDP ratio over the next decade. It is already three-fifths of the way there.
The so-called sequester (the across-the-board spending cuts scheduled to begin in March), would slash another US$100 billion this year and US$1.2 trillion over the next decade. Although it could stabilize the debt/GDP ratio, the sequester would be a mistake: it fails to distinguish among spending priorities, would undermine essential programs, and would mean another significant dent in growth this year.
Moreover, despite the warnings of deficit alarmists, the US does not face an imminent debt crisis. It is time to refocus. The US needs a plan for faster growth, not more deficit reduction.
Evsey Domar, a legendary growth economist (and one of my MIT professors) counseled that the problem of alleviating the debt burden is essentially a problem of achieving growth in national income. We should heed his wisdom.
Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
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