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American economists have reduced their expectations
22-10-2012 08:49
A few years ago - just after the financial crisis and the global recession - US economists were relatively optimistic about the future. Throughout their careers, they had been accustomed to V-shaped recessions, i.e. relatively quick downturns followed by quick upturns. This time it was different!
In their book "This time is different", Carmen Reinhart and Kenneth Rogoff have shown that it takes significantly longer to come out of a balance sheet recession than if the economy slowed e.g. through global markets cooling off or through a tightening domestic economic policy. The US economists did not know this, or rather, they believed that such situations occurred only in other countries such as Japan, the Nordic countries or emerging economies. In the US it was different, they thought.
Meeting the same economists now, I see there is a big difference in their expectations. GDP growth is forecast at just over 2 per cent in the next few years, the unemployment rate remains at just below 8 per cent, and although the housing market is beginning to strengthen this growth occurs from low levels and remains slow.
They have begun to speak about why their forecasts were so consistently wrong after the most serious crisis had subsided. They now realize that there were factors that needed more time to adapt, such as the housing market, mortgage financing and debt restructuring. They also mention that demography and health costs are pushing up the budget deficit, which has not been sufficiently accounted for in household saving decisions. Maybe the effects of fiscal policy measures had even been anticipated to be greater than they actually were, while monetary policy was less effective than normal. They also mention, of course, factors from abroad that affect the US, such as the eurozone crisis and the Japanese tsunami. However, they also mention that the US risks falling off its own "fiscal cliff". Since if households and businesses do not know what the tax and spending policies will be next year, how can they make the right decisions about investments, recruitments and consumption.
Unemployment has begun to decline, but so far remains at a high level. Long-term unemployment, in particular, risks becoming entrenched if no action is taken at the same time as manufacturing companies are complaining that they cannot find qualified staff since those who left the sector have probably now found other jobs. For President Obama, the high unemployment rate is a problem, but slightly better economic data could benefit him in the final weeks before the election on 6 November. Interestingly, Glenn Hubbard- who is likely to become the finance minister if Mitt Romney is elected president - focused his action plan solely on regulations and taxes when I heard him speak. There was not a word about unemployment, poverty, education system, and other things that cause different groups in the US to drift apart and that could also inhibit potential growth in the coming years – and, not to mention – make it harder to reduce the high government debt burden.
There is no shortage of challenges in the coming years facing the president who comes to power. But these challenges must actually be understood by the powers that be so that something can be done about them
