![handle is hein.crs/govceyq0001 and id is 1 raw text is:
, . ' riE S-' $. h ,. ,
U.S. Economy in a Global Context
p\w -- , gnmo,go
mppm qq\
, q
I
as
11LIANJILiN,
December 23, 2016
Congress faces difficult challenges in formulating policies
to foster economic growth. In the long run, the continuing
and growing imbalance between federal spending and
revenues would be a major challenge if current policies are
continued. This imbalance will lead to unsustainable growth
in the federal debt, which crowds out investment. The
economy appears to have largely recovered from the 2007-
2009 recession. Nevertheless, deficit reduction that is too
large in the near term could damage what is still an
incomplete recovery. Addressing this tension in policy
prescriptions for the short term and the long term is also
taking place in an increasingly global environment that
interacts with these policies.
The 2007-2009 recession was severe, and the recovery has
been relatively slow. The unemployment rate rose from
nearly 4.7% in November 2007 to 10% in 2009, before
declining to pre-recession levels over the next seven years.
As of November 2016, the unemployment rate stands at
4.6% and has remained equal to 5.0% or lower since
October 2015. According to the Congressional Budget
Office (CBO), the current unemployment rate is near
estimates of the natural rate of unemployment (about 4.8%).
Wage growth has also begun to accelerate in recent months,
suggesting a tightening labor market.
Although the official measure of unemployment appears to
be returning to normal levels, the labor force participation
rate fell during the recession and remains depressed.
Underemployment (those who could only find or keep part-
time employment) also remains elevated. A measure that
combines the official unemployment rate, and discouraged
or underemployed workers, is at 9.3% compared with 8.4%
in November 2007. Long-term unemployed workers as a
percentage of the labor force were 0.9% in 2007 and 1.2%
in 2016. Thus, although recovery appears to be largely
complete, the economy is still fragile. Inflation has
remained below the Federal Reserve's target rate of 2%,
and CBO estimates an output gap (i.e., the difference
between potential and actual gross domestic product
[GDP]) of 1.5%.
The U.S. recovery has been sluggish in comparison to
previous recoveries. Since the end of the recession, real
GDP growth has averaged 2.1% per year, compared with an
average growth rate of 4.3% during previous post-WWII
recoveries.
During a recession or a period of slow economic recovery,
reducing the deficit is contractionary. Although a small
fiscal stimulus was adopted in 2008 and a larger one in
2009, fiscal policy turned contractionary in 2011. The
Budget Control Act of 2011 specified deficit reduction that
eventually resulted in spending cuts, largely in discretionary
spending. In the beginning of 2013, policy makers faced a
major potential contraction (referred to as thefiscal clifj) as
the 2001 and 2003 tax cuts and other provisions were slated
to expire and spending reductions were scheduled to take
place. Although most of the 2001 and 2003 tax cuts were
made permanent and other changes were made, the fiscal
cliff still had a contractionary effect. Thus, addressing the
recovery in the past few years has fallen to monetary policy
conducted by the Federal Reserve.
The current condition of the economy indicates that a fiscal
stimulus (i.e., a deficit increase through higher spending or
lower taxes) would likely be ineffective in increasing
output. Yet the slow economic recovery and low inflation
rate suggest caution in moving too aggressively to reduce
deficits to address long-run debt challenges.
During the recession and recovery, the debt grew from
about 40% of GDP to more than 70%. This increase was
partly due to an increase in spending (stimulus and
automatic increase in transfer payments) and the decline in
revenues. As the recovery has progressed, revenues and
spending have returned to more normal levels stabilizing
the debt in recent years. (The debt can grow without
increasing the ratio of debt to GDP as long as it rises at a
rate less than or equal to GDP growth.)
Despite the near-term debt stabilization, the debt is
projected to grow in the future largely due to long-
recognized issues, such as the aging population and
increased health care costs. CBO's long-term projections
show the debt growing from 77% in 2016 to 86% in 2026
and to 141% in 2049, with accelerating subsequent growth.
The debt, in other words, is on an unsustainable path under
current policy.
Recent reductions in the deficit are mostly due to an
improving economy. But policy changes to reduce the
deficit were also achieved, primarily through caps on
discretionary spending (defense and nondefense).
Discretionary spending, however, is not the source of the
long-run debt problem. Based on current policies and an
extended baseline for certain types of spending, CBO
projects Social Security, Medicare, and other health
transfers (i.e., Medicaid, the Child Health Insurance
Program, and payments in the exchanges) each will
increase by about 1.6% of GDP, reaching a total of 4.7% of
GDP, by 2046. Discretionary spending is already set to
decline (due to the caps) by 1.6% of GDP over the next 10
years, leaving defense and nondefense spending at about](ViewImageLocal?handle=hein.crs/govceyq0001&div=1&collection=&method=preview&ext=.png&size=3)
What Is HeinOnline?
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most