The Hard Slog

In 2011, the economy was struggling. Americans were facing two problems: economic growth was low and we had piled up debt up to our eyeballs. The debt was unsustainable.

Unfortunately, this situation pushed the U.S. back not just for a few quarters; rather, we witnessed a high unemployment rate for years. This lethargic growth resulted in larger budget deficits which are still affecting the country today in 2014.

Peter Orszag predicted the fiscal gap would increase to over $13 trillion by 2020. In February, the U.S. government reported that the gap had already reached $12 trillion. However, some external sources (such as Bloomberg) have calculated the gap to be approximately $200 trillion – a drastic difference!

 

peter orszag fiscal gap

 

The reason Orszag predicted the fiscal gap to continue to increase was because he thought the government’s projections were far too optimistic when it came to unemployment. Financial collapse results in a frail economy. There are plenty of examples of this: Sweden and Finland in 1991, Japan in 1992… Those country’s unemployment rates still have not reached pre-crisis levels 20+ years later.

Due to the fact that U.S. labor markets are more flexible than other countries, the Congressional Budget Office predicted that the average unemployment rate from 2010-2020 would be six percent. This is only one percentage point above the five percent mark we were at before the crisis in 2008. Surprisingly, the country currently at 6.3% unemployment – a number that has been steadily declining since 2010.

Even though the U.S. has lowered unemployment and is approaching pre-crisis levels, it’s still struggling in terms of the fiscal budget. This is due to the adverse effects of deleverage, among other things.

The CBO, however, painted a misleading picture back in 2010 – basing its predictions on laws that Congress enacted at the time instead of how these laws would change in the future. An example of this is a tax cut; Congress put a date on when it is set to expire, but these tax cuts always extend past the deadline. Also, the recovery is exuberant in that it projects a recovery that is much quicker than other nations have experienced in the past.

Also, the CBO inflated its economic growth numbers with projections exceeding three percent from 2012-2016. Orszag thought that 2.25 was a much more realistic figure; taking that into account, he found that the country’s GDP would be more than 8.5% by 2021. We can only wait and see what the future will hold.

from Economist Peter Orszag http://ift.tt/1jYJ2zk

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