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Is the Recovery Sustainable?

Author

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  • Dimitri B. Papadimitriou
  • Greg Hannsgen
  • Gennaro Zezza

Abstract

Fiscal austerity is now a worldwide phenomenon, and the global growth slowdown is highly unfavorable for policymakers at the national level. According to our Macro Modeling Team's baseline forecast, fears of prolonged stagnation and a moribund employment market are well justified. Assuming no change in the value of the dollar or interest rates, and deficit levels consistent with the Congressional Budget Office's most recent "no-change" scenario, growth will remain very weak through 2016 and unemployment will exceed 9 percent. In an alternate scenario, the authors simulate the effect of new austerity measures that are commensurate with the implementation of large federal budget cuts. Here, growth falls to 0.06 percent in the second quarter of 2014 before leveling off at approximately 1 percent and unemployment rises to 10.7 percent by the end of 2016. In their fiscal stimulus scenario, real GDP growth increases very quickly, unemployment declines to 7.2 percent, and the US current account balance reaches 1.9 percent by the end of 2016—with a debt-to-GDP ratio that, at 97.4 percent, is only slightly higher than in the baseline scenario. An export-led growth strategy may accomplish little more than drawing a small number of scarce customers away from other exporting nations, and the authors expect no net contribution to aggregate demand growth from the financial sector. A further fiscal stimulus is clearly in order, they say, but an ill-timed round of fiscal austerity could result in a perilous situation for Washington.

Suggested Citation

  • Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2011. "Is the Recovery Sustainable?," Economics Strategic Analysis Archive sa_dec_11, Levy Economics Institute.
  • Handle: RePEc:lev:levysa:sa_dec_11
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    File URL: http://www.levyinstitute.org/pubs/sa_dec_11.pdf
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    1. repec:cbo:report:41586 is not listed on IDEAS
    2. repec:cbo:report:415867 is not listed on IDEAS
    3. repec:cbo:report:415866 is not listed on IDEAS
    4. Congressional Budget Office, 2011. "Budget and Economic Outlook: An Update," Reports 41586, Congressional Budget Office.
    5. repec:cbo:report:415865 is not listed on IDEAS
    6. Congressional Budget Office, 2011. "Budget and Economic Outlook: An Update," Reports 41586, Congressional Budget Office.
    7. Congressional Budget Office, 2011. "Budget and Economic Outlook: An Update," Reports 41586, Congressional Budget Office.
    8. Rania Antonopoulos & Kijong Kim & Tom Masterson & Ajit Zacharias, 2010. "Investing in Care: A Strategy for Effective and Equitable Job Creation," Economics Working Paper Archive wp_610, Levy Economics Institute.
    9. Congressional Budget Office, 2011. "Budget and Economic Outlook: An Update," Reports 41586, Congressional Budget Office.
    10. Congressional Budget Office, 2011. "Budget and Economic Outlook: An Update," Reports 41586, Congressional Budget Office.
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    Cited by:

    1. Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2012. "Back to Business as Usual? Or a Fiscal Boost?," Economics Strategic Analysis Archive sa_apr_12, Levy Economics Institute.
    2. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos & Gennaro Zezza, 2013. "Rescuing the Recovery: Prospects and Policies for the United States," Economics Strategic Analysis Archive sa_oct_13, Levy Economics Institute.

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