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Fiscal Austerity, Dollar Appreciation, and Maldistribution Will Derail the US Economy

Listed author(s):
  • Dimitri B. Papadimitriou
  • Greg Hannsgen
  • Michalis Nikiforos
  • Gennaro Zezza

In this latest Strategic Analysis, the Institute's Macro Modeling Team examines the current, anemic recovery of the US economy. The authors identify three structural obstacles--the weak performance of net exports, a prevailing fiscal conservatism, and high income inequality--that, in combination with continued household sector deleveraging, explain the recovery's slow pace. Their baseline macro scenario shows that the Congressional Budget Office's latest GDP growth projections require a rise in private sector spending in excess of income--the same unsustainable path that preceded both the 2001 recession and the Great Recession of 2007-9. To better understand the risks to the US economy, the authors also examine three alternative scenarios for the period 2015-18: a 1 percent reduction in the real GDP growth rate of US trading partners, a 25 percent appreciation of the dollar over the next four years, and the combined impact of both changes. All three scenarios show that further dollar appreciation and/or a growth slowdown in the trading partner economies will lead to an increase in the foreign deficit and a decrease in the projected growth rate, while heightening the need for private (and government) borrowing and adding to the economy’s fragility.

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File URL: http://www.levyinstitute.org/pubs/sa_5_15.pdf
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Paper provided by Levy Economics Institute in its series Economics Strategic Analysis Archive with number sa_may_15.

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Date of creation: May 2015
Handle: RePEc:lev:levysa:sa_may_15
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. Dimitri B. Papadimitriou & Michalis Nikiforos & Gennaro Zezza & Greg Hannsgen, 2014. "Is Rising Inequality a Hindrance to the US Economic Recovery?," Economics Strategic Analysis Archive sa_apr_14, Levy Economics Institute.
  2. Fernando Rios-Avila & Julie L. Hotchkiss, 2014. "A Decade of Flat Wages?," Economics Policy Note Archive 14-4, Levy Economics Institute.
  3. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos, 2013. "Is the Link between Output and Jobs Broken?," Economics Strategic Analysis Archive sa_mar_13, Levy Economics Institute.
  4. Wynne Godley, 1999. "Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World," Economics Strategic Analysis Archive 99-10, Levy Economics Institute.
  5. Michalis Nikiforos, 2013. "Employment Recovery? after the Great Recession," Economics Policy Note Archive 13-03, Levy Economics Institute.
  6. 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.
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