The Cost of the Recession

http://www.nytimes.com/interactive/2013/02/12/business/The-Cost-of-the-Recession.html?nl=todaysheadlines&emc=edit_th_20130213

***************
"If you are successful, it is because somewhere, sometime, someone gave you a life or an idea that started you off in the right direction." (Melinda Gates)
***************

"Potential GDP" is the Congressional Budget Office's (CBO) estimate of the maximum sustainable level of output of the economy. I have attached the color graph, along with the article that supports it, that shows how far "under" U.S. GDP growth is versus what it could have been: about $7.5 trillion in economic output.

Jacob Lew, the nominee for Treasury Secretary, testified in his confirmation hearing this morning that Senate lawmakers need to avoid $85 billion in automatic spending cuts set for March 1: "We cannot allow the series of harmful automatic spending cuts known as the sequester to go into effect on March 1. These cuts would impose self-inflicted wounds to the recovery and put far too many jobs and businesses at risk."

According to the CBO's latest forecast, GDP growth this year will average 1.4%. As measured by the CBO GDP growth trend line, by the time we recover to our potential, it will be 2017. Given this weak growth scenario, the CBO expects unemployment to remain above 7.5% through next year.

By CBO calculations, the sequester spending cuts referred to by Jacob Lew, will cut economic growth in half.

So, if I could put the thoughts of Nouriel Roubini that U.S. economic growth is generally running at "stall speed" (and I would think that the CBO-predicted 1.4% certainly qualifies) together with the March 1 sequester spending cuts that will cut economic growth in half, then what we'll have for the year 2013 is less than 1% GDP growth. I believe most economists agree that it takes U.S. GDP growth of roughly 2.5% just to stay even with new entrants into the workforce, let alone grow jobs.

Lawrence Summers, President Obama's former top economic adviser, points out that there are many profitable economic opportunities for the government to improve the nation's physical infrastructure, opportunities that would yield much more than a dollar in economic output for each dollar spent: "There is plenty of idle capacity in the construction industry - unemployed workers, unused machinery. And the government can borrow for 15 years at negative real interest rates."

This type of infrastructure spending is going to have to be done (roads and bridges) in the near future anyway. As Summers points out, not doing it now, "...burdens future generations just as surely as more debt does."

So, cutting spending does not appear to be the way to go for 2013 GDP growth.