CBO Director Doug Elmendorf Offered A Sobering Jobs And Budget Outlook Today
Congressional Budget Office Director Doug Elmendorf addressed the National Economists Club luncheon today in D.C. He started with the good news: "In the near term (FY10-FY12), we expect the economy to recover." However, his job outlook was grim: "More pain of unemployment lies ahead of us than behind us." That's because this recession has had much more permanent job loss than past recessions and because our recovery is likely to be weak, with subpar job growth. We've lost 8.5 million jobs so far, and it would take 11 million new jobs to reach the level we would have had if the recession hadn't occurred. He expects the unemployment rate to drop to 5% by FY13, but, "That's a long ways away."
The deficit outlook is grim also. We closed FY09 last September 30 with a 9.9% of GDP deficit, and CBO estimates this year, FY10, will end at about 9%. FY12 drops to 4% under present law, but that assumes the Bush Tax cuts, equal to 2% of GDP, will expire -- a very unlikely event, so FY12 has a 6% of GDP deficit under current policy. The 3% of GDP deficit decline over the next two years breaks down into 2% from the expiration of the American Recovery and Reinvestment Act stimulus bill and 1% from automatic stabilizers. Federal debt held by the public was 40% of GDP at the end of FY08, and it will end FY10 just over 60%. Assuming the extension of the Bush tax cuts and no other changes in policy, it would reach 87% of GDP by FY20.
CBO expects subpar economic growth averaging 2.4% of GDP in the medium term, CY13-CY20, because of this large amount of debt and rising interest rates. He expects the 10-year Treasury bond to reach 5.5% by CY16. Another factor weighing on economic growth is continued decline in labor force participation by men.
In the Q&A, Doug said deficit reduction wouldn't necessarily reduce growth if it was done gradually and with credibility. He added that our low savings rate and high current account deficits put us as "higher risk" of weak growth. He cited the work of Ken Rogoff and Carmen Reinhart to that effect.
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Pete - Is that correct?
Pete - I note you state Elmendorf "expects the unemployment rate to drop to 5% by FY13". This is much better than I recall reading elsewhere. Most analysts I have read say something along the lines of FY16 OR FY17. Can you confirm that is not a mistake/typo?
It is probably not a typo
Elmendorf gave the same presentation to the Prosperity Caucus on Tuesday with the same nubmers. However, he also made the point that CBO is required by law to make assumptions about continuity of current policy that most private sector analysts recgnize are unrealistic. Anyone reading CBO reports MUST incorporate the various caveates and alternative scenarios they almost always include in their publications.
Elmendorf was very careful during his presentation to point out where and why CBO estimates differed from private sector analysis. He also discussed what assumptions are included in the baseline.