a recovery at risk households and companies
TRANSCRIPT
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01 18 2010
A recovery at risk
Households and companiesin the United States and in Europe:
spenders or savers?
Dean BAKER,Co-Director, Center for Economic and Policy Research,Washington
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Key Factors Limiting Growth in the U.S.
1. Saving rate is rising back to normal levels
2. Housing wealth is likely to decline further
3. Demographics are hugely tilted towards savings
4. High unemployment will deter consumption
5. Excess capacity will restrain investment
6. Over-valued currencies create uncertainty
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U.S. Saving Rate has Risen Sharply, Still BelowTrend
0
2
4
6
8
10
12
14
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2007 2008 2008 2009
Source: Bureau of Economic Analysis and author's calculations
Saving as a Percent of Disposable Income
In %
Saving Rate
Adjusted Saving Rate
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The Housing Bubble Has Only Partially Adjusted
Real house prices are still 15-20 percent above long-term trend
Vacancy rates are at record levels
Continued high unemployment
Flood of foreclosures (2 million a year) Factors temporarily supporting house prices will be removed
Fed purchases of mortgage backed securities (March)
First-time homebuyers tax credit (April) Tighter standards at Federal Housing Authority
Tighter standards at Fannie and Freddie
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Demographics Tilted Toward Savings
Baby boom cohort is in its peak saving years (ages 46-64)
Defined benefit pensions are disappearing
Most have little savings Median 45-54 - @$50,000
Median 55-64 - @ $60,000
Housing equity vanished with crash (Many underwater) Median 45-54 -@$30,000
Median 55-64 -@$70,000
Proposals to cut Social Security
Seniors face large and growing health care expenseseven with Medicare
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Unemployment Will Remain High
10.2%
9.1%
7.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2010 2011 2012
Projected Unemployment Rate - Congressional Budget Office
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Investment Will be Limited by Excess Capacity
Retail, office, and hotels all hugely overbuilt
in boom 2005-2008
Capacity utilization in manufacturing 67.6 percent (Oct.)
near post-depression low
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Dollar Remains Substantially Over-valuedAgainst East Asian Currencies
U.S. deficit with China is continuing to rise
There is huge uncertainty over future exchange rates
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A weak growth is expected in the US
U.S. economy likely to show weak growth
for the next several years
Possibility of further stimulus due to political pressure
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The Prospects for Further Stimulus
Pro:
Slow growth and high unemployment are bad news
for the Democrats in 2010 congressional elections
and 2012 presidential election
Stimulus money can please key constituencies
Stimulus money can also be tied to long-term goals(e.g. global warming, health care)
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The Prospects for Further Stimulus
Con:
Concerns over deficit/debt raise (unfounded) fears of declining
future living standards and financial crises
projected debt/GDP ratio for 2019 is just 67.8 percent low current interest rates suggest little fear in financial markets
real U.S. deficit story is health care
Stimulus will result in wasteful spending:
bad news in the era of YouTube
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The View of Europe from the United States
Europe, especially France, is often held up as a model of failure
(eurosclerosis)
myth of high unemployment
lack of dynamism in the economy
increasingly irrelevant with the rise of China and India
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The View of Europe from the United States
Less aggressive response to the economic crisis
and therefore slower recovery
smaller stimulus packages
ECB less aggressive than Fed