CBO director Doug Elmendorf offered reporters a sneak preview of his agency’s forthcoming economic forecast Tuesday, at a breakfast roundtable hosted by the Christian Science Monitor. It’s bad news for most Americans — and bad political news for President Obama.
“A great deal of the pain of this downturn lies in front of us still,” Elmendorf said.
At the beginning of the year, CBO put the U.S. on a five-year path of modest growth, over which time they predicted the unemployment rate would crawl down toward five percent. Elmendorf sees nothing on the horizon to speed that up.
“At this point I don’t expect large changes to that forecast,” he said.A number of factors, Elmendorf noted, risk upending the recovery — another oil price spike, say, or a European economic crisis. But he’s heartened by the fact that households have deleveraged, businesses are sitting on cash, and anything that increases individual and business confidence could prompt new spending.
The White House recognizes the problem and the risk — though it’s unclear if they have a plan in place to inject more demand into the economy. On Monday, President Obama called on bipartisan debt negotiators to include an extension of a recently-enacted payroll tax holiday in any agreement to cut spending and raise the debt limit.
If he agrees to spending cuts in the coming years, it “gives us a little bit of room to continue to do some smart things like the payroll tax cut that we initiated in December while still keeping our eye on the ball in terms of the long term,” he said.
Obama’s former top economic adviser, Larry Summers, is also pushing to extend the payroll tax cut — but also to broaden and deepen it. Such a pairing, Elmendorf suggested, would be good medicine for the economy in the near and medium term.
“We think that cuts in government spending or increases in taxes in the next few years would reduce economic activity and employment relative to what would otherwise occur,” he said. “At the same time we think that reductions in government spending, or increases in taxes later in the decade would hold down interest rates and increase confidence today in a way that would increase output and employment today.”