Harvard’s Feldstein: Economy in a ‘Deep Hole,’ Doing ‘Terribly’

Thursday, 13 Sep 2012 07:47 AM

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The economy is performing "terribly" and might not even grow 2 percent this year, said Harvard economist Martin Feldstein, former Council of Economic Advisers chairman under President Ronald Reagan.

The economy grew a tepid 1.7 percent in the second quarter, while unemployment rates refuse to dip below 8 percent.

“We are in a deep hole, we are crawling along,” Feldstein, an adviser to the Romney campaign, told CNBC.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

Many economists are hoping the economy will grow beyond 2 percent, but even matching that goal would be quite an accomplishment, Feldstein said.

“We’d be very, very lucky if that happens,” Feldstein. “We’re much more likely to be well short of 2 percent growth when we really need several years of 4 percent growth if we’re ever to get back to anything like full employment.”

The Federal Reserve might announce plans to stimulate the economy via bond purchases from banks, though such a monetary policy tool, known officially as quantitative easing (QE) but dubbed by many as printing money out of thin air, won't spur demand and recovery but will merely keep already rock-bottom interest rates low.

"It won’t have much impact at all on the economy,” Feldstein said, CNBC added.

Allaying fiscal concerns will bring demand back to the economy.

“If people think taxes are going up, they’re going to hold back on spending, business are going to hold back on hiring and investing,” Feldstein said.

At the end of this year, a series of tax breaks are scheduled to expire, while automatic cuts to government spending are scheduled to kick in, a combination known as a fiscal cliff that could send the economy back into recession next year if left unchecked by Congress.

Other experts agree that further monetary policy won't create jobs, as the Fed has already jolted the economy twice with past rounds of bond buying, pumping a combined $2.3 trillion into the economy in the process.

"The Fed continues to want the economy to grow faster and, specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," said Catherine Mann, a Brandeis University finance professor and former Federal Reserve economist, according to CNNMoney.

"We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending," Mann said, adding "since it hasn't done any of that, it probably hasn't created jobs either."

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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