The U.S. Economic Outlook:
The Great Recession and anemic recovery
Andrew Fieldhouse
Federal Budget Policy Analyst
Economic Policy Institute
August 8, 2012
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Stages of the Great Recession
• U.S. housing bubble implosion: Decreased residential
investment, home equity wealth effects
• Recession: Decreased nonresidential fixed investment,
layoffs, rising unemployment, commercial real estate bust
• Financial crisis: Consumer and business credit contraction
(liquidity trap), stock market slide, non-residential financial
asset wealth effects
• State & local govt. budget crises: Falling property, income, &
sales tax receipts, balanced budget amendments force deep
cuts to employment & public services, tax hikes
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American Reinvestment and Recovery Act (ARRA)
• Turned around GDP and employment growth
• Averted a much deeper recession / depression
• Was far too small to fill the shortfall in demand
($821 billion 10-year cost smaller than one-year shortfall)
• As ARRA expenditures and tax cuts have wound down,
the economic recovery has stalled
Bottom line: Growth has been and will be determined almost
exclusively by fiscal policy - conventional monetary policy
has been maxed out since December 2008, limited impact of QE
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Consequences of failure to address jobs crisis
• Low inflation, low interest rates
-Too much slack in labor market for wage inflation
-Too much excess savings for government crowding out
• Increased income inequality
-Too much slack in labor market for real wage increases
• Long-term economic scarring
-Decreased potential output, capital erosion, wage scarring
• Big cyclical budget deficits
-Output gap accounts for roughly one-third of budget deficit
• Near-term deficit reduction is largely to entirely counterproductive
-Fiscal multipliers increase with the output gap 21

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Economic outlook remains bleak
• European recession and financial crises pose serious
headwinds to global economic growth (-2ppt for U.S.?)
• Federal fiscal policy has turned contractionary (ARRA,
ad hoc stimulus wind down), state & local remains so
• The “fiscal cliff” (i.e., current law fiscal trajectory) is
projected to induce a U.S. double-dip recession
• The Federal Reserve has little scope for further
monetary policy accommodation (QE3 in September?)
• Bottom line: U.S. faces years of slow GDP growth,
jobless recovery, big budget deficits, & downside risks
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