Home > Americas, Economics, USA > The U.S. Economy: What’s Next?

The U.S. Economy: What’s Next?

Wynne Godley, Dimitri B. Papadimitriou, and Gennaro Zezza write in the Levy Economics Institute:

The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment.1 Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. Others believe that the turmoil will be contained, and that the U.S. economy will recover quite rapidly and resume the steady growth it has enjoyed during the last four years or so. Yet no participants in the public discussion, so far as we know, have framed their views in the context of a formal model that enables them to draw well-argued conclusions (however conditional) about the magnitude and timing of the impact of recent events on the overall economy in the medium term—not just the next few months.

The CBO’s Report as a Starting Point

In January, the Congressional Budget Office (CBO) produced its annual report, which, as usual, gave projections of the budget deficit based on the government’s tax and expenditure plans, together with assumptions about GDP growth and inflation during the next few years. And, as usual, the figures describing GDP and inflation, both indicating a Goldilocks world in the medium term, were no more than assumptions. The CBO made no attempt to demonstrate that they made sense in terms of the likely evolution of the economy as a whole. One of our principal points is that the CBO’s assumptions, viewed in the context of other likely events, are wildly implausible if viewed as predictions.We build our own argument around likely changes in the financial balances of the three major sectors of the economy—government, foreign, and private—which, as a matter of logic, must always sum to zero.

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Categories: Americas, Economics, USA
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