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Working Against Economic Headwinds

Testimony Before the Massachusetts State Senate and House Ways and Means Committees

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SOURCE: Center for American Progress

CAP’s Christian Weller testifies before the Massachusetts State Senate and House Ways and Means Committees. Read the testimony. (CAP Action)

Introduction

The U.S. economic recovery remains weak. Economic growth returned in the middle of 2009, reversing course after the worst recession since the Great Depression, but the economic recovery has been remarkably weak.

U.S. economic growth currently seems insufficient to substantially lower the unemployment rate in 2011 and 2012 because it faces several headwinds. First, consumption growth is comparatively low for this recovery since households are still burdened by crushing debts. Household deleveraging could continue into the second half of this decade, slowing consumption and economic growth, unless income growth accelerates. Second, all governments—federal, state, and local—face large budget deficits, which have already reduced government spending and employment and hence economic growth. Governments at all levels seem poised to continue their spending cuts in key areas, thus further holding back growth in the near term. Additionally the ongoing economic crisis in Europe could slow U.S. exports in the coming years, thus further dampening economic growth.

A number of policy measures are possible to soften the impact of some of these headwinds. Congress is debating measures to raise personal after-tax income, such as lowering the payroll tax and extending unemployment-insurance benefits. But Congress has missed an opportunity to balance short-term challenges to boost economic growth with the need to rein in long-term budget deficits, when the super committee charged with devising a plan to reduce long-term deficits admitted failure just before Thanksgiving. Furthermore, there is little the U.S. government can do to handle the economic crisis that roils Europe. The economic headwinds will remain although some policy steps are possible to lessen the effects of these obstacles to faster economic growth.

Since the crisis began the Massachusetts economy has performed comparatively better than the rest of the country. Its growth has been stronger in the crisis and its unemployment rate has stayed below the national average since the crisis began in 2007. But some of the economic headwinds, especially declining exports to the European Union and defense spending cuts, could have a disproportionate effect on the Massachusetts economy, which depends more heavily on EU exports and on defense spending than the rest of the country.

CAP’s Christian Weller testifies before the Massachusetts State Senate and House Ways and Means Committees. Read the testimony. (CAP Action)

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