Tags: Feldstein | economy | recovery | 2014

Harvard's Martin Feldstein: 'Still Much to Worry About' Despite Economic Improvements

By Michael Kling   |   Friday, 03 Jan 2014 07:22 AM

The economic recovery may finally begin accelerating in 2014, says Harvard University economist Martin Feldstein.

"Although there are serious risks facing the U.S. economy in the coming year, there is also a good chance that growth will be substantially stronger than it has been since before the recession began," Feldstein writes in an article for Project Syndicate.

His latest forecast represents a shift in view. While most other forecasters predicted a robust post-recession upturn, Feldstein warned of strong headwinds and weak recovery. For one thing, low rates wouldn't help much since the recession, unlike earlier ones, wasn't caused by high interest rates.

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Obama administration officials said their fiscal stimulus plan would help prompt a rebound.

However it was largely ineffective, according to Feldstein. It was too small, and much of it only financed more state government spending that otherwise would have financed through other means.

"Other parts of the stimulus went to individuals, but given the nature of the fiscal package," he adds, "increased transfers and spending added more to the national debt than to GDP."

Responding to the feeble recovery, the Federal Reserve began its quantitative easing stimulus, purchasing huge amounts of long-term securities to increase lower long-term rates.

"The Fed and others were again overly optimistic about the extent to which these policies would boost GDP growth," Feldstein writes, noting that the economy merely "limped along" and both home prices and the stock market were slow to recover.

"Fortunately, the outlook may now be changing for the better," he asserts. "Real GDP growth reached 4.1 percent in the third quarter of 2013, and fourth-quarter growth appears to have been relatively strong, driven by a dramatic rise in housing starts and industrial production."

Substantial increases in household wealth from rising home values and stock markets could foreshadow more consumer spending in 2014, he notes.

"There is still much to worry about," Feldstein argues. "But the U.S. economy has a better chance of achieving a significantly higher real growth rate in the coming year than at any time since the downturn began."

Other economists are also optimistic about 2014.

Congress is more likely to keep the government open, oil and gas prices are low, consumers are spending more and the unemployment rate is falling, experts tell NPR.

"The global economy is likely to emerge in 2014 with modest growth of 3.3 percent compared with 2.5 percent this year," states IHS Global Insight Chief Economist Nariman Behravesh, according to NPR.

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