The U.S. economy is headed toward another recession because the Obama administration has not done enough to fuel job demand, says Martin Feldstein, a Harvard economist and chairman of President Reagan’s Council of Economic Advisers.
Unemployment numbers remain elevated will likely stay that way for a while.
"Until this downturn began in the beginning of 2008, the economy was doing just fine. We had 4.5 percent unemployment, we created millions of jobs," Feldstein says.
"The real problem is that we are still in a recession, and we don't have decent counter-recessionary tools. I think there is a serious risk that the economy will turn down again in the months ahead, that we'll move into a new recession."
|President Barack Obama
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The housing sector needs to recover in order to the economy to really gain steam
"House prices have fallen 11 out of the last 12 months, housing starts are down, so we're in a terrible situation in which lower house prices reduce the wealth of households, reduce the balance sheets of banks," Feldstein says.
"The administration's policies there have been a total failure because they haven't dealt with the serious problem, which is that millions of homeowners — about 15 million homeowners — owe more on their mortgage than their house is worth. And that has to be tackled."
The government, meanwhile, is working its way out of the debt-ceiling impasse and avoiding a default on its bonds.
Going forward, the administration needs to tackle gaping deficits if the economy is going to improve.
That's going to mean hikes to government revenue sooner or later, Feldstein says.
"Revenue at the federal level is now about 14 percent of GDP. But it's projected that as we come out of this recession to go back to the traditional level of about 18 percent. We may need to top that up because of growing entitlement spending," Feldstein says.
That doesn't necessarily mean Americans are going to have shell over more money to the IRS every year, Feldstein says. Improvements to tax codes can help
"We can do that without raising marginal tax rates. We can do that without penalizing saving and investments and corporate activity if we go after some of the so-called tax expenditures, the spending that is built into the tax code."
Focusing on the dollar, Feldstein says a weaker greenback has been good for the economy in that it has bolstered U.S. exports.
It's also going to force U.S. consumer to buy less imports.
Although exports account only 10 percent of U.S. gross domestic product, the rise in exports during the past four quarters contributed more than 50 percent of GDP growth during that period, Feldstein writes separately in the Wall Street Journal.
However, a weaker dollar — the product of monetary and fiscal policies — could lead to higher borrowing costs down the road.
"The worry is that foreigners seeing the falling dollar will reduce their appetite for dollar bonds and that would push up interest rates here unless the government stops borrowing so much," Feldstein tells CNBC.
"So if we're going to have reduced lending from the rest of the world to the United States, we have to cut back on government borrowing here."
Republicans and Democrats agreed on a debt-ceiling package that calls for shaving $2.4 trillion off budget deficits over a decade.
Spending cuts, coupled with tax hikes that many Democrats want to use to narrow deficits, make slow growth, economists say.
"Over the next 10 years, there will be further spending cuts and higher taxes, and that’s not good for economic growth," says Paul Dales, senior economist for Capital Economics in Toronto, according to Bloomberg.
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