Ryan Streeter
It may not be fun to read, but it's a must-read. John Makin at AEI has just released his AEI Outlook series pamphlet, "Lift-Off or Cold Shower? The Economy in 2011."
The initial estimates are that the effect of the tax cut deal signed at the end of 2010 will jump-start some growth, but the end of the year is anyone's guess:
The stimulus package will probably produce about a 3.4 percent growth rate in 2011, with a 4 percent annual growth rate possible in the first half and a 2.8 percent rate in the second half. These are estimates, of course, but the front-loading of the tax relief, especially the reduced payroll taxes, will give a nice boost to growth early in 2011. The tricky part will come at the end of the year. If the monetary-fiscal stimulus combination does not work--that is, if US growth is fading again in the second half of 2011--the US economy will face a very unpleasant 2012.
There are four internal risks (in addition to China overheating, a big external risk) that will make economic "lift-off" difficult, thus raising questions about what will happen after the initial boost:
- The new Congress will be far less friendly to additional stimulus plans and may even implement fiscal consolidation.
- Higher energy costs tied to a sharp rise in the price of oil could be a drag on disposable income.
- The housing sector remains under heavy stress with substantial excess capacity...that will continue to depress home prices and household wealth.
- State and local governments will be intensifying the fiscal drag already underway as support from the initial federal stimulus package wanes.
The best hope for growth is, as unpopular as it might be right now, more US consumption:
It is ironic that in a world where complaints of excessive US consumption abound, the best hope for sustainable global growth as we move into 2011 is more US consumption, financed this time by a combination of temporary tax cuts.
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