Economic growth in the U.S. will speed up this year even as the pace of expansion remains disappointing almost five years after the end of the recession, according to academic economists and former policy makers.
“2014 is going to be a better year,” Martin Feldstein, a professor at Harvard University and chairman of the Council of Economic Advisers under President Ronald Reagan, said Saturday at a conference in Philadelphia. “There is no reason for pessimism about our near future if we adopt appropriate policies.”
Mr. Feldstein pointed to diminishing drag from fiscal policy and an $8 trillion increase in household wealth over the last 12 months from rising stocks and home prices.
The Standard & Poor's 500 Index climbed 30 percent last year for its biggest advance since 1997, while house prices rose in October from a year ago by the most in more than seven years, according to the S&P/Case-Shiller index of property prices.
JPMorgan Chase & Co. is among the Wall Street banks turning more optimistic, predicting this week the economy will expand 2.8% this year, an increase from its 2.5% estimate of a month ago and faster than the 1.9% it calculates for 2013.
Former U.S. Treasury Secretary Lawrence Summers and John Taylor of Stanford University agreed in interviews that stronger growth this year was possible even as they clashed over what more policy makers could do to speed expansion.
“I'm not arguing with Marty about being a little more optimistic, but I think it's a mistake to say that all's well,” Mr. Summers, who also teaches at Harvard, said at the annual conference of the American Economic Association. Mr. Taylor, a former Treasury undersecretary, said growth this year “will be better but to me it's still disappointing -- it's not going to be what it could be.”
The academics spoke a day after Federal Reserve Chairman Ben S. Bernanke told the conference that headwinds to growth may be abating. He cited a healthier financial industry, greater balance in housing, less fiscal restraint and accommodative monetary policy as reasons for optimism in coming quarters.
“Of course, if the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts,” Mr. Bernanke said.
Mr. Summers, reiterating his warning that the U.S. could be suffering from “secular stagnation,” told the conference the economy is 10% weaker than the Congressional Budget Office projected prior to the financial crisis in 2007. About half of that probably won't be recovered as the recession has permanently damaged growth by curtailing capital spending and prompting people to quit the workforce, he said.
To propel growth, both Mr. Summers and Mr. Feldstein advocated a multiyear program of increased government spending on infrastructure projects such as improved transportation links. Mr. Feldstein said a $1 trillion, five-year fiscal plan should be offset by efforts to slow the growth of Social Security and Medicare outlays in the longer run.
“Expansionary fiscal policy is the right, primary response to our current woes,” said Mr. Summers, a former director of President Barack Obama's National Economic Council. “An increase in demand is required.”
Mr. Taylor blamed policy makers for undermining the economy by acting unpredictably and intervening too much, sowing confusion among companies and consumers about the economic outlook. Among his targets: a lack of clarity toward bank rescues, congressional standoffs over the budget and bond purchases known as quantitative easing by the Fed.
“Policy has to be on the list of factors to criticize for poor performance,” he said.
Summers rejected that analysis, drawing an analogy with a doctor who prescribes medicine at times of illness. Taking extraordinary action was often worthwhile even if it departed from past practice, he said.
In turn, Mr. Taylor questioned Mr. Summers's suggestion that the economy could be mired in secular stagnation in which the Fed cannot cut interest rates low enough to deliver full employment without risking financial instability. Although Mr. Summers said such a phenomenon could have taken hold before the crisis, Mr. Taylor said the economy had experienced faster inflation and strong hiring in the mid-2000s.
The U.S. is faring better than most other industrial nations in having recovered its pre-crisis level of per capita output, said Kenneth Rogoff, also of Harvard and a former chief economist at the International Monetary Fund.
That's “no guarantee everything is fine again,” Mr. Rogoff told a separate session in Philadelphia.
His co-author, Carmen Reinhart, said their study of historical crises showed it often takes time for companies to ramp up investment even after the economy has regained lost ground.
IMF chief economist Olivier Blanchard said it's “worrisome” that the U.S. and other industrial nations have failed to make a full recovery five years after the recession concluded.