WASHINGTON (CN) – The nationwide unemployment rate will likely stay above 8 percent until 2012 and above 6 percent until 2014 due to the slow pace of economic growth, Congressional Budget Office Director Doug Elmendorf told a Senate committee Tuesday. He warned that extending Bush-era tax cuts will harm economic growth by piling on to the ballooning federal deficit.
Though the economic recession officially ended in June 2009, the pace of recovery is “anemic” compared to recovery from other recessions, Elmendorf said at a Senate Budget Committee hearing.
Elmendorf, who heads the nonpartisan agency that studies the impact of legislation on the federal budget, said unemployment may not return to the pre-recession level of 5 percent “for quite a long time.” The unemployment rate has hovered at around 9.6 percent since May.
The biggest constraint on economic recovery, Elmendorf said, is the weak demand for goods and services, such as new home construction, that fuel economic growth.
“I don’t have a magic wand for the uncertainty and weak demand,” the director said.
Elmendorf said extending the 2001 and 2003 Bush tax cuts, an issue currently being debated among lawmakers, will boost jobs and economic output in the next few years, but will hurt the economy in the long run by raising deficit spending to unsustainable levels.
“The natural intuition is people thinking about their own situations,” Elmendorf said, explaining that the public largely believes tax cuts will only have a positive impact because they encourage more spending, saving and investing. But if the government funds the tax cuts through borrowing, Elmendorf said, it crowds out the investment in private capital such as buildings and machinery that drives real economic growth. “That connection is less visible…but it is no less important,” he said.
Extending tax cuts for both the middle and upper class would boost the deficit from $700 billion to $1.4 trillion by 2020, almost the amount the entire number the government spends on entitlement programs such as Medicare and Social Security.
“This is unsustainable-these numbers you are putting up here,” Sen. John Ensign, R-Nev., said. “This country is going to become Greece, except we don’t have the European Union to bail us out.”
During the last 40 years, government spending has averaged around 20 to 21 percent of GDP, Elmendorf said. With new projections in government spending, including the tax cuts extension, the percentage is expected to jump to the unprecedented rate of 24 percent of GDP.
The expanded government borrowing would “drag down income” and damage the economy to a greater extent than the economic boost that would be generated by tax cuts, Elmendorf said.
“So the tax cuts are harmful to economic growth because they are deficit-financed, is that correct?” Committee Chair Sen. Kent Conrad, D-N.D., asked.
“Yes, that’s correct, Mr. Chairman,” Elmendorf said.
“Then we’ve got a conundrum,” Conrad said.
But Elmendorf also said letting the tax cuts expire would surely slow economic growth. He said the tax cuts needed to be accompanied by other changes in government.
Elmendorf suggested that the government provide additional fiscal stimulus now and employ fiscal restraint in the medium- and long-term to ensure sustainability. He proposed a combination of lower tax rates and lower spending.
He said the most effective fiscal policy options would be to temporarily increase aid for the unemployed and temporarily reduce employers’ payroll taxes, which would spur hiring.