US growth gains strength

US economic growth will accelerate this year even as the pace of expansion remains sub-par 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 on Saturday in Philadelphia. “There is no reason for pessimism about our near future if we adopt appropriate policies.”

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 per cent last year for its biggest advance since 1997, while house prices rose in October from a year earlier by the most in more than seven years, according to the S&P/Case-Shiller index of values in 20 cities.

JPMorgan Chase & Co is among the Wall Street banks turning more optimistic, predicting this week the economy will expand 2.8 per cent this year, an increase from its 2.5 per cent estimate of a month ago and faster than the 1.9 per cent it calculates for 2013.

Former US 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,” Summers, who also teaches at Harvard, said at the annual conference of the American Economic Association. 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,” Bernanke said.

Summers, reiterating his warning that the US could be suffering from “secular stagnation,” told the conference the economy is 10 per cent 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 Summers and Feldstein advocated a multiyear programme of increased government spending on infrastructure projects such as improved transportation links. 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.