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White House economic adviser: Declining fiscal drag reason for optimism in 2014

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The economy is positioned for stronger growth in 2014 if the private sector can match its 2013 performance, top White House economic adviser Jason Furman said Friday morning.

Speaking at a Christian Science Monitor media breakfast, Furman said that "there are a lot of things that are unpredictable, there are a lot of risks, but broadly speaking the thing that is most predictable is fiscal policy." And in 2014, the U.S. will have far fewer tax hikes and government spending cuts that Furman explained held back growth. "That's the single biggest reason to be optimistic about 2014,” he noted.

In February 2013, the Congressional Budget Office projected that on top of the tax provisions that took effect as part of the "fiscal cliff deal" early in the year, the broad-based sequestration spending cuts would cut 1.5 percentage points from growth last year.

Economic growth checked in at a total 1.9 percent, the Bureau of Economic Analysis reported Thursday. That number, a decrease from the year before, reflected a 0.4 percentage point negative contribution from federal government spending and investment.

Goldman Sachs estimates that fiscal drag will decrease gross domestic product growth only by a quarter to a half of a percentage point in 2014 and total growth should rise to 3 percent. In a recent interview with "Time," incoming Federal Reserve Chairwoman Janet Yellen also expressed hope for a GDP number starting with three in 2014.

The greatest threat to an improving economy in the short run, Furman said, is high long-term unemployment. The long-term unemployment rate remains sky-high at 2.5 percent, and those out of work for 27 weeks or longer make up 40 percent of all the jobless.

The Obama administration has been pushing for a continuation of an extended unemployment insurance program that expired in December, depriving an estimated 1.6 million job-seekers of benefits. On Friday, the White House was due to host an event with major corporations focused on improving hiring of the long-term jobless.

The long-term unemployed are an especially disadvantaged group, Furman said, but people who look a lot like the workforce as a whole. "This is a group that, for the most part through the bad luck of the recession, lost their job and haven’t been able to get back on their feet since," he told reporters.

Furman also downplayed the significance of the declining labor force participation rate, which in December stood at its lowest level since 1977. That decline "wasn't just predictable, it was predicted," said Furman, claiming that about half the decline since 2008, and almost all of it in the past three years, has been because of demographic factors. The rest is cyclically driven, and reflects people staying in school longer, and some staying out of work longer after having a baby, as well as some people getting discouraged by poor job opportunities.

"We expect to see those people start re-entering the labor force" as the recovery continues, Furman said.

He also waved off concerns raised by former Obama economic adviser Larry Summers that the U.S. has entered a period of "secular stagnation" in which the country is unable to naturally return to full employment without risking some kind of bubble.

Despite the "headwinds" of fiscal contraction and economic turmoil in Europe, Furman noted, the U.S. economy has "over-performed," at least "relative to what you have coming out of a financial crisis" like the one that struck in 2008.

Furman also dismissed the idea that robots will displace human workers as technology improves. That idea, he said, "doesn't keep him up at night," because the economy has seen hundreds of years with rapid technological innovation, and most of the time roughly 97 percent of the people who want jobs can find them.

Furman has served as chairman of the Council of Economic Advisers since August. The CEA is tasked with providing the president with economic advice on domestic and international policies.

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Joseph Lawler

Economics Writer
The Washington Examiner