Recovery in the United States is under way but at such a moderate pace that painfully high unemployment rates will persist for some time, the Organization for Economic Cooperation and Development said on Monday
During the 2007-2009 recession, unemployment rose for 2-1/2 years before peaking in the fourth quarter of 2009 at 10% of the labour force, suggesting that it could be early 2013, at best, before the rate returns to its pre-recession level, the Paris-based group said.
It said the damage from the recession was so extensive that consumer demand was likely to be restrained over the next couple of years and, potentially, it could inflict a long-term increase in unemployment.
The OECD said that US actions in temporarily extending the duration of unemployment benefits up to 99 weeks from 26 weeks didn't seem to be reducing incentives to search for work but warned that could happen later.
Thus, as the unemployment rate comes down, the maximum duration of unemployment benefits should return to the pre-crisis level, as has happened in past recessions, it said.
The OECD said that because of the degree of slack in the economy and low inflation, current low interest rates were appropriate. But it urged policymakers to continue planning for a quick withdrawal of the very accommodative stance of monetary policy as soon as conditions permit in order to avoid a flare-up of inflation.
The housing market faces a long process of returning to normal, the OECD said. It noted that fallout from the slump in housing markets was more acute in the United States than elsewhere and urged reducing or ending mortgage-interest tax deductibility that it said benefits the rich disproportionately and spurs excessive home buying.
The OECD said the United States needs to get its budget deficits under control because it can't pile up debt endlessly but acknowledged that a questionable outlook means it must proceed with care. It offered an endorsement for the Obama administration's plan to cut the federal deficit to 3% of GDP by fiscal 2015 from 10.6%.
The report also said that the United States should look at pushing up consumption taxes rather than income taxes and suggested that would be one way to get savings up and deficits down.
”Raising consumption taxes, notably by introducing a federal value-added tax (VAT), could therefore be another approach to addressing fiscal challenges” OECD concluded.