When will unemployment drop enough to signal a healthy labor market?
We don't see [that] rate below 7 percent until the 2nd half of the decade. In the next 2-3 years, we need more demand. A major public works program would help but is politically impossible. In the longer term, we must improve workforce skills.
You predict a 40 percent chance of a double dip. Why?
A worsening financial crisis in the Eurozone. But we could have more shocks [here], too, with deadlines for 2012 budget details, the Super Committee’s report due in Nov., and the temporary payroll tax cut and emergency unemployment benefits expiring in January 2012 if no action is taken.
Will the Fed’s move to lower borrowing costs revive housing and the overall economy?
The Fed is “pushing on a string.” Its actions won’t make a big difference. Direct action in the housing market – perhaps allowing underwater borrowers to refinance to lower interest rates – would help, but that’s not under Fed control.
Is now the right time for fiscal restraint, with a weak economy?
It is appropriate to focus on future fiscal restraint, and to produce credible plans to implement it. But we do not need immediate austerity.
If the Super Committee fails, how will the economy react?
It would create more uncertainty and less confidence, which would be bad for growth. It would be a major blow for defense, which would be hit hard by automatic cuts. The election would focus on what spending cuts and/or tax increases should be enacted.