Handicapping 2012

In the past few weeks, the good economic news pouring in has kept newspaper business sections buoyant, but the celebrations may be premature. One of the biggest problems barring a quick comeback for the economy is inadequate aggregate demand—without demand, we can't produce more goods and can't hire more people. The Treasury estimates that the gap between actual and potential output is over 7 percent—that's equal to $1 trillion worth of goods and services. The U.S. has a considerable 12.1 million jobs gap as well, which won't close until 2024 if we keep adding 200,000 new jobs per month, the pace set in December 2011.

Recovery so far has been somewhat backwards too—consumer spending, housing, and construction are usually signs of early growth, but they have been the last things to bounce back. Instead, manufacturing and business investments—leading to downturns in unemployment—have been at the forefront of our recovery. These changes have led to a tepid increase in consumer spending that was accompanied by the largest increase in consumer debt since October 2001. All in all, there are a lot of variables to be considered—not even accounting for the economic situation in Europe. The economy needs to be on its best behavior in 2012, and that doesn't leave room for the government to undertake a mission of financial austerity. 
 

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The Economist's Big Mac Index was recently updated for the first time since July 2011, and the Euro crisis' impact on currency is clear. The euro, 21 percent overvalued against the dollar in July, is now only six percent overvalued and trading at less than €1.30 to every dollar. The Hungarian forint and the Czech koruna have also considerably weakened against the dollar.
 

 

Reason to Get Out of Bed in the Morning

Stephen Colbert is exploring a presidential run in South Carolina. Colbert made the exploration legal by handing over control of his super PAC, Americans for a Better Tomorrow, Tomorrow, to fellow joke news anchor Jon Stewart.
 

 

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