URBANA — Prospects for the U.S. economy look grim for the next six to nine months, a former chairman of President Barack Obama's Council of Economic Advisers said.
But Austan Goolsbee said longer-term prospects for the U.S. economy look brighter, especially when compared with other countries around the world.
Goolsbee, a University of Chicago professor of economics who served as council chairman in 2010 and 2011, shared his thoughts in delivering the David Kinley Lecture on the University of Illinois campus Thursday.
Usually the housing sector helps bring the economy out of recession. But this recovery has been slow due to an overabundance of housing and a shrinking government sector, Goolsbee said.
The world can't help the U.S. recovery much because the Chinese economy is slowing down and the European economy is a mess, he said.
China has "a significant property bubble," but the medium-term prospects there are "quite good," Goolsbee said.
Not so Europe, where countries are linked together at the wrong exchange rate, he said.
Unless Germany is willing to subsidize the weaker economies, the European Union will blow apart, he said.
"Europe is on the road to nowhere," Goolsbee said.
Goolsbee said he has little confidence U.S. leaders will find a way to avert the "fiscal cliff" coming at the end of the year when the Bush tax cuts are due to expire.
As a result, he said, some economists are predicting the U.S. will go into recession in early 2013.
But Goolsbee said he's optimistic government leaders will strike "a grand bargain on deficit reduction" next year.
He said they were "85 percent on the way to a deal last summer." He predicted that if leaders fail to avert the "fiscal cliff" this year, taxpayers who see a $4,000 increase in their tax bill next year will be so angry that politicians will respond.
Goolsbee said the proposed Bowles-Simpson compromise would have cut $4 trillion from the deficit over 10 years by making $3 million in spending cuts and raising $1 trillion in revenue. But Republicans and Democrats couldn't come to terms on an alternative.
Though the deficit numbers seem staggering, Goolsbee said, the U.S. is "completely capable of solving these problems."
It's in a much better position than most other countries, because it has a younger population and lower taxing and spending rates, he said.
If a federal value-added tax were enacted to solve the problem, it would need to raise an amount equal to 4 percent to 6 percent of Gross Domestic Product, Goolsbee said. That's a lower percentage than what most countries would require.
Goolsbee said the U.S. is also "massively entrepreneurial," a huge help when it comes to spurring economic growth.
When asked whether the student debt crisis is the next big crisis to hit the U.S., Goolsbee responded that "by far, the most dangerous crisis is in Europe."
European banks are holding European government debt with no capital held against it, he said.
"If European banks collapse," Goolsbee said, the problem could "jump the Atlantic and put us back into financial crisis."
When asked what he liked and disliked about his Washington experience, Goolsbee called his time there "extremely stressful," some days "sleeping under my desk and eating Tic Tacs for dinner."
He described his White House experience as "really tense" with "awful arguments" and "a pit in the stomach."
But when he turned and saw the Emancipation Proclamation in the Oval Office, he was reminded it was an "amazing place."
In contrast to academia, where he sometimes wondered if his work made a difference, he could see the results of his efforts in Washington.
Often, it was warning the president not to follow the advice of some government agency. At times like that, Goolsbee said, he could tell himself, "I just saved the government $30 billion."