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The Congressional Budget Office (CBO) is required by section 202(f) of the Congressional Budget Act of 1974 (Public Law 93-344) to submit an annual report on budgetary options to the House and Senate Committees on the Budget. This year's report is in three parts. This volume, Part I, examines the state of the economy and the outlook, fiscal and monetary policy choices, and policies to reduce unemployment. Part II, Baseline Budget Projections for Fiscal Years 1984-1988, provides a baseline for the consideration of multiyear budget options; the projections show what would happen if current taxing, spending, and lending policies were to continue unchanged for the next five fiscal years. Part III, Reducing the Deficit; Spending and Revenue Options, presents for Congressional consideration a number of broad strategies to reduce projected budget deficits and various specific options for cutting outlays and increasing revenues. In accordance with CBO's mandate to provide objective and impartial analysis, these reports contain no recommendations.

The Outlook for Economic Recovery was prepared by George R. Iden, Frederick Ribe, Robert Dennis, Frank S. Russek, Jr., Peter M. Taylor, Jane D'Arista, Stephan Thurman, Peter Woodward, Debra Holt, Christopher D. Kask, Naif A. Khouri, Emery Simon, John W. Straka, John R. Sturrock, and Stephen H. Zeller, under the direction of William J. Beeman.

Robert L. Faherty and Francis S. Pierce edited the manuscript. Debra M. Blagburn, Dorothy J. Kornegay and Mechita O. Crawford typed the many drafts.
 

Alice M. Rivlin
Director
February 1983
 
 

CHAPTER I. SUMMARY AND INTRODUCTION

• Recent Economic Developments
• The CBO Economic Projections
• The CBO Budget Projections
• Policy Alternatives
• Conclusion

CHAPTER II. THE ECONOMIC SITUATION

• The Reduction in Inflation
• The Recessions of the 1980s
• An International Recession
• Fundamentals of Recovery and Growth

CHAPTER III. THE CBO ECONOMIC AND BUDGETARY PROJECTIONS TO THE YEAR 1988

• The Outlook
• Major Uncertainties in the Outlook
• Alternative Economic Paths and Budget Estimates

CHAPTER IV. FISCAL AND MONETARY POLICY

• Fiscal Policy
• Monetary Policy and Financial Conditions

CHAPTER V. POLICY OPTIONS TO REDUCE UNEMPLOYMENT

• Unemployment: A Review of the Situation
• Cyclical Unemployment and the Limitations of Countercyclical Policies.
• Noncyclical Unemployment and Policies to Reduce It
• Reducing the Hardship of Unemployment
• Conclusions

The recession in the U.S. economy is now the deepest and the longest of the post-World War II period. Contrary to expectations of a year ago, the decline continued through the second half of last year, reducing output to levels achieved four years earlier; by year-end, unemployment rates were at double-digit levels not observed in this country since 1940. Moreover, most economists do not anticipate rapid recovery or a substantial improvement in the dismal unemployment picture this year.

The inflation outlook has improved markedly. The record slack in the U.S. economy, together with a depressed world economy, have sharply reduced inflationary pressures. During 1982, the inflation rate was lower than for any calendar year in the last decade.

The outlook for the future is highly uncertain. Although most forecasters anticipate an upturn in the months ahead, they disagree over how much the economy will grow during the next several years. There are two broad reasons for this: a high degree of uncertainty concerning the prospective behavior of both monetary and fiscal policy and their impact on the economy; and uncertainty about the effect of the debt burden of the developing countries on world trade. Monetary and fiscal policy are critical because they will strongly influence the course of the economy in coming years.

Administration and Federal Reserve spokesmen have indicated that the goal of economic policy is a moderate recovery that would permit a continuing decline in inflation. It is not clear how they would respond to other outcomes, such as stronger growth coupled with higher inflation. Consequently, some of the differences among forecasters reflect different opinions about how the Federal Reserve will behave once recovery is under way. Some believe it will emphasize reducing inflation, whereas others believe it will emphasize short-run growth.

The outlook for fiscal policy is, perhaps, even more uncertain. It is not clear what measures the Administration and the Congress will take to reduce the extremely large federal deficits that current budget policies would generate in future years. In the current economic environment, it may not be desirable to raise taxes or lower spending during the coming year, because that might weaken the recovery. But unless legislation is enacted to reduce deficits in future years, tight credit conditions may threaten the recovery, especially the resurgence of investment needed to enhance long-run economic growth.

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