U.S. Can Spur World Growth as Employment Recovers, Phelps Says

The U.S. can be an engine for global growth this year and unemployment in the world’s largest economy will go back to its “natural” rate, said Edmund Phelps, the Nobel-prize winning economist and Columbia University professor.

“I’ve been saying for a long time that the U.S. downturn overshot the mark and that we’ll be going back to the natural unemployment rate with all deliberate speed,” Phelps, 78, said in an interview with Bloomberg Television today at the Boao forum in Hainan, China. “It’s been slower than I thought it would be but I’m still confident.”

An improving job market and rising consumer confidence in the U.S. are boosting scope for the country to re-emerge as a main driver of global expansion as Europe slides into recession and growth in China slows. Unemployment held at a three-year low of 8.3 percent in March, according to a Bloomberg News survey ahead of data due later this week, and a report yesterday showed manufacturing expanded at a faster pace last month.

The country’s “natural” jobless rate today isn’t as good as it was mid-1990s, Phelps said, without specifying a level.

The U.S. will need to put its fiscal house in order, even as the prospects of achieving that are “not too bright,” said Phelps, the McVickar Professor of Political Economy at Columbia and winner of the 2006 Nobel prize for economics.

The impasse among lawmakers over what to do about the government’s $1.2 trillion deficit may continue for another four years unless one party has enough of a majority to bring about some legislation, he said.

In Europe, governments have “run out of fiscal fuel” as they deal with a sovereign-debt crisis, excessive deficits and low productivity growth since 1998 or 1999, Phelps said. The region’s economies will have to “engage in serious structural reform,” he said.

While China has lost some ground as exports faltered, it remains “way too strong” to suffer significantly from a dip in overseas sales, he said.

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