WASHINGTON (Reuters) - The U.S. recovery is so soft that it risks creating a “frustrated generation” of young people unable to find work despite having heeded advice to stay in school, a senior official from the Organization for Economic Cooperation and Development said on Monday.
“During the 2007-2009 recession, unemployment rose for 2-1/2 years before peaking in the fourth quarter of 2009 at 10 percent of the labor force, suggesting that it could be early 2013, at best, before the rate returns to its pre-recession level,” the Paris-based OECD said in a U.S. outlook.
OECD Secretary-General Angel Gurria called high unemployment among U.S. youth “a tragedy within the tragedy” of the downturn, adding it was devastating for young Americans who had equipped themselves through education for jobs that are not appearing.
“There is a danger of a frustrated generation,” he said.
The OECD report, which projects U.S. economic growth at a sluggish 2.6 percent in 2010, said damage from the recession was so extensive that consumer demand was likely to be restrained “over the next couple of years,” and could potentially inflict a long-term increase in unemployment.
It said U.S. actions in temporarily extending the duration of unemployment benefits up to 99 weeks from 26 weeks did not seem to be reducing incentives to search for work, but warned that could happen later.
“Thus, as the unemployment rate comes down, the maximum duration of unemployment benefits should return to the pre-crisis level, as has happened in past recessions,” it said.
The OECD said that because of the degree of slack in the economy and low inflation, current low interest rates were appropriate. But it urged policymakers to continue planning for a quick withdrawal of “the very accommodative stance of monetary policy” as soon as conditions permit in order to avoid a flare-up of inflation.
“The housing market faces a long process of returning to normal,” the OECD said. It noted that fallout from the slump in housing markets was more acute in the United States than elsewhere and urged reducing or ending mortgage-interest tax deductibility that it said benefits the rich disproportionately and spurs excessive homebuying.
The OECD said the United States needs to get its budget deficits under control because it cannot pile up debt endlessly, but acknowledged that a questionable outlook means it must proceed with care.
It endorsed the Obama administration’s plan to cut the federal deficit to 3 percent of GDP by fiscal 2015 from 10.6 percent.
“It is an essential step to boost confidence,” Gurria said, though he specified that policymakers must spell out how it is to be achieved and the measures that will be implemented to achieve that objective.
“The course of the recovery is still uncertain, arguing against a sharp and immediate deficit reduction,” the OECD said. “In view of these conflicting considerations, the administration’s fiscal plan is ambitious, but appropriately gradual and should therefore be implemented in full.”
The report also said that the United States should look at pushing up consumption taxes rather than income taxes and suggested that would be one way to get savings up and deficits down.
“Raising consumption taxes, notably by introducing a federal value-added tax (VAT), could therefore be another approach to addressing fiscal challenges,” the OECD concludes.