Obama Adviser: U.S. Economy Recovering but Far From Normal

While the fragile U.S. economy is on the way to recovery, it's still far from back to normal, one of President Obama's top economic advisers said Saturday.

"By almost every indicator, the U.S. economy is finally on the road to recovery," said Christina Romer, chair of the Council of Economic Advisers at an event held at the Woodrow Wilson School of Public and International Affairs at Princeton University.

But she cautioned, "When it comes to the economy, we are very far from normal," noting the U.S. unemployment rate is 9.7 percent.

There are now roughly 6.5 million workers who have been unemployed more than 26 weeks, and those workers represent 44 percent of the unemployed, she said.

"Long-term unemployment is cause for serious concern," Romer said. But she disagreed with those that say high unemployment is "the new normal."

"Unemployment is high fundamentally because the economy is producing dramatically below its capacity," she said. "That is, far from being 'the new normal,' it is 'the old cyclical.'"

The decline in traditional manufacturing jobs and falling rates of employment among less-educated middle-class men "are trends that we absolutely need to work to change, but they are not indications that the United States is doomed to permanently higher unemployment," Romer said.

While the government's policy response so far has "greatly mitigated" the consequences of the financial crisis, she said, the American economy still faces some challenges, as state and local governments face continuing budget shortfalls and credit remains tight.

"The combined result of the policies we have taken, the inherent resiliency of the American economy, and the headwinds that we face, is that we are growing again, but not booming," Romer said.

The Obama administration has already taken some targeted steps to address the high unemployment situation, she said, such as the HIRE Act, which provides tax incentives for businesses to hire unemployed workers and retain them over time. The law also has provisions to spur infrastructure spending, Romer said.

Beyond that, another targeted measure likely to be effective is additional fiscal relief to the states, Romer said. President Obama has called for additional funds to support state and local governments, a measure that's been endorsed by policy makers of both parties.

In addition, providing capital to small banks to promote business lending and opening markets to U.S. goods and moving the global economy toward more balanced growth are also key to returning to a better employment picture, she said.

Romer also discussed using policy as a way to return the economy to a "better normal." Looking ahead, she said the U.S. government will have to find a way to tackle its burgeoning budget deficit.

"It would be penny-wise but pound-foolish to try to deal with our long-run problem by tightening fiscal policy immediately or foregoing additional emergency spending to reduce unemployment," she said. "But a credible, comprehensive plan for deficit reduction would create a favorable climate for investment and ensure that the economy remains strong."

Financial reform will also be crucial.

It "will help curb destructive bubbles and help ensure that ordinary Americans will never again have to endure years of devastating recession caused by a financial crisis," Romer said.