Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries....
The current recovery has been disappointingly weak compared with past U.S. economic recoveries. Researchers and policymakers have pointed to a number of potential causes for this unusual weakness, including contractionary fiscal policy. For example, Federal Reserve Vice Chair Janet Yellen (2013) argues that three tailwinds that typically help drive strong recoveries—investment in housing, consumer confidence, and discretionary fiscal policy—have been absent or turned into headwinds this time....
In this Economic Letter, we examine these questions by estimating what fiscal policy would be if it followed historical patterns in the relationship between fiscal policy and the business cycle. We then compare this historically based estimate with actual fiscal policy during the recession and recovery to date. We also look at government projections of fiscal policy over the next three years to see how these compare with estimates based on the historical norm. Finally, we discuss what these trends in federal fiscal policy imply for economic growth.FRBSF Economic Letter
Fiscal Headwinds: Is the Other Shoe About to Drop?
Brian Lucking and Daniel Wilson
(h/t Mark Thoma at Economist's View)
Fiscalists unite! You have nothing to lose but drains.
3 comments:
Try bumping the deficit back to 10% of GDP for 2 years.
"Try bumping the deficit back to 10% of GDP for 2 years"
Can't have that...might be good for the great unwashed.
Some things that they are missing are:
Since 2010 all student loans are made by the government...
Since probably the same year, all home loans are made by the government...
Fed is in the marketplace....
So in the past, the non-govt sector often made these loans internal to itself, the loans being made to Paul's 'net liability cohort' (NLC) in the non-govt sector from the banks and the 'net surplus cohort' (NSC)... these arrangement are now gone from the scene.
In the past the NSC would simply move the return of the P&I revenues from these intra-sector loans back into savings and look for opportunities to make the next loan, now much of the P&I is paid back to the govt and results in a smaller deficit, cet par...
The end of this month, Fannie is planning on returning 60B to its owner the US Treasury as "profits" it has made on it's home lending operations while in the past, these were probably returned to FNMA shareholders in the non-govt in the form of dividends and bonuses... Freddie is doing the same type of thing I'm sure.
Here is Sec. Lew bragging about this activity like he is Angelo Mozillo or something (all he needs is a little more bronzer):
http://www.treasury.gov/initiatives/Documents/Debt%20Limit%205-17-13%20Boehner.pdf
This will probably put the govt back into surplus for June after the surplus in April while they want back to deficit in May temporarily...
So as govt has taken over these prior non-govt sector operations, ie govt used to have their fiscal agents the banks in concert with the NSC in the non-govt do this type of lending, the whole fiscal scenario is going to change...
Deposits to the Treasury account from student loan proceeds are running at near 30B....
Then you have the Fed itself really involved now via the "QE" thing and buying a lot of govt securities and returning so far almost 60B to the Treasury for "deficit reduction" so-called...
So it makes no sense to be comparing "the deficit now" to "the deficit then" as the whole scenario has changed... as far as what the govt sector is now doing itself vs in the past how it used to get its agents in the non-govt to do such things for it ... and the ex post accounting of course is going to reflect this ...
These are two more macro-economists who dont even know what the hell is going on...
rsp,
And PS the other shoe is not about to drop imo... govt is still injecting 2% more $NFA this year than last while the aforementioned non-govt sector loans/securitizations are waaaaaay down while govt loans/securitizations are waaaaaaay up... "deficit fears" are subsiding with "the deficit" itself and will help the fiscal politics ... and throw in the Asian zombies are running neck and neck in a dead heat in their race to the bottom to see who can provide the US market with the lowest cost provision by abusing some of their own citizens the most...
The US equity markets at/near new highs are reflecting this reality imo...
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