Fiscal Policy to the Rescue?

Federal government spending cuts have been a drag on GDP growth and, as argued by Larry Summers and others, are one of the main reasons we’ve been facing down secular stagnation. A late-night, last-minute deal between lame ducks John Boehner and President Obama may hold the key to unlocking this drag.

Business Insider:

“Talk about a pendulum shift,” Greg Valliere, chief global strategist at Horizon Investments, wrote in a note to clients on Tuesday. “The era of fiscal austerity is waning, as foreign central banks reflate and fiscal policy loosens.”

Aside from the particulars of the deal — which would also see any concerns about the debt ceiling pushed off until March 2017, when a new president will occupy the White House — Valliere sees the accord as adding to the stimulative monetary and fiscal policies being undertaken not just in the US but around the world.

Bernanke and other central bankers have commented in the past that interest rates are not a silver bullet for growth. Central bank policy must be accompanied by growth-oriented fiscal policy to enable the recovery to reach “escape velocity.”

If you look at history, private enterprise combined with large-scale project mobilization, abetted by Congress, has been the answer to most economic quagmires. Think about the run-up to WWI and WWII, FDR’s work programs during the Depression, the buildout of the interstate highway system in the 50’s, the space program in the 60’s, the Cold War armament boom of the 80’s and the first Gulf War. Government primes the pump (sometimes out of wartime necessity) and capitalism takes it from there.

No one is suggesting a new wave of government-led projects will happen (they won’t), but an end to the austerity drag (and a cessation of government layoffs) would be a step in the right direction.

Source:

Washington’s blockbuster budget deal could be the end of an era (Business Insider)