Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office. Those who don’t like Obama are still asking “if the fiscal stimulus was so great, why didn’t it work?” What is the appropriate response?
The Federal Reserve and the Bank of England have each recently backed away from “forward guidance” that they had given earlier in the form of thresholds for the unemployment rate. As a result of their changes in emphasis, they are both being accused of confusing the financial markets.
The Fed at the end of 2012 had said that it planned on keeping monetary policy easy at least until the unemployment rate had fallen below 6 ½ %. The Bank of England in mid-2013 had made a similar statement, with a threshold figure for UK unemployment of 7%.
Politico asked 8 of us for a prognosis on US growth in the new year. This was my response —
Something important will get better in 2014: Fiscal policy will stop hurting the economy. The results should show up as expansion in such service sectors as health, education and construction.
The biggest impediment to economic expansion over the last three years has been destructive budget policy coming out of the Congress: misguided fiscal drag in the short term (crude cuts in spending, especially under the sequester; the expiration a year ago of Obama’s payroll tax holiday); repeated unnecessary disruptive and uncertainty-maximizing political crises (debt ceiling showdowns and government shutdown); and little progress on the genuine longer-term fiscal problem, which is the 40-year prognosis for U.S. debt (a result of projected rapid growth in entitlement spending). These fiscal failures have together probably subtracted well over a percentage point from U.S. growth in each of the last three years.