Saturday, December 22, 2012

We’ve Been Falling Off That Fiscal Cliff

Brad DeLong is unhappy with how President Obama is negotiating with the Republicans on the wrong fiscal issue as he cites reporting from Suzy Khimm:
President Obama’s concessions to Republicans on taxes and Social Security have grabbed the headlines, but there’s another big area where the White House has shifted considerably in the GOP’s direction: direct stimulus to revive the short-term economy. In his original offer, Obama asked for $425 billion in stimulus through jobs measures and tax extenders, according to the Committee for a Responsible Federal Budget, including $50 billion in infrastructure spending and other stimulus measures; mass mortgage refinancing to boost the housing market; $30 billion in unemployment extension; a $115 billion extension of the payroll tax holiday; and the extension of a host of business tax breaks known as extenders. The stimulus measures are intended to counteract the impact of a fiscal cliff that would put major austerity into effect immediately. But they’re also meant to counter the fiscal tightening in a fiscal cliff deal, which both Democrats and Republicans have agreed should promote major austerity in the longer term through deficit reduction. Republicans, however, have argued that more explicit stimulus right now isn’t the answer: House Speaker John Boehner included no explicit stimulus measures in his original offer and has only proposed to extend a handful of business tax breaks since then. It’s clearly been a point of contention in the negotiations as Obama’s stimulus proposal has progressively shrunk over time: In his third offer, reported Monday, Obama dropped his ask from $425 billion to $175 billion in stimulus
Suzy’s reporting reminds us what Ben Bernanke meant by the fiscal cliff:
Even as fiscal policymakers address the urgent issue of fiscal sustainability, a second objective should be to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law--the so-called fiscal cliff--would, if allowed to occur, pose a significant threat to the recovery.
In other words, we need the stimulus that the President originally proposed to avoid the fiscal tightening that the Federal Reserve chair warned us to avoid. Our graph reminds us that the original Federal fiscal stimulus (FED) early during Obama’s first term has been dissipated over time. It also reminds us that state and local government purchases (S/L) has been contractionary over the past few years, a point that Bernanke also made in his June 7 testimony to Congress:
Another factor likely to weigh on the U.S. recovery is the drag being exerted by fiscal policy. Reflecting ongoing budgetary pressures, real spending by state and local governments has continued to decline. Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain, as I will discuss shortly.
The Federal Reserve chairman has repeatedly begged Congress to reverse its unwise shift to austerity. We had hoped that President Obama in his fiscal cliff negotiations had actually started listening to Bernanke. But it seems he has stopped listening to him and most of us in the economics profession. If the President is not going to push for this fiscal stimulus, then why bother? Some might say we’ll fall off the fiscal cliff but it looks like we’ve been heading down that road for a while.

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