Fiscal flailing | FT Alphaville

Fiscal flailing

We’re late to this, but here’s a nifty chart from Goldman showing the expected fiscal drag on the US economy through next year, adjusted for the range of potential outcomes of the American Jobs Act:

And a bit of commentary:

We estimate that the President’s proposal as a whole would increase GDP in 2012 by 1.25 percent versus current law, on a Q4/Q4 basis and excluding any second round spending effects. Compared with our baseline estimate for fiscal policy that already assumes extension of the 2 percentage point payroll tax cut, the effect would be just under one percent. However, if Congress were to adopt only the tax based components of the President’s proposal, we estimate it would boost GDP in 2012 by just over 0.5 percentage point on a Q4/Q4 basis compared with current law.

We have no idea which parts of the American Jobs Act have a realistic chance at becoming reality. (Not “we” as in nobody, just not us specifically.)

We’re not political forecasters, and we’re wary of sell-siders when they dabble in politics. But all the reports we’ve seen thus far seem to indicate that Republicans won’t have the stomach for the “pay-fors” Obama has recommended, and that the Super Committee’s job is hard enough as it is without tasking it with an additional $447bn.

Too bad. Because the chart above does reinforce the extent to which fiscal policy is expected to be a drag on the economy through next year. We won’t entirely replay our earlier post on the subject, except to note that on Tuesday the US Treasury sold one-month bills for 0 per cent and 10-year notes at 2 per cent. We also had testimony from the Congressional Budget Office effectively pushing the Spending Now, Austerity Later line… or at least the Definitely Not Austerity Now line.

Look, we know this can be complicated and that there are alternative ways to interpret currently depressed yields other than “Spend now”. But even putting aside competing political views or preferences for how fiscal policy should be designed, it’s the case that austerity enacted too soon is overwhelmingly likely to have a strongly contractionary impact at precisely the wrong time.

And, having noted that we don’t really trust the sell-siders (or ourselves) on politics, we’ll indulge in a bit of mild hypocrisy and say that we mostly agree with this line from Citigroup:

In many respects, America almost needs to go through the 2012 election in order to determine the path that Americans are willing to take in terms of spending cuts, tax increases, regulatory constraints and even the degrees in which the country participates in global trade. While one can hope for the super committee’s success, the task may be a bit too daunting without broad public support.

Right. We’ll have a much better sense of the political will to tackle medium-term deficits after 2012 (which is also why we thought that S&P’s decision to downgrade was made prematurely). Meanwhile, the US economy has stalled and faces increasing odds of a double-dip much sooner than that.

Related links:
Struggling back to neutral, fiscal policy edition – FT Alphaville
Consumption conundrums continued – FT Alphaville