Recent Fiscal Policy: Its Impact on the Economy

and the People in ItJared Bernstein

CBPP11/7/13

The Problem…• Shampoo Economy: Bubble, bust, repeat• Prevention and treatment• Prevention: adequate oversight of financial markets; faster, more equitable

growth; investment in “supply-side.” (To be clear, that’s not “trickle-down!)• Treatment: what must of this presentation will be about—the use of fiscal and

monetary policy to offset demand contraction.

• First, new information on the costs of getting this wrong• Second, documentation of impacts• Third: bold assertion—I’ve never seen worse economic policy.• Fourth: what to do about it.

RWW—Fed Economists on impacts of policy neglect

Source: Reifschneider, Wascher, and Wilcox, 2013

Impact of Fiscal Policy in Recent Years• Recovery Act• Pivot to Deficit Reduction, both here and abroad• US Budget Deficit down from 10% in 2009 to 4% in 2013: Largest 4-

year decline since 1950!• But isn’t deficit reduction imperative? • CDSH: cyclical doves, structural hawks.• Most recent fiscal drag: BCA, sequester, shut down…dysfunction

Source: Eurostat

6

Actual and Projected US Deficits as a Percent of GDP, 2001-2023

Source: CBPP based on Congressional Budget Office, May 2013 baseline.

All Very Macro: What About…Um…People!?• Wage and Income Trends• Impact of budget cuts on services.

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201250,000

52,000

54,000

56,000

58,000

60,000

62,000

64,000

66,000

Real Median HH Inc, Non-Elderly HH's2012 $’s

Impacts of Shutdown (coals to Newcastle?)

On the other hand: Safety Net Works!

So, What’s The Solution?• Separate fact from ideology: fiscal policy works, dysfunction doesn’t.• Restore the role of government to its proper place—it is a

complement, not a substitute to private economy.• Balanced fiscal policy: CDSH• Stop hampering recovery! We need to hit escape velocity!• What are the real problems we face: slow growth (RWW), inequality,

immobility, opportunity deficit (again, safety net helps here!)• Forward thinking: Full employment