Thought du Jour

Mark Thoma complains that US fiscal policy is even more timid than its monetary policy: “at best it offset declines at the state and local level leaving the net effect near zero”.

Our long-run budget problem is mostly a health care cost problem, and we do need to fix this. If we address the health care cost problem, the picture improves and any worry about bond vigalantes showing up in the future mostly goes away. If we don’t adress health care costs, the long-run budget remains problematic no matter what else we do. Given that reality, there is plenty of time, plenty of room, and plenty of need for more help from fiscal policy. This was always a battle that needed to be fought on multiple policy fronts, neither monetary nor fiscal policy alone, or perhaps even in combination, was going to be enough. We needed both monetary and fiscal policy to respond aggressively, and to continue to respond as long as needed, but both have fallen short and there is no sign of monetary and fiscal policymakers moving to make up lost ground.

Mark Thoma, “Don’t Let Fiscal Policymakers Off the Hook“, Economist’s View, 29 April 2011.

Britain’s experiment with fiscal austerity is not going well.

The figures are stark. The UK economy grew by 0.5 per cent in the first quarter. But this means that over the past six months growth has been exactly zero ….

What does this tell us? On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved.

…. [The fiscal consolidation] relies on spending cuts far more than tax increases. Some aspects of it – especially welfare benefit cuts – will hit the poorest particularly hard. And the full impact of these cuts is very much still to come. ….

[T]he UK is a large country, issuing debt denominated in its own currency. It has very long average debt maturities, and therefore no serious issues over its long-term solvency. Countries such as ours have considerable freedom over fiscal policy in the short to medium term. We should use it.

Jonathan Portes, “Dismal UK growth demands fiscal rethink“, Financial Times, 28 April 2011.

Jonathan Portes (born 1966) is director of the National Institute of Economic and Social Research, a London-based, independent research institute.

How can the long-term deficit of the US federal government be eliminated? Lakehead University economist Livio Di Matteo thinks that new taxes on consumption are needed.

[T]he United States can solve its current deficit situation by bringing in a broad based federal sales tax on consumption and a federal gasoline tax.  These would be taxes on consumption and would result in smaller distortions than taxes on income, which would remain unchanged.  Moreover, in the case of gasoline taxes, it might also reduce consumption and dependence on imported oil and foster greater conservation. ….

[Consider a 7% Federal Sales Tax and a 10% Federal Gasoline Tax, with no change in federal expenditure.] As a share of GDP, these new tax revenues would raise the American tax to GDP ratio by about 5 percentage points which would bring it to about the OECD average. [This would immediately shrink the deficit, and produce surpluses beginning in the year 2014]. . ….

[T]he United States indeed has the wealth and ability to resolve its fiscal problems with a set of tax and expenditure policies that are not outside the range of the global fiscal experience.  Will this happen?  Likely not.  … American political culture is rooted in tax aversion and many Americans believe their federal government’s fiscal dilemma is only a spending problem and not also a revenue problem.  However, balancing the budget on expenditure cuts alone would mean nearly a 40 percent drop in expenditures.

Livio Di Matteo, “Resolving the U.S. Fiscal Crisis“, Worthwhile Canadian Initiative, 25 April 2011.