The fiscal cliff and the economy: Pointless, painful uncertainty: Everyone agrees uncertainty is bad for the economy…. I have my own back-of-the-envelope exercise. I count mentions of the word “uncertainty” in the Federal Reserve’s “beige book”… uncertainty has shot up in the last month…. The beige book is a narrative based on conversations between analysts at the Fed and business contacts throughout the country. While this means it's not well suited to quantitative analysis such as mine, it does allow you to isolate the source of the uncertainty.
Usually, it's the economic or sales outlook. Often, it's an event beyond America’s control: the European crisis, higher petrol prices, Japan’s tsunami, and so on. Some months, though, the source is clearly exogenous policy decisions. In April of 2011, the federal budget was cited in three of that month’s 15 references to uncertainty. Recall that that month the government was on the verge of shutting down over Republican pressure for cuts to discretionary spending…. Uncertainty rose again in July; four of 14 references were related to fiscal policy, almost certainly because of the fight over whether to raise the debt ceiling…. Uncertainty appears more often in this month’s beige book than any month since September. Five of 30 references cite fiscal policy, apparently a reference to the fiscal cliff….
[I]n terms of economic impact, fiscal policy trumps all other exogenous sources of policy uncertainty. Why does this matter? Because it’s so pointless. It’s not surprising or even necessarily bad that tighter fiscal policy leads to weaker growth…. [T]he disincentives to hire and invest brought on by the debt ceiling battle and now the fiscal cliff aren’t the result of fiscal policy per se, but by the reckless and confrontational way that America makes it. Little wonder Ben Bernanke, the Fed chairman, spent so much of the last two days begging Congress to act on the cliff. Such action is not a substitute for more quantitative easing; but the stimulative impact would so much greater, with far fewer side effects.
Fecklessness: Asymmetric pressure: ONE hardly knows what to say:
Other Republicans cautioned that an expansion of the Fed’s existing efforts could deepen the nation’s financial challenges by postponing a necessary reckoning and eventually accelerating the pace of inflation. Democrats made no similar effort to convince Mr. Bernanke that he should take additional action. They congratulated the Fed chairman in the manner of people confident that they are speaking with an ally.“I want to thank you for your steadfast commitment to taking action as you deem appropriate,” said Representative Michael E. Capuano, Democrat of Massachusetts. “Thank you for not giving up.” Representative John Carney, Democrat of Delaware, went one step further.“The Fed is doing everything it can to address the unemployment part of your mandate, is that correct?” he asked Mr. Bernanke. Mr. Bernanke, momentarily startled, responded that the Fed could do more, and was considering whether it should.
Well, Scott Sumner knows what to say:
The GOP is evil, the Dems are morons, and the public is screwed.
Eventually, these mistakes will be understood, long after the realisation could have done any good.
Expansionary austerity: The cupboard is bare: GLENN HUBBARD is by many accounts a sensible economist. But he is currently advising Mitt Romney, and political entanglements often nudge sensible people toward curious arguments. In a recent Financial Times piece outlining "a conservative growth agenda for the US economy", Mr Hubbard writes:
High and rising debt burdens are a structural impediment to growth…. Gradual fiscal consolidation may also be stimulative in the short run. Research by Hoover Institution economists concludes that reducing federal spending relative to GDP to pre-financial-crisis levels over a decade would increase GDP in the short and long term….
The economics of the growth impacts of austerity is a subject to which this newspaper has paid considerable attention over the past few years…. [T]he evidence on the precise level of debt at which growth impacts become severe is fairly uncertain, and there is good reason to suspect that America can sustain higher debt loads at little cost than most other economies. Episodes of austerity with higher ratios of spending cuts to tax increases are associated with better growth performance, but—crucially—much of that effect can be chalked up to difference in central-bank willingness to accommodate the two strategies: central banks do more to offset spending cuts than tax rises.
Most importantly, episodes of expansionary austerity are clearly associated with two dynamics: large declines in interest rates and big currency depreciations. America would derive zero benefit from the first effect; the real yield on the 20-year Treasury is now...0.0%. It couldn't expect to get much of a boost from the second effect either….
[T]he only thing conservative politicians seem to hate more than tax increases is the idea of a falling dollar. And as recent events demonstrate, Republican legislators miss few opportunities to demand tighter policy from the man who could do most to cushion against the impact of austerity.
Now, I think you could get a lot of Democrats, including Barack Obama, to sign on to a broad tax reform with an eye toward improving the medium-run deficit, so long as the reform wasn't regressive and raised revenues on net. And that should have a positive impact on growth over the longer run. But there is very little reason to think that a conservative plan to come in and begin slashing deficits would be good for short-run growth.