Fiscal Policy: Accomplishments, Challenges and Opportunities

That’s the title of CEA Chair Jason Furman’s presentation at the University of Wisconsin at Madison on Monday. Introduced by UW Chancellor Becky Blank, his discussion covered a wide range of issues. From WisBusiness:

Jason Furman, chairman of Obama’s Council of Economic Advisers, said Congress should invest in infrastructure at today’s low borrowing rates, reform the tax code, approve an immigration reform bill projected to cut the deficit and agree on long-term debt reduction, instead of implementing short-term cuts like sequestration that impede economic growth.

One point highlighted by Dr. Furman was the fact that there has been substantial reduction in the budget deficit, and a remarkably large reduction in the deficit, expressed in percentage points of GDP, in just the last year. I’ve pulled a graph from the CBO to highlight this observation.

Figure from CBO, Monthly Budget Review – Summary for FY 2013.However, the objective, if I paraphrase correctly, is not to cut spending indiscriminately, but in a manner that is both smart and effective. The sequester does not satisfy either of those criteria.

He also stressed the related point, made elsewhere, that the fiscal gap has shrunk considerably. So that I convey the point correctly, I’ll quote from the interview:

The second point, which I think is less widely appreciated, is it’s not just that the near term deficits has come down, the long run deficit outlook is also considerably better than it used to be. So you look at the Congressional Budget Office’s 75-year outlook and what most economists would look at for the measure of the deficit – “the fiscal gap” or how much you would need to raise taxes or cut spending today to stabilize the debt over a 75-year window — and their fiscal gap over 75 years is a little bit less than 2 percent of GDP. Now, if you look at the debt 75 years from now it spirals and goes really high but every time you have a small wedge things get very large. In contrast, I used to write things before CBO was doing the estimate with Alan Auerbach and Bill Gale and we generally had numbers that were nearly 10 percent of GDP. So the 75-year outlook is considerably better and that’s because of projections around health and some of the changes we’ve made in terms of revenue and things like the Affordable Care Act that has significant long-run deficit reductions.

Other coverage, here and here.

This piece is cross-posted from Econbrowser with permission.

One Response to "Fiscal Policy: Accomplishments, Challenges and Opportunities"

  1. benleet   November 25, 2013 at 2:24 pm

    A federal jobs program would produce the best outcome. The greatest period of economic growth in U.S. history was a direct result of this policy. For instance, Marshall Auerback wrote The Real Lesson of the Great Depression: Fiscal Policy Works, showing that the rate of unemployment fell from 25% to 9.6% between 1933 and 1937. During WWII employment increased by 42% in 5 years, all direct government hiring. Concurrently the GDP also grew; in the six years 1939 to 1944 it grew by 76%, from $319.8 bn to $561.9 bn, that is an annual rate of more than 7% compounded over six years. (from American Economic Development Since 1945 by Samuel Rosenberg, page 20). Employing people to achieve constructive results is a double win. The infrastructure improves, the economy becomes more efficient, and prosperity is spread more evenly. It is such a good idea that the conservative elements in society protest with fears of losing our freedom, and the wealthy protest for fear of losing their relative power of wage control and profitability. I write an economics blog, Pavlina Tcherneva writes at the Levy Economics Institute on this topic, and Robert Pollin recently wrote a book on the topic Back to Full Employment.