Austerity That Would Make a European Policymaker Proud

February 26th, 2013 at 10:22 pm

It’s not just the sequester. It’s that those cuts are coming on top of a bunch of other fiscal and economic headwinds.

The two figures below come from Mark Zandi and Moody’s.com.  The first shows the quarterly impact to real GDP of the cuts from the sequester, whkch amount to about -0.5% this year, assuming it hits and sticks.  The second figure adds in all the other cuts and tax increases blowing back on growth right now.

Focusing on 2013, the sequester isn’t even the biggest chunk.  That dubious honor goes to the expiration of the payroll tax break.  Sum them all up, and you’ve got fiscal policy sucking more than a point off of real GDP growth right now, a level of austerity of which our Congress’s coutnerparts in Europe would surely approve.

These figures are part of a presentation I’m giving tomorrow on this stuff—here’s a draft of the PowerPoint.  The figures on slide #7 show a couple of other headwinds to consider.  I’ve written before about the recent spike in gas prices—bad timing for sure, but it’s also true that folks are driving less so it might not bite as much as usual.  Still, that’s another subtraction from disposable incomes.

And then there’s the wage story–which certainly relates to the fiscal drag through the channel of the higher unemployment it causes–shown through a plot of low (10th percentile), middle (median), and high (90th percentile) real earnings, since 2000, indexed to 100 in that year (these are weekly earnings of full-time workers).  Over the longer term, you can see the inequality story, though you really have to go higher up the pay scale than the 90th percentile to see the tippy-top really pulling away from the pack.

But since the 2007 macro-peak, the middle’s been flat, the bottom’s way down, and the top’s doing a bit better.  The point is that most families can’t exactly reach into their wallets or savings to offset the fact that growth has yet to reach them.

Source: Mark Zandi, Moody’s.com

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One comment in reply to "Austerity That Would Make a European Policymaker Proud"

  1. foosion says:

    >>Focusing on 2013, the sequester isn’t even the biggest chunk. That dubious honor goes to the expiration of the payroll tax break.>>

    In that case, how about giving everyone a refundable $2,000 tax credit. The Republicans can’t object to a tax break can they? (Of course they can, as they only care about taxes on very high income types, but the politics may be interesting to watch.)


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