Good changes: I continue to recover from the brain hemorrhage I sustained on March 23. Today’s my first meds-free day and I’ve been blessedly headache free. Thanks again for the outpouring of support–it’s been really uplifting.
Neutral Changes: As I slowly rev up Ye Olde Analysis Shoppe, I found the figure below (by GS fiscal analyst Alec Phillips) to be worth a close look. It underscores a point that even seasoned budget analysts sometimes miss: the role of fiscal impulse.
One of the more important policy-driven determinants of near-term US growth is under debate right now: setting discretionary spending levels for 2020/21. Because of 2011 legislation that set caps for such spending, avoiding a sharp drop requires Congress to pass a bill approving spending above the caps. They’ve done so numerous times before and, while there’s a lot of squabbling going on about this both within and between the parties, it’s likely they’ll bust the caps again.
The point I wanted to underscore here is even were Congress to agree to keep the levels of discretionary spending stable over the next few years, the impact will be a fading of fiscal stimulus on real GDP growth, as the lines at the end of the figure below reveal. That’s because when it comes to fiscal impulse, it’s not the level that matters. It’s the change.
The last deal–the one that determined spending in 2018/19–went both well above the caps but, more important from an impulse perspective, went well above prior agreements. As far as I can suss out about what’s on the table in terms of the next round of spending, we’re unlikely to see numbers higher than the 18/19 deal (around $300 bill above the caps). Thus, Phillip’s projection of the fiscal impulse going forward under various scenarios if flat next year. Roughly speaking, that’s one reason to expect 2020 growth to be closer to 2 percent than 3 percent.
I don’t think the negative impulse forecasts from the WH or sequestration (“no caps deal”) are likely. And the House D’s line may get nudged up a bit based on proposals by the Progressive Caucus. But the larger point is that when you read analyses suggesting that these spending levels won’t drop, that doesn’t mean their impact on growth won’t drop. In fact, it will, as positive fiscal impulse downshifts to neutral.