Ch-ch-ch-changes! (Both personal and fiscal impulse)

April 10th, 2019 at 3:39 pm

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.

Source: Alec Phillips, GS Research

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.

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11 comments in reply to "Ch-ch-ch-changes! (Both personal and fiscal impulse)"

  1. Rima S Regas says:

    Jared,

    So glad to see you posting so soon.

    So worried you might be back at work too soon.

    On spending levels… When you can, might you expand on the types of spending that have the most impact?

    Take good care!


    • Jared Bernstein says:

      Thanks for you concern! I’m just putting in a few hours for now with rest and walks in between, so don’t worry–I understand the need not to rush the healing process.

      I don’t know about granular elasticities (bang for buck)–like spending on food stamps is more stimulative than spending on roads. Zandi makes such estimates, as in here https://www.economy.com/mark-zandi/documents/Stimulus-Impact-2008.pdf I do believe that tax cuts for the wealthy are pretty low on that list as they’re not income constrained, so they’re less likely to spend the marginal tax break dollar.

      I’d say that right now, the bigger force is the Fed. If they’re not raising rates–if they’re current pause holds–then that will boost the multiplier of any fiscal impulse.


  2. Ken Austin says:

    Jared,

    Good to have you back with us.

    Ken


  3. Chuck Sheketoff says:

    Nice to have you back, Jared. Onward!


  4. George Yannopoulos says:

    So glad to hear you’re feeling better.


  5. Cem Kandemir says:

    Why is the change of fiscal impulse more important than the level, or is that a function of how fiscal impulse is defined, Jared? Welcome back.


    • Jared Bernstein says:

      It’s definitional, but that’s because it’s the change that affects growth. Think of G in the GDP identity (C+I+G, etc.). If the level of G is unchanged (no fiscal impulse) it doesn’t have any impact on the change in GDP.


  6. Michael E. Kanell says:

    Jared,

    Great to see you posting again! And writing about issues I don’t quite understand — that’s a good sign!! (For *you* that is!!).

    /m


  7. Ann Kempski says:

    Welcome back, Jared! So glad to hear your recovery is progressing and you are feeling better.


  8. Rick McGahey says:

    Jared, great to see you back! And nice bit of analysis. This is only federal impulse, right? If economy slows and state and local revenue slow with it, then non-federal government piece falls as well, so total government sector has less strength.


    • Jared Bernstein says:

      Yep…important point, Rick. States have to balance their budgets so state fiscal drag is a real thing in downturns (that’s why state fiscal relief was a high-multiplier stimulus in the last downturn). And thanks (to all) for the well-wishes!


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