Fiscal Drag

January 10th, 2012 at 2:03 pm

While acknowledging that we’ve got a little mo’ going in the current economy, I and others have stressed various risk factors, including Europe, oil, and fiscal drag. 

Here’s a picture of the latter.  It’s the one risk, that with smarter policy, we could control…but it’s that “smarter policy” part that’s the catch (Europe’s debt problem is also amenable to policy solutions, but that’s mostly up to Germany et al).  Our policy makers remain motivated more by austerity and dysfunctional politics than by clear-eyed thinking about offsetting the fiscal drag as stimulus fades, states shed jobs, and we’re still climbing out of the hole caused by the Great Recession.

BTW, note the dip in terms of lower real GDP (“current law”) this year if we fail to extend unemployment insurance benefits and the payroll tax break beyond the two months agreed to thus far.

Source: Goldman Sachs Researchers

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4 comments in reply to "Fiscal Drag"

  1. perplexed says:

    -“Our policy makers remain motivated more by austerity and dysfunctional politics than by clear-eyed thinking about offsetting the fiscal drag as stimulus fades, states shed jobs, and we’re still climbing out of the hole caused by the Great Recession.”

    But to what extent do we enable this behavior by allowing the entire cost of doing nothing to be imposed on a small, powerless group? I’d like to propose the following question for one of your YAIA sessions (just in case you find yourself in need of more question to address of course):

    Why doesn’t the constitutional guarantee of the right to “life, liberty, and the pursuit of happiness” guarantee that those who are willing to work, and willing to work for less than the prevailing wage, have a right to access the job “market” and “take” whatever jobs they are qualified for (or force the incumbents to work for the new “market” rate)? Where is it decided that the “job market” only consists of “new” or “vacant” jobs and positions, and that all existing jobs and positions are entitled to protection from “market forces?” The reality is that this is nothing but a form a “price fixing” and collusion by employers and their employees to protect them from market forces at a cost to those excluded from these “markets.” Obviously employers benefit through lower turnover and training costs, and current employees benefit through monopoly profits that accrue to them for maintaining higher than market wages; but allowing this form of price fixing results in a loss of income that is imposed on the unemployed (and on the government “insurance” programs to the extent they provide unemployment benefits) by denying the unemployed access to the market. Why are these practices not subject to the Sherman, Clayton, & Robinson Patman Acts that protect against market manipulations by powerful actors against those less powerful?

    Many of the protections in the constitution are designed specifically to prevent the “tyranny of the majority” over a defenseless minority. Protecting those willing to work from having to bear the entire cost of the output gap by losing all of their income through this price fixing scheme is indefensible and needs to be addressed. If the government believes it to be advantages to maintain higher than market wages (and avoid deflation), the costs should be born by all, not by those powerless to resist having these costs imposed on them.

    And a follow up: Why do economists ignore this reality in their discussions while millions of powerless people suffer the consequences of these perverse policies? If the option to impose the entire cost of a less than full-employment economy on a small, powerless group were taken away, more equitable solutions would soon get serious consideration. It seems that economists are in the best position to lead this charge by discussing the differences between what we’re in fact doing (price fixing), and real market outcomes.


  2. beezer says:

    perplexed

    “Where is it decided that the “job market” only consists of “new” or “vacant” jobs and positions, and that all existing jobs and positions are entitled to protection from “market forces?” The reality is that this is nothing but a form a “price fixing” and collusion by employers and their employees to protect them from market forces at a cost to those excluded from these “markets.””

    Possibly you are perplexed because you see the ‘job market’ as monolithic instead of one that involves more than 100 million employees and hundreds of thousands of employers. To think of this market as being able to fix wages without regard to market forces, including those of the labor market, is just plain silly. And thus the source of your perplexion.

    Mr. Bernstein.
    It would be interesting to see a chart of what economic growth would be without this drag. We are getting some slow growth currently, or so it would appear, but what would we be getting if the drag was taken off?


    • perplexed says:

      If it was a “market,” it would clear. To believe otherwise is just plain silly & thus the source of your perplexion.


  3. SanDiegoSam says:

    Why is there a rebound beginning in April this year?


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