Fiscal Impulse and the Highway Trust Fund

July 14th, 2014 at 7:22 pm

Just back from a segment on MSNBC’s Rev Al show wherein we worried about the impact of Congressional screwing around with the Highway Trust Fund on the job market.

I wrote about this concern on the day of the last jobs report, which you’ll recall was a pretty strong report, under the heading “Congress, PLEASE don’t screw up today’s great news on jobs.”  The idea is that this is a really, really bad time to be flirting with another fiscal cliff/self-inflicted wound, which in this case would be failing to replenish the soon-to-be-exhausted HTF, leading to the suspension of highway projects and layoffs.

In the context of this discussion, I keep the figure below in the back of my mind.  It’s from Goldman Sachs researchers, showing the extent of positive and negative impacts from fiscal policy on real GDP.  When economists talk about fiscal tailwinds helping to push a weak economy forward, we’re talking about bars above the line, representing the increase in the level of real GDP.  And vice versa re fiscal headwinds.

The impact of the Recovery Act is clear in 2009-10, but here I’d like to focus on the difference between 2013 and this year.  Last year, fiscal austerity led to the loss of about 1.5% of real GDP, which amounts to about three-quarters of a point of unemployment, or over a million jobs in a labor force of 155 million.

This year, the fiscal impulse has been and is expected to stay pretty neutral.  It’s one reason why the job market is improving and evidence of how both here and in Europe, it’s actually been hard for economies still damaged by the Great Recession to make real progress with fiscal policy pushing the wrong way.

Think of those stabilizing bars in 2014 in the context of the HTF debate.  To screw around with the fund is to move from “do no harm” to actively slowing growth, and at a time when we actually have a bit of velocity.

It’s now looking like they’ll come up with a last minute patch to replenish the fund, before states have to start laying people off.  But no one should underestimate the ability of these folks to snatch defeat from the jaws of victory.  And a patch isn’t a victory anyway—it’s a patch, which means we’ll be back here before we know it.



Source: Goldman Sachs Research

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7 comments in reply to "Fiscal Impulse and the Highway Trust Fund"

  1. Robert buttons says:

    Why raise taxes in a weak economy? We should just borrow the money at historically low rates.

    • Larry Signor says:

      Good point, especially if we settle for a “fix”. Every little bit of stimulus helps.

    • mitakeet says:

      Because according to the Tea Party we are already drowning in debt that our great great grandchildren will be paying off as they toil in some Chinese factory. There is no talking sense to these people…

      • Robert buttons says:

        We are drowning in debt, but I am short treasuries. I want the debt bubble to explode.

  2. Some Guy says:

    Wait-I havent had my coffee yet, but… under some crazy analysis, your chart just might suggest that too much austerity could possibly be correlated with lower growth– shhh… don’t show it to the austerity crowd. We’ll all promise to keep this a secret, right??

    • Robert buttons says:

      From another angle, one could say dumping borrowed money on the economy makes us feel good only in the short run. Shhhhhh.

  3. Joe Marinaro says:

    There seems to be near universal agreement on the necessity of infrastructure spending in order to assure long term prosperity. Big question is paying for it.

    Why not establish a dedicated “bank” funded by a dedicated payroll tax? Make the new tax revenue neutral with a corresponding reduction in the lowest marginal income tax rate. Since receipts would be constant one major issue would be determination of where and how to shift spending priorities. A second issue would be setting whatever degree of progressiveness desired (by managing the rate with subjected income amounts). The final and perhaps most difficult issue would be fund distributions back to the states. Probably a return to individual states of an amount approximating state taxpayer contributions to the fund with a small percentage reserved for national or multi-state projects.