When it comes to jobs and the macroeconomy, one thing you want to be worrying about right now is fiscal contraction—the fading of fiscal policies that have been helping to stimulate growth. (Oh yeah…and that debt ceiling stuff too.)
There’s a good bit of it–fiscal brake pedaling–baked in the cake including the fading of the Recovery Act and continued state budget gaps (states have to balance their budgets, and as I’ve shown, one way they’re doing so is by shedding teachers, cops, etc., including 350K (!) over the past six months).
The impact of those two dynamics will likely shave between one and two points off of real GDP the rest of this year and next. The basic rule of thumb is that this adds one-half to one percent to the unemployment rate—and at the high end, that’s over a million extra jobseekers.
Of course, it shouldn’t outta have to be that way. Stimulus is temporary by definition which is as it should be—who’d want to be stimulated all the time? Temporary spending, even on big tickets like the $800 billion Recovery Act, adds little to the deficit or the growth in the debt once that spending fades. It’s the permanent stuff that just keeps on giving, deficit-wise, like the Bush tax cuts.
But if plan A fades while unemployment is still way too high and the jobs engine is stuck in first gear, you need a plan B.
In that regard, it’s been good to hear some talk about new measures that could help on the jobs front. The researchers at Goldman Sachs kindly estimated the impact of these ideas, including the fiscal drag noted above. The figure shows what they found.
Source: GS Global ECS Research
If everything expires as planned, GDP takes a 1.5% hit by about a year from now. Remember, this doesn’t mean GDP will be shrinking by 1.5% percent. It means that instead of growing at 3.5%, for e.g., it will grow 2%. Which, if those numbers are ballpark, is the difference between unemployment falling a half a point per year or rising 25 basis points (one-quarter percent).
But if we go all in on the stuff some policy makers are starting to consider—payroll tax cuts, unemployment insurance extension—we can bring that loss down to a mere 0.5% of fiscal drag.
Shouldn’t we fully offset the drag and try to get a line in the graph into positive territory? I like the way you think. I’m just not sure how many others are thinking like us.