I gave a presentation the other day and re-used the figure below from this important speech by Fed vice-chair Janet Yellen back in February, showing the current and historical impact on real GDP of fiscal stimulus or drag in recoveries. I reprint it here because a) I think it’s so important, b) it’s a very intuitive approach to demonstrating the problem of premature contractulation, and c) I was reminded of it when I was just looking at these three forecasts for real GDP growth in 2013 (keep in mind that GDP growth in 2012 was 2.2%):
So, the economy’s improving (too slowly, but directionally speaking) in terms of the housing market, household and business balance sheets, the job market, and so on. Yet growth is slightly decelerating.
Yellen’s figure shows that this is not only an obvious policy mistake, but that it’s an historical outlier.