Should-read: Martin Feldstein The heightened risks of a U.S. downturn

Should-Read: Bernanke and Yellen’s failure to push the envelope further to attain an inflation rate higher than 2% has created enormous risks, given our dysfunctional government’s right-wing ideologically-driven inability to get its fiscal act together. I note that a little opposition to tax cuts that consumed our fiscal space without credible prospects of boosting growth would have been welcome and constructive from Marty Feldstein. But that ship has sailed. And here he is talking sense: Martin Feldstein: The Heightened Risks of a US Downturn: “The Fed traditionally responds to a downturn by sharply reducing the short-term federal funds rate…

…At only 1.4% now, the Fed has little scope for a significant rate reduction…. The responsibility for stimulating the economy in the next downturn will therefore fall to fiscal policy–changes in taxes and government spending. A new temporary tax cut would not work…. An economic downturn in the next few years would be a good time to enact make the cuts permanent. The other way to reverse an economic downturn would be to increase government spending. There is now widespread bipartisan support for increased spending on infrastructure…. The US Congress and the White House should begin now to develop an inventory of infrastructure projects…. If there is no downturn during the next several years, it would still be desirable to start some of those projects….

The high level of the national debt–about 77% of GDP now and heading to 97% at the end of the next ten years–would create strong resistance to either tax cuts or increased spending. But a significant economic downturn with limited scope for Fed action would leave Congress with little choice…

January 27, 2018


Brad DeLong
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