Free Exchange: “The Phony War”:


  There are two reasons Mr Obama’s budgets have become irrelevant, one good and one bad. The first, good reason is that since 2008 balancing the budget has simply had to take a back seat to averting economic collapse. Nominal GDP this year will be 6%, or almost $1 trillion, smaller than Mr Obama projected three years ago. That miss alone explains some of the worsening in the deficit and debt ratios. The remainder is largely down to explicit decisions to delay tax increases and spending cuts. The resulting red ink is not pretty but plainly better than applying a fiscal vice at a time when monetary policymakers are running out of ideas for stimulating demand.
  
  The second, bad reason is that the parties are deeply polarised, largely over Republicans’ refusal to consider tax increases on a scale that Democrats consider meaningful. The result of these two forces is that fiscal policy only gets made when it absolutely must, usually in late-night white knuckle negotiating sessions with a sword hanging over the heads of both parties: the expiration of Mr Bush’s tax cuts in December, 2010; a government shutdown in April, 2011; and a near-default last August.

Free Exchange: “The Phony War”:

There are two reasons Mr Obama’s budgets have become irrelevant, one good and one bad. The first, good reason is that since 2008 balancing the budget has simply had to take a back seat to averting economic collapse. Nominal GDP this year will be 6%, or almost $1 trillion, smaller than Mr Obama projected three years ago. That miss alone explains some of the worsening in the deficit and debt ratios. The remainder is largely down to explicit decisions to delay tax increases and spending cuts. The resulting red ink is not pretty but plainly better than applying a fiscal vice at a time when monetary policymakers are running out of ideas for stimulating demand.

The second, bad reason is that the parties are deeply polarised, largely over Republicans’ refusal to consider tax increases on a scale that Democrats consider meaningful. The result of these two forces is that fiscal policy only gets made when it absolutely must, usually in late-night white knuckle negotiating sessions with a sword hanging over the heads of both parties: the expiration of Mr Bush’s tax cuts in December, 2010; a government shutdown in April, 2011; and a near-default last August.

Posted on Tuesday, February 14th, at 10:40 AM (∞). Available in higher resolution.

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