Thursday, 25 October 2012

The US economy and such

The US economy has not recovered quickly or strongly since the GFC.

A number of Keynesian critics say this shows that fiscal stimuli doesn't work.

However the net fiscal stimulus was not large. ( Their NBER paper is a must read as this is the expurgated version.)

Herein lies the irony. Private sector employment has been quite good. It is public sector employment that has held the recovery back. It is extremely ironic that if public sector employment grew at levels we saw when George Bush Jr was in power then unemployment would be falling to 7%. If public sector employment was similar to that when Ronald Reagan was in power then unemployment would be falling to 6%.

In either case the Fed would be increasing rates not indulging in QE!

We see here that simply allowing the private sector to grow is not good enough. Libertarians must be tearing their hair out seeing their ideological cubby hole being demolished.

One of the major inhibitors this time round has been the housing sector. It was in a bubble and thus not able to be a prime mover to boost economic growth.The distressing gap has been large for some time.

I will leave it to you to guess what would happen to that gap if unemployment was approaching 6% rather that only just getting under 8%.

In the Presidential election we see a current President who in reality has been much more austere than any Republican and of course unsuccessful.

We have a challenger whose economic plan doesn't add up and seems to have ignored why both Reagan and Bush blew their budgets. Indeed the Romney team have supported the totally discredited  theory of austerity policies promoting economic growth. ( gosh it is working well in Europe.)

Then we have the possiblity of a fiscal cliff which would lope a cool 5% of GDP. This would bring on another recession.

I am glad I live in Australia where economic policy has been quite good and successful.