US Daily Economic Notes:Fiscal stimulus coming into focus?
Commentary for Friday: Yesterday, we highlighted the fact that growth in totalinflation-adjusted government spending has been unusually weak in the currentbusiness cycle. In fact, government outlays have declined over the 30 quarterssince the economy emerged from recession in both absolute dollar terms as wellas on a per capita basis. Moreover, the table below shows that the softness ingovernment consumption and investment has been across the board, which ishighly unusual compared to other business cycles of similar length.
Federal defense as well as state and local spending have decreased since theend of the last recession. While federal nondefense spending is up slightly inlevel terms, it remains roughly unchanged on a per capita basis. In aggregate,government spending at the federal, state and local levels has subtracted 2.4percentage points from real per capita output in the current expansion. Inessence, the US has pursued its own version of fiscal austerity. What is theupshot?Fiscal stimulus is the key to the growth outlook. Although the current businesscycle is in its eighth year, there remains considerable scope for further economicgains. In particular, there is meaningful room for improvement in governmentspending, especially if the emphasis is on productivity-enhancing infrastructure.
A well-designed program to modernize our transportation infrastructure—namely, roads, bridges and the air traffic control system—would not only soakup any remaining excess labor slack in the short term, but also boost underlyingproductivity growth over the longer term.