Soaring US deficit is a source of concern

When our grandchildren study economics one day, will they systematically have to add a dummy variable* to their econometric equations for the period covering the Trump administration? Will the US economy over this period have something of a “special status” due to Trump’s and Congress’ decisions? This question is worth raising in light of moves to cut taxes and raise spending, with the ensuing effects on the appalling US public deficit.

The state of public finances is the trickiest of questions. The sustainable rise in the public deficit seems to show that the economy is undergoing a severe recession, yet this is far from true as Janet Yellen took the economy to full employment (see analysis from Jason Furman). So economic stimulus moves from the White House and Congress raise very real questions on the rationale behind this policy. Governments do not embark on economic stimulus programs when the country is running on full employment, otherwise major long term imbalances are created, which are bad news for all concerned. Continue reading

Euro Area: A new policy mix that could favor growth

Last week was important may be decisive for the Euro Area. For the first time since the end of 2008, just after Lehman bankruptcy, government policies and monetary policy will both support economic activity on the same side. They will support internal demand in order to boost growth and employment.

This can be a game changer. Until now and since 2011 monetary strategy was accommodative but governments were committed to stabilize their public finance and their debt. This policy mix was compatible with an economic dynamic that requires fine tuning. This was not compatible with the drop of activity seen since spring 2011. The policy mix change seen last week reflects mainly a change in the European Commission policy as the EC forecasts a recession in 2013 after a recession in 2012. The situation does need a fine tuning but a deep change that recognizes that the Euro Area is still far from its potential trend and from full employment.
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