Jan Hatzius: Some Strange Inconsistency on the US Budget Deficit

May 5th, 2013
in Op Ed

by Dirk Ehnts, Econoblog101

Here is some older reporting (February 2013) from marketwatch.com, which quotes Goldman Sachs Chief Economist Jan Hatzius.

Follow up:

He said,

But the more important reason is that Republicans in Congress seem to have given up on the idea of using the debt ceiling to force additional spending cuts. So the tail risk that the overall fiscal drag will be much larger than the 1½-2 percentage points we assume for 2013, and that this will push the economy below ‘stall speed’ and into a renewed recession, looks much lower now.”

But will the fiscal tail risks re-enter the limelight further down the road? Nope, Hatzius said. The deficit has already fallen from 10% of GDP in fiscal 2009 to 7% in 2012 and is likely to shrink to only 3% in 2015 due to lower spending, higher tax rates and a cyclical improvement in the economy.

He also said,

The longer-term budget outlook remains much more problematic, mainly because of the sharp projected increases in federal health care spending. But even in this area we have seen a bit of good news recently, as actual spending has come in well below official projections.

This is odd. In the first paragraph, the fiscal drag is to push the economy into renewed recession. In the last paragraph, actual spending coming in below official projections is good news. Huh? Is fiscal spending pushing the economy into recession or not? It appears that it is “yes” for the short run and “no” for the short run, since he talks about recent data. In how far does the longer-term budget outlook play a role in the economy? This only makes sense if you believe in too much government debt slowing down the economy, but that myth has been discarded. Alternatively, how many parallel universes are there?

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