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posted on 22 December 2015

US Congress Has Passed 1.8 Trillion Spending Measure

by Dirk Ehnts, Econoblog101

... as the New York Times reports:

The agreement also showed just how easily a fractious legislature can seem functional again when there is agreement to spend more money, adding at least $2 trillion in debt over the next 20 years, according to the Committee for a Responsible Budget, a nonpartisan group. [...]

After a period of belt-tightening in Washington - including automatic budget cuts imposed in 2013 - the spending measure for 2016 provides a notable $66 billion increase in federal outlays above previously agreed-upon limits, divided equally between military and nonmilitary programs.

It also represents a return to a more traditional appropriations process, with lawmakers directing money to an array of their priorities, including a $1.4 billion increase for military construction projects and $2 billion increase for the National Institutes of Health, as well as an array of individual items that some lawmakers were still discovering buried in the 2,009-page spending bill.

It seems to me that this is pragmatic politics. In terms of macroeconomics, US economic growth has been ok but not spectacular. Given that interest rates are set to rise, as last week saw at least the intent to turn around interest rates, it makes a lot of sense to run expansionary fiscal policy. Tax cuts and increase in government spending, both sides got something.

It is quite clear that expansionary fiscal policy is not about the size of federal government: if you want it to shrink, you can go for tax cuts, and if you want it to increase you go for increased spending. However, there is no reason to not use expansionary fiscal policy because you believe in one or the other proposition regarding the size of the government. The US has a valuable lessons to teach to the austerity crowd in Europe:

It's the economy, stupid!

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