Friday, October 29, 2010

Roubini : A presidency heading for a fiscal train wreck

Roubini : A presidency heading for a fiscal train wreck

By Nouriel Roubini

Published: October 28 2010 20:48
Last updated: October 28 2010 20:48

http://www.ft.com/cms/s/0/dd140d16-e2c2-11df-8a58-00144feabdc0.html

What has been the fiscal performance of President Barack Obama? He inherited the worst economic crisis since the Great Depression, as well as a budget deficit that – after much needed bail-outs and a series of reckless tax cuts – was already close to $1,000bn. His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression. Mr Obama also deserves credit that the US, alone among advanced economies, currently supports a “growth now”, rather than an “austerity now” path.

But this is but one half of the picture; we must also judge his first two years on his ability to anticipate what the economy will need tomorrow. Here the picture is much less positive. Given the likely path of fiscal policy after next Tuesday’s election – with the expiration of existing stimulus and transfer payments, and even with most of the 2001-03 tax cuts being kept – the US economy will soon experience serious fiscal drag just when it needs a further boost. Problematically, the administration’s failures leave it relying on the Fed, which is bent on further QE, likely to be announced next Wednesday. But studies show this will have little effect on US growth in 2011, so fiscal policy should be doing some of the lifting to prevent a double dip recession.

 In an ideal world Mr Obama would also have been able to move towards reforming and reducing entitlement spending, with commitments to measures that could be phased in over the next few years, therefore avoiding short-term fiscal pain. He would also have committed to increase, gradually over the next few years, less distortionary taxes such as a VAT and a carbon tax. This would have reduced the fiscal deficit, and created a climate in which no investor would worry about additional stimulus.

http://www.ft.com/cms/s/0/dd140d16-e2c2-11df-8a58-00144feabdc0.html

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