Who Says Fiscal Policy Is Hurting the Economy? (Almost) Everyone

Niraj Chokshi

OK, not everyone thinks that the recent spending cuts and tax hikes are slowing the economic recovery, but as The New York Times points out on Thursday many, many economists do.

Experts who advise investors and businesses, as well as those at institutions such as the Federal Reserve and International Monetary Fund, say current fiscal policy will slow growth in 2013 by anywhere from 0.3 percent to 2 percent.

Government spending should not be cut, at least not while the economy is still trying to recover, they argue. Here’s what 10 economists or groups of economists have recently said:

  1. "Fiscal tightening will take 1.8 percentage points off of growth this year compared to 1 percent in each of the past two years.”—Reuters report on an estimate from Michael Gapen, senior U.S. economist at Barclays Capital, April 11.

  2. "Mark Zandi, chief economist for Moody’s Analytics, said fiscal policy should shave 1.5 percentage points from gross domestic product growth in 2013. The fiscal contraction coming this year will be the biggest pinch since the government drew down forces at the end of World War II, he added.”—The Hill, May 8.

  3. "The budget sequester, which went into effect March 1, is projected to subtract about 0.3 percentage point from GDP growth in 2013 if maintained until the end of this fiscal year (Sept. 30, 2013) as assumed by the IMF staff. If the sequester continues into the next fiscal year, it could shave another 0.2 percentage point from GDP growth in 2013.”—International Monetary Fund, April World Economic Outlook report.

  4. "Fiscal policy is restraining economic growth.”—Federal Reserve’s Federal Open Market Committee, May 1.

  5. “The minutes of the meeting by the Federal Advisory Council [private-sector advisers to the central bank] trace how the 12 bankers’ views evolved from opposition to the Fed’s announcement of new bond buying in September to support for Fed efforts in February to boost an economic expansion beset by a ‘drag’ from fiscal tightening.”—Bloomberg report, May 8.

  6. A less-than-expected budget deficit—the debt the government owes so far this year—means less pressure for further austerity policies, but that doesn’t mean there won’t still be a drag this year. “In our view, the most important implication from the reduction in the budget deficit for the near-term economic outlook is reduced pressure for further fiscal retrenchment. Partly for this reason, we expect the drag from fiscal policy on real GDP growth to decline sharply from around 2 percent of GDP in 2013 to around 0.5 percent in coming years.”—Goldman Sachs economists, April 10.

  7. "All things considered, still tight lending standards explain why the U.S. economic recovery was so lackluster in the first few years after the recession ended, but increasingly it is contractionary fiscal policy and the weakness of global demand that explains why U.S. growth is still below par.”—Paul Ashworth, chief U.S. economist at Capital Economics, May 6.

  8. "The slowing pace of global growth, and contractionary U.S. fiscal policy are the key risks to growth.”—Carl B. Weinberg, chief economist at High Frequency Economics, May 2.

  9. "Fiscal tightening is hurting."—Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, April.

  10. "The slowing pace of global growth, and contractionary U.S. fiscal policy are the key risks to growth.”—Nomura, May 3.