Evan Soltas
Apr 30, 2013

After Austerity

An excerpt of a post in Bloomberg:

What comes next, however, isn’t clear. Don't expect a clean break. Some austerity is already locked in: Gradual fiscal tightening will occur as recovery dampens "automatic stabilizers" such as unemployment insurance and food stamps. Aside from that, fiscal policy could move in any of several directions.

Longer-term issues might come to the fore. How can we best restructure social-insurance programs like Medicare, Medicaid and Social Security? How can we best reduce spending on defense programs? How can we best raise new tax revenue? Washington will probably do some modest long-term tightening, especially where partisan fervor is less intense -- on corporate tax reform, for instance. But don't expect much more.

Here's another possibility: Attention might turn back to monetary policy. That would make sense, because the evidence suggests that central banks have mattered much more than treasuries in influencing the depth of the recession and the pace of recovery. If aggregate demand is the problem -- and in the U.S., Europe and Japan, there's every sign of it -- then one solution is to adopt a monetary-policy rule that returns nominal income to its pre-recession growth path. That's something Congress could tell the Federal Reserve to do -- revising the mandate it laid down in 1978. Japan is already talking monetary policy. Europe will be forced to soon.

Maybe political debate will focus on other subjects altogether. The rise of new issues -- such as gun control, immigration, and gay marriage -- may crowd out a fiscal battle fought to stalemate. At least in the U.S., this might even be a good thing. Putting the budget on autopilot for a while -- and dealing with questions that were sidelined during years of fiscal monomania -- might be the best result.