Economists Claim Fiscal Policy Hurting Growth

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Thursday, 09 May 2013 01:01 PM

By Lisa Barron

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While Republicans and Democrats continue to clash over their approaches to economic recovery, many economists say the emphasis on reducing the budget deficit has taken a toll.

Although both government analysts and private financial advisers continue to tout signs of improvement in the economy, they also maintain that things would be better if Washington had not cut spending and raised taxes, reports The New York Times.

How much better? According to private sector and government economists, the unemployment rate would probably be a point lower at 6.5 percent from where it is now and economic growth about two points higher.

Ian Shepherdson, chief economist of Pantheon Macroeconomic Advisors, recently told clients in a letter that "fiscal tightening is hurting," while the investment bank Jefferies said in its midyear report on Tuesday that reduced government spending "has detracted from growth in five of the past seven quarters."

In addition, the Times reported, the Federal Open Market Committee last week acknowledged that while there has been improvement in the private sector "fiscal policy is restraining economic growth." The statement supports comments that have been made by Federal Reserve Chairman Ben Bernanke for months.

According to the Times, the budget compromises that have been made so far between President Barack Obama and Congress have resulted in the lowest level of discretionary spending on domestic and military programs in half a century. At the same time, the newspaper noted, business and consumer spending has been further reduced because the White House forced the GOP to agree to higher taxes on wealthy Americans and because both parties agreed not to extend a two-year-cut in Americans' payroll taxes for Social Security.

Making matters worse, economists see little indication that the president and Republican leaders plan to work together to seriously address the nation's budget issues in ways that would help spur the economic recovery.

The president plans this week to renew his call for combining deficit reduction, including spending cuts and tax increases, with new spending and targeted tax cuts for projects in research, education, manufacturing, and infrastructure improvements. According to the Times, that approach is "closer to what the economists propose" to help create jobs and stimulate growth.

But Republicans, the newspaper noted, are still insisting on no new spending or tax increases.

House Speaker John Boehner defended the GOP's position when speaking to reporters on Tuesday. "After four years of mediocre job creation, it's obvious that we don’t need more tax hikes and more government spending," he said. "We need smarter policies to make America more competitive and expand opportunities for everyone in our country."





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