Tuesday, 8 January 2013

The Fiscal Cliff

Okay we now know the US will not go over the fiscal cliff.

Jared Bernstein has a pretty good summary of everything you need to know.

A couple of points.

We now know the Republicans really do not believe in expansionary austerity. If they did They would have let the automatic spending and taxing elements alone. This  would have led to a strong recovery not a recession.

Instead of a reduction of 3.5 percentage points in GDP ( which would had led to a recession) it is now only half that.Now that is just what you need when you have a sluggish recovery.

One thing we have learnt both from Japan in the 90s and Europe, The UK and the USA now is that fscal policy is more potent then monetary policy at present given the ZLB.
more on this later