“America First”, Fiscal Policy and Financial Stability: a report on the US economy

What does the future hold for the US economy, given its current trajectory and recent changes in government policy?

The Levy Economics Institute of Bard College, of which distinguished former associates include post-Keynesians Hyman Minsky and Wynne Godley, has just published its Strategic Analysis report on the medium-term prospects for the US.

Godley is recognised as having predicted a severe recession in the US some years before it began in 2008, due to the unsustainable build-up in private sector debt, particularly among households.

Minsky is also well known for his ‘financial instability hypothesis’ and its implication that ‘stability is destabilising’ in the financial sector of capitalist economies: periods of stable economic growth can create fragile balance sheets in the private sector, which often lead to stagnation or crisis.

Minsky died in 1996, but his work continues to inform the thinking of economists such as Steve Keen and Michael Pettis, who both castigate many of their mainstream peers for ignoring the role of private debt in the economy.

The Levy report details the results of the Institute’s macro-model, but is free of mathematics and is perfectly readable given a little knowledge of macroeconomics.

The authors’ results explore the implications of the recent tax reform and increased public spending for economic growth and the financial balances of the government, private (firms and households) and external sectors. These policies are shown to give a small boost to GDP growth over several years.

However the authors note that had they been designed to be more progressive, and favoured poorer households, which tend to save a smaller proportion of their income, the positive impact on consumption may have been greater.

They then present an alternative scenario, in which the increased government deficit implied by these policy changes is instead used to fund infrastructure spending, something which the US sorely needs. This alternative is found to produce more favourable medium-term growth.

A large increase in government spending on infrastructure could also improve US productivity and competitiveness in the longer term, aside from the shorter term boost to demand. The former aspect is mentioned in the report, but not included in the model.

Finally, the report models the impact of a new financial crisis. As an example, a steep decline in the stock market and/or an increase in interest rates could trigger a new round of private sector deleveraging (paying down debt), which would cause a slowdown or even a recession.

Firm and household debt to GDP ratios remain historically high, as does the stock market, so this is a real possibility.

The report is useful for anyone interested in the medium-term future of the US economy given its current trajectory, and how current government policies, and an alternative package, might influence things. It is well worth a read.


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