According to the Council of Economic Advisors’ (CEA) quarterly report on the continuing effects of the American Recovery and Reinvestment Act (ARRA) (see our analysis of ARRA here), the magnitude of the fiscal stimulus and its positive effect on the U.S. economy have been increasing substantially in the first half of 2010 (from $108 billion in Q1 of 2010 to $116 billion in Q2).
Markets are justifiably confused about the strength of the economy: is growth slowing? Is it slowing a lot or just a little? Will it keep chugging along and sustain forward momentum as fiscal stimulus lessens? A reasonable case can be made for any of these views based on a reading of key indicators in the U.S., Europe and China.
Here are the highlights from this weekend’s editorials on fiscal and budget policy:
The Denver Post said that although they opposed a large stimulus package, they did not believe that Congress should penny pinch on the unemployed in the current economic situation. Noting the recent upward trends in unemployment claims, they believed that it was important to extend benefits in an economic climate where "even the most talented and ambitious job-seekers" cannot find a job. The Post believed that the benefits of extending unemployment benefits outweighed the costs of not paying for them.
Alberto Alesina of Harvard University has a new paper out that talks about how differences in the composition of debt reduction packages make a difference in terms of success. He looks at which contractions have been fiscally successful, less harmful to growth, fiscally unsuccessful, or more harmful to growth. In addition, he examines the political ramifications of tightening fiscal policy and whether they necessarily lead to the incumbent being voted out of office.
Yes, financial markets too are being affected by the World Cup. So far today, trading is quiet – even though today is one of the famous Triple Witching Days (which is not about Harry Potter but the day each quarter when contracts in three main markets must be settled and which are famous for being unpredictable). Sometimes however thin markets can be volatile.
U.S. financial markets this week have continued to be dominated by global capital seeking a safe haven in U.S. Treasury instruments, as the eurozone continues to struggle getting its fiscal problems under control. When safe haven effects kick in due to fears about problems with the U.S. recovery or elsewhere, investors turn to U.S. Treasury instruments and U.S. interest rates go down. When investors become more bullish over U.S. economic prospects (including relative to other countries), the U.S. stock markets looks better and assets are shifted from the bond markets.
In testimony before the House Budget Committee this week, Ben Bernanke called for a plan to be put in place now to reduce deficits once the economy recovers. Already being a (frequently re-affirmed) member of the Announcement Effect Club, Bernanke's testimony was no surprise to readers of our blog or anyone who is familiar with Bernanke's public statements.
Chairman Bernanke's testimony today underscored the fundamental lack of sustainability of the growing federal budget deficit, while simultaneously defending the large increases in deficit spending that were necessary to support economic recovery. Bernanke predicts real GDP to grow at 3.5% over the course of 2010, yet he acknowledged that this must be tempered by latent problems in the housing market.
Yes, today’s employment news from May is disappointing – even though there are some encouraging signs.
Let’s start with the bright side: the unemployment rate edged down (to 9.7% from 9.9% in April, a lot better than the 10.1% high of last October); job creation was positive for the fifth month in a row (it has been increasingly positive every month this year); and the job number was what we like to hear (+431,000). So, more people are working now.