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Avoiding fiscal drag

There are several risk factors for the economy this year, but fiscal drag is one that we can avoid with smart policy

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Jared Bernstein
This chart shows the effect of certain fiscal policies on economic growth.

While acknowledging that we’ve got a little mo’ going in the current economy, I and others have stressed various risk factors, including Europe, oil, and fiscal drag. 

Here’s a picture of the latter.  It’s the one risk, that with smarter policy, we could control…but it’s that “smarter policy” part that’s the catch (Europe’s debt problem is also amenable to policy solutions, but that’s mostly up to Germany et al).  Our policy makers remain motivated more by austerity and dysfunctional politics than by clear-eyed thinking about offsetting the fiscal drag as stimulus fades, states shed jobs, and we’re still climbing out of the hole caused by the Great Recession.

BTW, note the dip in terms of lower real GDP (“current law”) this year if we fail to extend unemployment insurance benefits and the payroll tax break beyond the two months agreed to thus far.

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