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Prof. Lu Feng: New Thinking behind US Fiscal Policy

Jul 15-2021   



The fiscal and monetary policies of the US have undergone profound changes over the last ten plus years. In particular, the pandemic-induced crisis has seen the emergence of an important maneuver: the predominant role of fiscal policies, says Prof. Lu Feng of the NSD in the 57th edition of China Economic Observer (CEO).

 

Such a tilting towards fiscal policy was laid bare by debates between Lawrence Summers and Paul Krugman on the American Rescue Plan (ASP) in February this year. Both heavyweight economist and pioneers of Neo-Keynesianism, they shed light on the unusual punch packed in the ASP as well as the contents and paradoxes of fiscal interventions.

 

Though its monetary policy has been doubly eased, the fiscal policy of the US has undergone even more substantial changes this time round compared to the Financial Crisis. For one, current fiscal support amounts to five times that for the Financial Crisis. For another, large-scale fiscal interventions have become routinized maneuvers, marking a significant adjustment to discretionary fiscal tools. The Biden Administration has been rolling out one fiscal stimulus package after another despite the certainty of economic recovery. In contrast, the Obama Administration sought to cut deficits and rein in debts in early 2010.

 

A variety of realistic and cognitive elements might be at play. Years of strong stimulus policies have considerably compressed the room for monetary policy. Besides, discussions about the long-running stagnation of the American economy have led its policy makers and elite to resort to fiscal tools to boost growth and avoid Japan-styled slow-growth prospect. Also notable might be the research by American academicians into traditional fiscal policy and the resultant push for a shift in fiscal thinking.

 

After outlining the major viewpoints of the new thinking behind fiscal policy making, Prof. Lu believes that the current fiscal stimuli will generate some positive outcomes but will nonetheless create problems in the long term. The US economy can be expected to grow at a faster pace in the near term; however, attempts to use macro means to boost long-term potential growth rate are destined to run into multiple constraints, particularly those related to the supply side. Equally alarming is soaring consumer prices, rising asset prices and increasing financial risks. When import shoots up and trade deficits pile up, the US will find faults with the exchange rates and polices of its trade partners – just one more risk for China-US trade ties.

Prof. Lu Feng: New Thinking behind US Fiscal Policy

Jul 15-2021   



The fiscal and monetary policies of the US have undergone profound changes over the last ten plus years. In particular, the pandemic-induced crisis has seen the emergence of an important maneuver: the predominant role of fiscal policies, says Prof. Lu Feng of the NSD in the 57th edition of China Economic Observer (CEO).

 

Such a tilting towards fiscal policy was laid bare by debates between Lawrence Summers and Paul Krugman on the American Rescue Plan (ASP) in February this year. Both heavyweight economist and pioneers of Neo-Keynesianism, they shed light on the unusual punch packed in the ASP as well as the contents and paradoxes of fiscal interventions.

 

Though its monetary policy has been doubly eased, the fiscal policy of the US has undergone even more substantial changes this time round compared to the Financial Crisis. For one, current fiscal support amounts to five times that for the Financial Crisis. For another, large-scale fiscal interventions have become routinized maneuvers, marking a significant adjustment to discretionary fiscal tools. The Biden Administration has been rolling out one fiscal stimulus package after another despite the certainty of economic recovery. In contrast, the Obama Administration sought to cut deficits and rein in debts in early 2010.

 

A variety of realistic and cognitive elements might be at play. Years of strong stimulus policies have considerably compressed the room for monetary policy. Besides, discussions about the long-running stagnation of the American economy have led its policy makers and elite to resort to fiscal tools to boost growth and avoid Japan-styled slow-growth prospect. Also notable might be the research by American academicians into traditional fiscal policy and the resultant push for a shift in fiscal thinking.

 

After outlining the major viewpoints of the new thinking behind fiscal policy making, Prof. Lu believes that the current fiscal stimuli will generate some positive outcomes but will nonetheless create problems in the long term. The US economy can be expected to grow at a faster pace in the near term; however, attempts to use macro means to boost long-term potential growth rate are destined to run into multiple constraints, particularly those related to the supply side. Equally alarming is soaring consumer prices, rising asset prices and increasing financial risks. When import shoots up and trade deficits pile up, the US will find faults with the exchange rates and polices of its trade partners – just one more risk for China-US trade ties.