Are we seeing the big picture?

It’s safe to say many people are worried about whether economic growth – in the United States and abroad – will be stifled by changing monetary policy in the United States. As a result, all eyes have been on the Federal Reserve, which is expected to begin raising the Fed funds rates sometime soon.

However, the Federal Reserve’s monetary policy isn’t the only game in town. Fiscal policy – the actions taken by our government – can also have a profound effect on economic growth. A July Brookings’ blog post ‘Fiscal Headwinds are Abating,’ reported:

“Tight fiscal policy by local, state, and federal governments held down economic growth for more than four years, but that restraint finally appears to be over… Fiscal policy is no longer a source of contraction for the economy, but neither is it a source of strength.”

The blog post discusses the reasons that government spending has held back economic growth. At the federal level, contraction was attributed to “…tight caps on annually appropriated spending and the automatic spending cuts known as sequestration.” The organization’s Federal Impact Measure (FIM), which estimates the effect of federal, state, and local spending (and taxes) on gross domestic product growth, suggests federal spending caused economic growth to be 0.35 percentage points lower per year, on average, between 2011 and 2013.

There is talk of a government shutdown at the end of September. If it happens, it could have an effect on economic growth. The last time the government shut down was in 2013. Experts cited by the BBC reported the 2013 shutdown cost the U.S. economy about $24 billion and reduced quarterly economic growth by 0.6 percent. That shutdown lasted 16 days.

It is possible economic growth may slow for some period of time. It’s also possible monetary policy, fiscal policy, and other factors may be responsible.

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