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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鈥檝e got a little mo鈥 going in the current economy, I and others have stressed various risk factors, including Europe, , and fiscal drag.聽

Here鈥檚 a picture of the latter.聽 It鈥檚 the one risk, that with smarter policy, we could control鈥ut it鈥檚 that 鈥渟marter policy鈥 part that鈥檚 the catch (Europe鈥檚 debt problem is also amenable to policy solutions, but that鈥檚 mostly up to Germany et al).聽 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聽we鈥檙e still聽climbing out of the hole caused by the聽Great Recession.

BTW, note the dip in terms of lower real GDP (鈥渃urrent law鈥) 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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