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DE | Sinai Economic and Market Perspectives | Macro Policy to the Forefront—How Much is Enough? – 03/24/21
Macro Policy to the Forefront—How Much is Enough?
Monetary-Fiscal Policy Mix: “Ultra-Easy” Money—“Hugely Loose” Fiscal
Macroeconomic policies, monetary and fiscal, are front-and-center after the signing into law of the $1.9 trillion American Rescue Plan and last week’s two-day FOMC Meeting.
Combined, the Ultra-Easy Monetary Policy of the Federal Reserve—reaffirmed in the Statement and Q. and A. of Chair Powell last Wednesday, again this week, and the huge fiscal stimulus of the past year, $5.9 trillion, cumulatively over 26% of current Nominal GDP—constitute the largest macro policy stimuli ever in the history of the United States.
A big question is whether the stimulus is Too Much or About Right. No one is suggesting Too Little since it is so large and also widely expected is more fiscal stimulus later this year.
Some Historical Perspective
Potential parallels are the 1960s and 1980s. There was the Kennedy-Johnson tax cuts of 1962ff and increases of federal government spending, Great Society outlays, then the Vietnam War surprise increased defense spending in 1965-67. In the 1980s, there were the Reaganomics tax cuts for individuals and businesses, massive increases of Federal defense spending, deficit and debt-financed, and easing, easier and easy monetary policy under Chair Volcker beginning in 1982: 3.
With lags, those policies brought strong Expansions, eventually Booms, lower and low unemployment, higher inflation, tighter monetary policy, rising interest rates, financial excesses, financial distress, then Credit Crunches and Recessions—a standard sequence in numerous business cycle upswings.
Current monetary and fiscal policies in combination—call this the “Policy Mix”—in absolute terms and related to a now much larger U.S. economy than in the 1960s and 1980s are hugely stimulative on any historical comparisons.