Following the US election we are likely to see a large fiscal stimulus. This has support from many Republicans and many Democrats, but in each case it is based on a different set of expectations. Both groups hope that fiscal stimulus will pay for itself through greater growth, but use different assumptions to reach the same conclusion.
Fiscal stimulus Republicans believe that tax and regulation have constrained the ability of the US economy to grow and that reducing them will have an immediate and sustained beneficial impact, not only on demand but also on supply. Fiscal stimulus Democrats believe that the capacity of the economy to grow is much greater than recent trends and the current level of unemployment suggest. If either group is correct, additional fiscal stimulus could increase demand and lower unemployment without raising inflation.
Both these attitudes seem based on wishes rather than hard headed assessment. They resemble the UK’s ill-fated National Plan which, as Mervyn King has pointed out,* failed because it was also based on the hope that growth of the economy could be accelerated by simply boosting demand.
The US economy has grown at 2.1% p.a. since the recovery started in Q1 2010, while unemployment has fallen sharply from 9.8% to 4.9%. The growth of output has thus been much faster than the growth of output capacity (aka the trend rate of growth).
Full paper: US Economic Policy
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*The End of Alchemy – Money Banking and the Future of the Global Economy by Mervyn King published by Little Brown (2016).