In recent years, we’ve heard a lot about the Federal Reserve’s role in setting monetary policy. In other words, set interest rates to stimulate the economy, or more recently, to slow it down.
The government has another powerful tool at its disposal: fiscal policy. Think about government spending like Social Security and other benefits or assistance.
A new paper published Monday by researchers at the Federal Reserve Bank of San Francisco found that fiscal policy has contributed a lot to economic growth in recent years.
But in the next few years? The researchers say fiscal policy won’t make much difference.
It’s been a while since the federal government stepped in and stimulated the economy with more than $5 trillion in pandemic relief aid.
“The enhanced unemployment benefits have expired, the direct checks haven’t been distributed in quite some time, the Paycheck Protection Program has ended,” said Michael Pugliese, senior economist at Wells Fargo.
He said it was not as if the government had changed course and made huge spending cuts or tax increases. Instead, Pugliese said one could imagine the country’s current fiscal policy as fairly neutral.
“It represents neither a significant boost nor a drag on the U.S. economy,” he said.
And that’s not necessarily a bad thing, said Menzie Chinn, an economics professor at the University of Wisconsin.
Chinn said, on the one hand, we don’t want the government to make big spending cuts or tax increases right now that are weighing on the economy.
“There is a concern that a recession is coming, and you don’t want the spending cuts to come right at a time when you’re at a sensitive point in the economic cycle,” he said.
On the other hand, Chinn said we don’t need fiscal policy to stimulate anything.
Remember: The Federal Reserve is trying to cool the economy to reduce inflation.
“Unemployment is still very low,” he said. “GDP [gross domestic product] still seems to be growing quickly.”
The economy is still strong, thanks in large part to all the spending the government did before the pandemic.
Preston Mui, senior economist at the advocacy group Employ America, said even though consumers aren’t currently receiving aid, their finances are still fairly healthy.
“Household balance sheets performed really well in 2022 compared to 2019,” he said.
But Mui said we are still not sure how people’s balance sheets will change after the government’s fiscal policy becomes more neutral, especially as student loan payments have only just resumed and pandemic-era childcare subsidies recently expired be.
“The concern would be that there are delays in how this affects the economy and the job market,” Mui said.
It will be important for fiscal policy to keep the economy afloat, he said, especially as the Federal Reserve’s monetary policy continues to slow the economy.
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