[jeffkrol]

Throughout the recovery, business surveys have identified lackluster customer demand and weak sales prospects as the primary factors holding down business investment. Business confidence has remained subdued as a result of uncertainty about the future growth of markets both at home and abroad and more recently about the future course of United States fiscal policy.

Limits on credit availability were also significant deterrents to investment, especially by small and medium-size firms at least through 2010, when banks began to ease their commercial loan terms.

Weak investment demand cannot be explained by low profits and high taxes: the profit share of national income has hit a historic peak and taxes on investment income are at historic lows.

Another factor contributing to the slow pace of the current recovery relative to previous recoveries has been the relatively weak growth of government spending on goods and services by both state and local governments and by the federal government.

Indeed, the contraction in state and local government spending and the associated decline in public-sector employment have been major headwinds restraining G.D.P. growth.

The increase in federal government purchases of goods and services in the 2009 stimulus bill mitigated but did not offset the effects of weak private-sector demand through 2010. But since then, the slowdown in such purchases has been a drag on G.D.P. and employment growth.

After three years of recovery, the economy is still operating far below its potential and long-term interest rates are hovering near historic lows. Under these circumstances, the case for expansionary fiscal measures, even if they increase the deficit temporarily, is compelling.

A recent study by the International Monetary Fund finds large positive multiplier effects of expansionary fiscal policy on output and employment under such circumstances.

And more output and employment now would mean higher levels in the future, because stronger demand now would encourage more private investment and stem the loss of skills and productivity resulting from long-term unemployment and the drop in the labor force participation rate.

The rationale for expansionary fiscal policy is particularly compelling for federal investment spending in areas like education and infrastructure that have large multiplier effects on the current level of output and employment and strong returns over time.

Laura D'Andrea Tyson: The Tradeoff Between Economic Growth and Deficit Reduction - NYTimes.com

[Nesster]

Sadly, a perverse spirit takes hold of humans with predictable regularity, and we do dumb things despite knowing better. Of course there is always the possibility of a civilization or an empire going into irreversible decline... but even in decline there are good times mixed in. I don't think western civilization is going into decline, though it will have to allow its mercantile, enterprising side channel the aggression and dominance that's such a part of it.

In other words, another 8 or so years, maybe sooner, maybe later, we'll have a different set of problems.

[jeffkrol]

The apprehensive fantasy is that a sudden rise in tax rates and a drop in spending will cause consumers and investors to cut back on their economic activities, leading to worse unemployment. The economy contracts.

The cheery fantasy sees investors and consumers so delighted with a more balanced federal budget, so relieved that the political impasse is over, that they go on a spending spree that not only overcomes the cutbacks, it exceeds them, stimulating a boom. The economy grows.

Which of these two scenarios is more likely?

If these were “normal” times, the more optimistic view might be tenable. It would work like this:

A more balanced federal budget (not even a surplus) would reduce the need for federal borrowing. This would reduce the role of the Treasury in the money market and decrease the demand for loanable funds. With loan demand down, interest rates would fall and private borrowers (consumers and investors) would respond positively to the lower rates. They would borrow more, spend what they borrow and stimulate economic growth.

However, increased private borrowing and spending would have to offset the federal reduction in spending and the increase in tax revenue. That requires an almost euphoric private sector. This might happen, if the fall in interest rates was a big one.

Can interest rates fall further? They now are so low that additional declines may be just a happy hallucination.

The more skeptical approach says raising taxes and cutting spending will reduce the deficit and ease pressure on the rising debt. Yet there is little benefit to this action if we want to create more jobs. Instead we should be very selective in raising taxes and most careful about cutting spending.

If the private sector will not respond with gusto to lower interest rates, if those rates cannot fall much further, then the answer to our economic woes continues to be low taxes and high spending by the federal government..............
That may be the best policy. Sometimes wisdom demands putting off to tomorrow what you could do today

funny..........

The ?fiscal cliff? is unknowable terrain

[VoiceOfReason]

I'm not dying. I'm just fine!