The Economic Outlook and Options for Fiscal Policy

Editor's Note: We generally don't think of government officials prognosticating on the record regarding future economic policy. As a former journalist in Washington, D. C., I'm used to the labyrinth that you sometimes have to overcome in order to get the information you need. For example, press officials at the U.S. Department of Commerce and the Office of Management and Budget were polite but direct: “We don't forecast.” Indeed, we generally look to them for after-the-fact statistics.

However, checking with the Congressional Budget Office turned up a gem. Not only did I find a recent forecast (fourth quarter, 2010), Douglas W. Elmendorf, director of the budget office, was the official who presented the information. Ironically, his audience was the Forecasters Club of New York, people who must divine the economic future as a part of their profession. This presentation is an invaluable sneak peek into the thought processes driving the current administration's fiscal policy. While your instinct may be to disagree, focus more on how these various fiscal policies could impact your business in 2011.

Here is what Elmendorf shared with his audience.

Congressional Budget Office Presentation to the Forecasters Club

The Economic Outlook and Options for Fiscal Policy

October 27, 2010
Douglas W. Elmendorf, Director

Introduction

CBO expects that the economic recovery will proceed at a modest pace, leaving the unemployment rate above 8 percent until 2012. There are monetary and fiscal policy options that, if applied at a sufficient scale, would increase output and employment during the next few years (but not overnight). Such options would have costs as well. Expansionary fiscal policy would increase federal debt, which is currently larger relative to the size of the economy than it has been in more than 50 years — and is headed higher. (See Figures 1-4.)

Monetary Policy Options

The traditional tool of lowering the federal funds rate is not available. Based on comments of FOMC participants, the most important available tool appears to be the ability to buy additional longer-term securities.

• Uncertainties: How much will a given amount of purchases reduce interest rates? How much will a decline in interest rates spur spending?

• Risks: Can the Federal Reserve withdraw the additional stimulus quickly later? Should the Federal Reserve become more involved in capital markets?

Fiscal Policy Options

Options include changing many different types of federal spending and taxes. Two key questions:

• What sorts of fiscal policies would encourage greater economic activity and more employment?

• How can short-term fiscal stimulus be reconciled with the imperative to put fiscal policy on a sustainable medium-term and long-term path?

CBO has done a substantial amount of analysis on both of those questions.