Is the US Economy Really About to Go Boom?

Politico asked 8 of us for a prognosis on US growth in the new year. This was my response –

Something important will get better in 2014: Fiscal policy will stop hurting the economy. The results should show up as expansion in such service sectors as health, education and construction.

The biggest impediment to economic expansion over the last three years has been destructive budget policy coming out of the Congress: misguided fiscal drag in the short term (crude cuts in spending, especially under the sequester; the expiration a year ago of Obama’s payroll tax holiday); repeated unnecessary disruptive and uncertainty-maximizing political crises (debt ceiling showdowns and government shutdown); and little progress on the genuine longer-term fiscal problem, which is the 40-year prognosis for U.S. debt (a result of projected rapid growth in entitlement spending). These fiscal failures have together probably subtracted well over a percentage point from U.S. growth in each of the last three years.

Private-sector output and employment have been rising for four years, which is what has made this a period of continued economic recovery. Many of the benefits have come in manufacturing and energy, unexpectedly. But real government spending has been falling since 2010 in absolute terms, let alone as a share of GDP. Government employment has been declining since 2009, especially as a share of total employment. This is the No. 1 reason why the overall pace of the recovery has been frustratingly slow until now.

There are good grounds for optimism in 2014. For the first time in four years, Congress will probably not inflict contractionary fiscal policy on the American people. If the government sector stops making a negative contribution, that will show up as economic growth. True, it would be better if fiscal policy could actually make a positive contribution. This would mean spending some money on priority areas such as roads, bridges and other public investment, while simultaneously enacting legislation to address the long-term issue of debt that will otherwise rise relative to GDP in future decades. But ending in 2014 the negative short-term contribution to growth is itself a political development that deserves to be celebrated.

[Responses to the question from the others -- El-Erian, Bernstein, Kotlikoff, Reich, Chinn, Frieden, and Baker -- are at Politico.].