IMF Article IV on the US: “deficit reduction in 2013 has been excessively rapid and ill-designed”

The IMF has just concluded its Article IV consultation with the US. The concluding statement observes:

In particular, the automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth. These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration’s budget proposal. At the same time, the expiration of the payroll tax cut and the increase in high-end marginal tax rates also imply some further drag on economic activity. A slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further.

On the fiscal front, the IMF staff recommends:



  • Repealing the sequester and adopting a more balanced and gradual pace of fiscal consolidation in the short term;
  • Expeditiously raising the debt ceiling to avoid a severe shock to the U.S. and the global economy;
  • Implementing a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability;

This point is highlighted by the slowdown in growth. Monthly indicators of growth have flattened.


june2013pix.png

Figure 1: GDP (BEA 2013Q1 2nd release) (blue bars), monthly GDP from e-forecasting (red line), from Macroeconomic Advisers (green line). NBER defined recession dates shaded gray. Source: BEA, e-forecasting.com, Macroeconomic Advisers, and NBER.

See also Lowry/Economix.

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16 thoughts on “IMF Article IV on the US: “deficit reduction in 2013 has been excessively rapid and ill-designed”

  1. 2slugbaits

    the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth.
    It could also be dangerous to public health. A few months ago there was a conservative drumbeat coming from the usual suspects claiming that Obama was just hyping the cuts to the Center for Disease Control (CDC). We now know that the usual suspects (once again!) got it wrong:
    http://www.cdc.gov/fmo/topic/Budget%20Information/appropriations_budget_form_pdf/CDC_FY2013_Budget_Overview_Slides.pdf
    Slide #12 shows a $664M reduction from FY2012 budget authority. In anticipation of the sequester the CDC was smart enough to set up a fee-for-service revolving working capital fund that will cushion the shock to a $222M cut. That assumes of course that there will be entities willing to buy that fee-for-service. Flu shots for old Tea Party voters will be kept level by transferring money from other accounts. In other words, we’re going to keep the old fogies alive by cutting funding on programs that kill the young (e.g., tuberculosis reduced by $5M, birth defects reduced by $12M, immunization reduced by $58M, etc.).
    Falling back on a fee-for-service revolving working capital fund is something that I thought might bother many small government conservatives. Afterall, the armies of Caesar, Pompey and Crassus were fee-for-service revolving working capital funds with lines of funding independent of the Roman Senate. Apparently conservatives are not worried about government entities creating funding sources independent of the Congressional appropriations process.

  2. tj

    The sequester was one of Obama’s dumber ideas. Of course, he was for the sequester before he was against it.
    Obama November 2011: “I will veto any effort to get rid of those automatic spending cuts, domestic and defense spending. There will be no easy off ramps on this one.”

  3. Steven Kopits

    Is this the same IMF who completely blew the Greek forecasts?
    It’s very, very simple. The OECD commodity producers are doing well, the commodity importers are struggling, with Korea perhaps the only exception.
    Why doesn’t the IMF suggest that the Europeans lower their oil taxes, promote offshore and shale gas development, and hasten the conversion of transport to natural gas? Why doesn’t it suggest that the US expand coal exports, that Canada expand oil sands exports, that Keystone XL be built, or that Alaska be fast-tracked? That has a much higher correlation with GDP growth.

  4. 2slugbaits

    tj The sequester was a dumb idea, but it was in response to an even dumber Tea Party threat to throw the government into default. If you recall, the Budget Control Act (BCA) of 2011 was a direct response to the Tea Party threatened debt ceiling crisis. Under the BCA a committee in Congress was supposed to agree to a deficit reduction plan. The motivation for getting Congress to come up with a plan was the threat of sequestration. What Obama was responding to was a GOP effort to exclude certain kinds of GOP favored spending, so the sequestration would only apply to programs that Democrats favored. Doing that would not have lowered the total number of dollars subject to sequestration, only the distribution of the sequestration. And in that context Obama’s comment was not dumb.
    Steven Kopits Europe isn’t suffering from any oil supply shock recession. Europe’s immediate economic problems are not because of supply failing to keep up with demand. Exactly the opposite. Europe’s problem is weak aggregate demand creating a large and persistent output gap. The solution to that problem is hampered by a large productivity differential between northern Europe and the southern periphery coupled with monetary but not fiscal union. One way to resolve that difference would be higher inflation in the north. Because of monetary union there is no easy solution for Europe’s problems, only options that lessen the unnecessary pain. But that’s not true with the US and UK. In the US we have other options, but after the 2010 election we managed to inflict upon ourselves a braindead political process that somehow managed to give us threats of default, the BCA and budget sequestration.

  5. Steven Kopits

    What do you know about oil, Slugs?
    Without a doubt, the attempt to remain in the Euro zone is crushing the periphery members, leading to unemployment rates literally double those for similarly governed countries outside the Euro zone.
    But the US departed from the European path just as shale oil production began to boom, and it hasn’t looked back. Find me a net oil exporter in financial trouble; or a major, high wage oil importer not in trouble. Even Germany’s struggling. The only real exception is Korea, and they’re a medium wage country to all appearances living on borrowed time.

  6. 2slugbaits

    Steven Kopits What I know about oil could fit in a thimble. But I do know something about calendars and this is not 1979.
    Last I heard Canada was a high wage oil exporter. Last I heard Canadian real GDP growth was flat (0.2% in both 2012Q3 and 2012Q4).

  7. 2slugbaits

    Robert Whoever said tax hikes during a recession were a good idea? Some of us were quite critical of Team Obama for not fighting harder (or even at all) for extending the FICA holiday. If you’re worried about the fiscal drag of higher taxes during a very weak recovery, then you should be mortified by lower spending because the spending multiplier at the ZLB is higher than the tax cut multiplier.
    And you should at least pretend to make an effort to correctly restate the opinions of others.

  8. tj

    2slugs
    The motivation for getting Congress to come up with a plan was the threat of sequestration.
    Correct, the sequester was Obama’s response to the right’s position on the debt ceiling. Obama messed up. He followed a flawed bargaining strategy and created a bad policy option. He owns it. End of story.
    You radical lefties are priceless. Never take responsibility for your flawed policy decisions then steer the debate away from your mistakes.

  9. anon2

    tj:
    “The Budget Control Act passed in the House with 269 votes in favor — 174 from Republicans and 95 from Democrats. And the bill cleared the Senate with 74 “yea” votes, of which 28 were cast by Republicans. ”
    Yup, all those radical lefties fault. Yup, yup, yup.
    No way those righties had anything to do with it. No way, no way, no way.
    Yup.

  10. 2slugbaits

    tj You radical lefties are priceless. Never take responsibility for your flawed policy decisions then steer the debate away from your mistakes.
    Hmmmm…I didn’t know sequestration was a leftie policy. As I recall events Krugman (who could fairly be described as a leading voice on the left) opposed the sequestration deal and argued for calling the Tea Party’s bluff. The sequestration option was the safe, middle-of-the-road option.
    And if you think the fiscal consequences of the sequestration are bad, then how much worse would things have been if Obama had caved outright and agreed to whatever the Tea Party wanted in the way of cuts? The Tea Party types were upset because the sequestration cuts didn’t go far enough for their tastes.
    So tell us, if you were President tj what would you have done given the constraints that Obama faced? Take the Krugman option? Cave into Tea Party demands? Or take the middle-of-the-road approach?

  11. tj

    2slugs
    Read carefully. I never claimed this was a radical left policy, only that Obama owns it, and radical lefties, like yourself, never take responsibility for any of your policy mistakes. It’s always blame Bush, blame the tea party, blame Wall Street, blame Republicans, blame a video for Benghazi, blame Citizens United for IRS targeting .
    Obama owns it –
    Obama November 2011: “I will veto any effort to get rid of those automatic spending cuts, domestic and defense spending. There will be no easy off ramps on this one.”
    The blame game is just another symptom of the radical left’s inabilty to take responsibility for anything.
    None other than NBC’s David Gregory today pressed Obama’s chief economic advisor, Gene Sperling, whether his boss told the truth in the third presidential debate that “the sequester is not something that I’ve proposed. It is something that Congress has proposed.” Sperling finally wilted under the pressure of tough questioning to admit that “yes, in fact, the sequestration was President Obama’s plan.”
    Jack Lew, in his confirmation hearings, conceded on February 13 that the sequester originated in the White House.
    On Tuesday February 19, press spokesman Jay Carney admitted “The sequester was something that was discussed… and as has been reported, it was an idea that the White House put forward.”

    http://www.forbes.com/sites/paulroderickgregory/2013/03/03/white-house-admits-third-time-president-obama-fibbed-on-sequester/

  12. 2slugbaits

    tj So let’s see if I’ve got this straight. By your reasoning if a man proposes marriage to a woman who then accepts the proposal, then the groom owns the marriage but not the bride. That seems to be an almost exact parallel with your reasoning. Jack Lew proposes a compromise proposal, the Tea Party accepts it, but it only belongs to Jack Lew. Right. Thanks for clearing that up.
    As to not owning up to responsibilities, we’re still waiting breathlessly for your answer as to what President tj would have done if he were in Obama’s shoes and faced with the same constraints

  13. Anonymous

    Slugs:
    Whoever said tax hikes during a recession were a good idea?
    What makes you think that they don’t retard growth when growth is strong? You think there is a free lunch?
    Also, just admit the sequestor, which was GOOD for America, was Obama’s idea.

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