How Can We Tell if Fiscal Policy is Sustainable? Three Views

As negotiations over fiscal policy heat up, one thing nearly everyone agrees on is that U.S. fiscal policy should be sustainable. The trouble is, there are sharp disagreements about just what sustainability means. This post explores three different meanings of fiscal policy sustainability and explores their significance for current budget debates.

Sustainability as solvency

 The first, and simplest, meaning of sustainability makes it a synonym for solvency. The proposition that we do not have to worry about debts and deficits because the government can never “run out of money” has become a mantra among followers of Modern Monetary Theory (MMT). >>>Read more

Follow this link to view or download a classroom-ready slideshow with simulations of debt dynamics under various fiscal policy assumptions

Recommended for your Classroom Discussion of the Fiscal Cliff: Lee Arnold’s New Video on the Debt and Deficit

This new video from Lee Arnold is a great tool to spark a classroom discussion on the budget negotiations underway as the United States approaches the “fiscal cliff.” It uses great animated graphics and a polished voice-over to lay out the way that the CBO baseline revenue projections would interact with scheduled changes in spending to determine the future course of the debt and deficit.

Many students will be surprised to find that the CBO baseline projections produce future budget surpluses that would bring the debt down to nothing over time. Economists familiar with the CBO methodology will understand how this happens. The projections are based on the assumptions that all laws on the book as of late 2012 will come into force without further changes.

US CPI Data: Late Summer Inflation Spike Ends in October; Deflation Risk Nosedives on Election Results

U.S. inflation data released yesterday by the Bureau of Labor Statistics show that a two-month spike in headline inflation seems to have run its course. Both headline and core inflation measures are now close to or below the Fed’s 2 percent target. In a related development, the Atlanta Fed reports that deflation probabilities have nosedived since President Obama won re-election earlier this month.

The headline all-items CPI increased at an annual rate of just 1.81 percent in October, down from 7.48 percent in August and 7.06 percent in September. Most of the decrease came from a drop in energy prices, which had soared in the previous two months. New and used car prices also fell. Increases in the prices of food and apparel partly offset the decreases in energy and vehicles.

Measures of underlying inflation, which had not followed the late-summer spike of the all-items CPI, remained moderate.>>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of all the latest US inflation data

Austerity Bomb? Don't Panic. Keep Your Eyes on Real Fiscal Reform

Austerity bomb” is the metaphor of the day. First introduced by Brian Beutler, it has now been endorsed by Paul Krugman as a replacement for “fiscal cliff.” Both are bad metaphors. They invite us to think that the most important thing on the national agenda is to avoid the cliff or defuse the bomb before disaster strikes. Instead, we need to stay calm keep our eyes on the prize, that is, on real reform of our muddled fiscal policy. Unless we are willing to look beyond what happens at the end of the year, we risk being panicked into a deal that will leave us in an even worse fiscal mess than we are in now. Here are the three long-term considerations that should be at the center of budget negotiations: >>>Read More

October Data Show Stronger Labor Market as Workers Return and Part-Time Work Falls

The October jobs figures released today by the BLS showed a stronger U.S. labor market. The unemployment rate edged up by 0.08 percentage points, just enough to raise the headline rate from 7.8 to 7.9 percent. However, a look at the underlying data showed that the uptick in the headline rate was a “good” increase of the kind that we often see  as previously discouraged workers return to a strengthening labor market.

The labor force increased by 578,000 workers in October. The number of employed persons, as measured by the household survey from which these data come, increased by 410,000.>>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest jobs data

Bringing Hurricane Sandy into your Econonomics Class: Links on Price Gouging and Climate Change

Hurricane Sandy has dominated the news this week. How can you tie the storm into your econ class? Here are some links that should help.

• In this post on Slate, Matthew Yglesias gives a brilliant explanation of why "price gouging" laws make it harder to prepare for and respond to natural disasters.
• Writing for the blog of the Council for Foreign Relations, Michael Levi reminds us that measures to reduce CO2 in the atmosphere do not have immediate effect. Because of climate inertia, they take decades to affect air temperatures and even longer to affect ocean levels. Reducing methane emissions works a little faster, but not tomorrow. In short, don't expect measures to mitigate climate change to stop storms like Sandy. Investment in more resilient infrastructure has to be part of the package.
• In "Playing God," Written for Foreign Policy, economists Gernot Wagner and Martin L. Weitzman write that with efforts to halt climate change on life support, scientists are looking at some radical geoengineering options to save our planet. But could the cure be worse than the disease?