Sideways

At Bloombeg Rich Miller warns that if the federal government does not continue to pump trillions into the economy it will just move “sideways”:

The U.S. government spent historic sums to support the economy in the pandemic. Its withdrawal will create an unusually big fiscal cliff.

The U.S. expansion looks set to slow sharply in the second half of 2022 as measures that propped up the economy during the pandemic — from stimulus checks for households to no-cost financing for small companies — fade from view.

That will be the case even if President Joe Biden manages to win Congressional approval for the bulk of his $3.5 trillion Build Back Better agenda. The spending will stretch over years, with limited impact in 2022. It will also be at least partly paid for by tax increases that slow the economy down rather than speed it up.

“We’re in for some very low growth rates” in late 2022 and into 2023, said Wendy Edelberg, director of the Brookings Institution’s Hamilton Project. “It wouldn’t surprise me if there’s a quarter here or there where the economy basically moves sideways.”

but here’s the flip side of the coin:

There is a potential benefit: lower inflation. Prices have surged this year on the back of snarled supply chains and fiscally-fueled consumer demand. “We’ll need to come off the boil,” Edelberg said, because the rapid U.S. rebound will push the labor market and the economy to their limits by the middle of next year.

My takeaway form this is that quantitative easy and excessive fiscal spending targeted at increasing consumer spending without increasing production constitute a tiger that is very difficult to dismount. Particularly in an election year.

And every year is an election year somewhere.