News Column

U.S. Fiscal Policy Restrains Growth, Fed Says

May 10, 2013

Isaac Cohen --

financial policy

With one phrase, in the statement issued after its last meeting, the Federal Reserve recognized that U.S. fiscal policy is "restraining economic growth."

In other words, recent federal and state budget cuts and tax increases are having a negative effect on the economic recovery. This is the first time the central bank has expressed its opinion on what is today's most intense debate on economic policy.

So far, the alternative between austerity and stimulus has pitted Republicans and Democrats and academics close to both political persuasions.

Name-calling has also been intense. For instance, the editorial page of the Wall Street Journal almost pejoratively calls "Keynesians" those followers of the British economist John Maynard Keynes, who advocated increased public expenditure to counter the Great Depression of the 1930s.

In his bi-weekly column in the New York Times, Nobel Prize-winner Paul Krugman responds, calling "austerians" those who predicate less public expenditure and lower taxes to reactivate the economy.

However, when confronted with some of the ugly consequences of reducing federal expenditures, Keynesians and austerians can reach agreements. Recently, when air traffic started to slow down because budget cuts were causing furloughs of air traffic controllers, an immediate bipartisan agreement to solve the problem was reached in Congress and with the White House.

Isaac Cohen is an international analyst and consultant, a commentator on economic and financial issues for CNN en Espaņol TV and radio, and a former director, UNECLAC Washington Office.


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