How Smart Fiscal Rules Keep Sweden's Budget in Balance

Almost three decades ago, Herbert Stein, the former Chairman of Nixon's Council of Economic Advisors, lamented that the United States had no long-run budget policy—no policy for the size of deficits and for the rate of growth of the public debt over a period of years. He pointed out that Congress makes annual budget decisions that are wholly inconsistent with professed long-term goals, hoping that something will happen before a point of crisis is reached. He might have added that when the crisis does arrive, it is resolved by a combination of hasty, one-off measures; the making of promises that are rarely kept; and the appointment of special commissions whose advice is rarely heeded.


What Stein said then remains true today. The rational way out of this destructive cycle of irresponsibility and crisis is to establish long-term fiscal policy rules and stick to them. There is at least a vague recognition among some members of Congress of the need to do so. The problem is that the rules they actually propose are primitive and counterproductive. The debt ceiling itself, which Congress routinely sets at levels that are inconsistent with its own spending and taxing decisions, is one such rule. The balanced budget amendment championed by many fiscal conservatives is also deeply flawed, for reasons detailed in this earlier post.

Instead of these "dumb" fiscal policy rules, we need to be looking at what can be learned from countries that have faced the same problems and introduced smarter rules to overcome them. Last week's post examined how intelligent budget rules have helped Chile prosper. Today we look at the smart fiscal rules that have put Sweden's budget on a sustainable path and made that country's economy one of the strongest in Europe. READ MORE>>>

How Intelligent Budget Rules Help Chile Prosper: Lessons for the US

As everyone knows who has followed the current budget debate, U.S. fiscal policy needs more than a quick fix. It needs budget rules to put the debt and deficit on trajectories that are sustainable in the long run. Where better to look for workable rules than to countries that have done things right? Chile, which has managed to prosper under an intelligent set of budget rules, is a good place to start. READ MORE>>>

Is a 56.2 MPG Fuel Economy Standard Really a Good Idea?

According to news reports, the Obama administration is talking to automakers about raising the Corporate Average Fuel Economy standard for passenger cars to 56.2 miles per gallon by 2025, more than double the  27.5 MPG in force for the 20 years up to 2010. Economists, even those like myself who favor policies to reduce fuel use, have argued that CAFE standards are a bad idea. Has anything changed to make stricter fuel economy standards look better now than in the past? Read the full post >>>

Yes, the US Needs Budget Rules, but Not Hatch-Lee

Sometimes the United States is slow to join a global trend. Fiscal policy rules are a case in point. Economists love the idea of rules that decouple tax and spending policies from short-term politics and focus instead on long-term growth and sustainability. Such rules used to be rare; as recently as 1990, they were in effect in only 7 countries, according to an IMF survey. By 2009, the number had grown to 90. Aside from failed attempts like the Gramm-Rudman-Hollings Act of 1985, the United States has been missing from the list.

It won't be missing for long if Utah Senators Orin Hatch and Mike Lee have their way. They are pushing a set of budget rules in their Hatch-Lee Balanced Budget Amendment, which was introduced on March 31 with the backing of the entire Senate Republican delegation. Just this week, Senator Lee gave it added momentum by including it in his Cap, Cut and Balance Act. That new proposal would require the Hatch-Lee amendment to be passed, along with a set of short-term cuts and caps, before the debt ceiling could be raised.

Linking long-term rules to a short-term increase in the budget ceiling is an excellent idea. The IMF cites several examples, from Sweden to Bulgaria to New Zealand, where a fiscal crisis provided the impetus for the adoption of successful budget rules. But is Hatch-Lee the right kind of rule? Unfortunately it is not.

Follow this link to read the full post on Ed Dolan's Econ Blog at Economonitor.com
 

Data for the Classroom: US Unemployment Rises in June

 U.S. job growth slowed again in June. Although total payroll jobs increased for the ninth straight month, the Bureau of Labor Statistics reported a disappointing total increase of just 18,000. At the same time, the May figure was revised down from 54,000 new jobs to just 25,000. An increase of 57,000 private nonfarm jobs was offset by a loss of 39,000 government jobs. Jobs decreased at all levels of government, federal, state and local.

The unemployment rate, based on a separate survey of households, edged up by 0.4 percent to 9.2 percent, its highest level since December 2010. The unemployment rate is the ratio of unemployed persons (those looking for work but unable to find it) to the labor force. Unemployed persons increased by 173,000 in the month, and at the same time, 272,000 discouraged workers stopped looking for work and left the labor force. All in all, the household survey showed a net loss of just under 445,000 jobs.

The government also calculates a broader measure of unemployment called U-6. The numerator of U-6 includes unemployed persons, discouraged workers who would like to work but are not looking for jobs because they do not think there are any to be found, and persons working part time who would prefer full-time work, but can't find it. U-6 rose to 16.4 percent in June, its highest rate in half a year.

One final measure of the job situation is the employment-population ratio. The numerator consists of people who are officially employed, while the denominator includes the entire population. The employment to population ratio has decreased not just because of the poor job situation, but also because of the increased number of retired persons in an aging population. The ratio fell to 52.8 percent in June, equaling its lowest level of the recession.

Follow this link to view or download a brief, classroom-ready slideshow with graphs of the June employment situation.