The Real Drag Of Government

by: Marc Chandler

This Great Graphic was posted on Business Insider by Sam Ro, who got it from the Chicago Fed President Charles Evans. It shows the US government's contribution to GDP. The fiscal drag that the US is experiencing now appears to be the largest in modern times--last half century.

Despite the name calling in the blogosphere, President Obama is no statist/socialist.

When Bush-the-Lesser expanded the basket of goods one gets as a citizen of the country with the largest economy to include prescription benefits, no one called him a socialist. The Affordable Care Act (Obamacare) is very much in line with what some Republicans like Richard Nixon seemed to support 45 years ago and what Mitt Romney introduced as governor of Massachusetts. None dare called them socialists.

Most of Obama's economic team has come from the so-called Rubin-wing of the Democrat Party. Although Janet Yellen may not be a formal member of that faction, it did support her as Governor and Vice Chairman of the Federal Reserve. It tends to support free trade, advocated and enacted financial deregulation, and also places much emphasis on reducing the deficit. Obama may be a transformational president in some aspects, but not economics.

When the Federal Reserve refrained from tapering, among the reasons it cited was the fiscal headwinds. We had argued that the US economy may be able to absorb the tightening of fiscal policy or less accommodative monetary policy, but not both. We argue that tapering is highly unlikely to begin next month and we have strong doubts that it will begin in December, when the FOMC will likely downgrade its GDP forecasts again.

There is a direct link between the outcome of the brinkmanship games on Capitol Hill and monetary policy, not just fiscal policy. A rough estimate of the cost of a government closure is 0.1% of GDP a day (~$15 bln). A government shutdown of more than a few days would likely push more investors to our camp regarding a tapering this year. In addition, a compromise, and there will be a compromise as there has been in the other 17 times in which the government has closed since the mid-1970s, may include more spending cuts. This will increase the fiscal headwinds and will also likely deter the Fed from tapering this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.