Fiscal policy, past and present

Recent events expose some of the difficulties of making timely and rational fiscal policy choices. The recession that began in early 2001 has likely been over for several quarters, but as of early 2003 the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) had not yet declared its end, and economic growth has been tepid. The ideal time for countercyclical fiscal measures may have passed, but politicians remain under pressure to act. Politics aside, the current economic climate has many unusual attri-butes that may provide support for expansionary fiscal action. First, despite several quarters of positive economic growth, the unemployment rate remains relatively high, in part because of unusually rapid productivity growth during the recent recession. Second, the vigorous use of monetary policy over the last few years has left the federal funds rate at 1 percent, its lowest point in over four decades. With this primary tool of monetary policy so close to its lower bound of zero, there is concern that monetary policy will be helpless should the economy relapse. Third, the recent war in Iraq has contributed to an atmosphere of economic uncertainty. Finally, state governments face large budget deficits, which past practice suggests, and the laws of most states require, be followed by substantial tax increases and expenditure cuts in the coming months, possibly weakening economic activity