At the end of last week, Alan Greenspan said that rising oil prices will
tend to slow economic growth a little.  He estimated that the impact
would be abou .75% slower growth.  Economists had expected this years
GDP growth to be between 3% and 4%.  If Greenspan is correct, it would
mean that the growth for the year would be closer to 3%.   Does this
change your view of the need for more fiscal policy??

Hi Vonsedric, 

The revision of the growth estimates will surely impact the
government's fiscal policy decisions.  Currently the US is running a
collossal deficit, somewhere in the range of $450 billion dollars
(yikes!).  Much of this comes from increases in military expenditure
and revenue decreases from tax cuts.

With lower taxes the government is counting on economic growth to
drive up revenues by raising personal and corporate incomes, and by
adding to the tax rolls through job creation.  Slower economic growth
will impact all of these things, meaning revenues will not grow in the
way that the federal government may have hoped.  The result will be
that the government will either have to cut its budget, raise taxes,
or increase deficit spending.

To suggest that the government needs either more or less fiscal policy
isn't really appropriate.  The government can't really have more or
less policy, just different policy.  So if the question is what the
policy should be, whether or not the government needs to reduce
spening, raise taxes, etc, then my view would be that the government
needs to make some changes to its current policies.

First, it must be agreed that the deficit is out of control.  The
long-term impact of high deficit spending will be rising interest
rates and slower productivity growth due to the crowding out of
private investment.  The additional debt burden will make it all but
impossible to pay for the retirement of the baby boomers.  IMF
Projections indicate that the Social Security and Medicare systems
will both be insolvent in 20-30 years (
http://www.imf.org/external/Pubs/NFT/Op/227/ ).  So reducing the
deficit must be a priority, and it's clear that relying on economic
growth to cover the tax cuts is simply not going to work.  The
government will need to either reduce spending or raise taxes, and the
best solution would be a combination of both.

Though the republicans find it politically unthinkable, rolling back
tax cuts would be a sensible move.  The government simply can't afford
to both cut taxes and raise spending at the same time.  The alternave
would be to drastically reduce expenditures, but with ongoing large
military operations this will be difficult in the forseeable future. 
Once rolled back, the tax revenues should not be used to finance more
spending as this will just bring us back to the same deficit
situation.  At the very least the tax cuts of 2001 and 2003 should not
be extended when they expire.

The deficit reduction of the 1990s was helped by the Budget
Enforcement Act of 1990 which instituted the pay-as-you-go requirement
for government spending.  This act expired at the end of FY2002.  Some
similar legislation should be reinstated to ensure that spending stays
roughly in line with revenues.

Further sources of revenue should also be found.  This won't be
popular.  Energy taxes, which are much lower than in most other parts
of the world, are an area of opportunity, and various tax shelters
could be eliminated, like the deductability of mortgage interest.  The
implementation of a federal sales tax would shift the tax burden away
from the current heavy reliance on payroll taxes and towards a more
efficient consumption tax.  It might also work to boost household
savings which are at an all time low.

I suppose the question is whether or not the slower growth brought
about by higher oil prices actually creates a need for more agressive
fiscal policy measures.  My view is that the measures were necessary
before and are even more obviously so now.  The threat posed by fiscal
policy inaction for the long-term outlook for the economy is extremely
serious.


Some resources for you to check out:
------------------------------------

IMF document: U.S. Fiscal Policies and Priorities for
Long-Run Sustainability
http://www.imf.org/external/Pubs/NFT/Op/227/

OECD document: Ensuring fiscal sustainability and budgetary discipline
http://www.oecd.org/document/11/0,2340,en_2649_34595_31458443_119663_70867_1_1,00.html

US FY2004 budget:
http://www.whitehouse.gov/omb/budget/fy2004/

An interesting article from the Economist about the declining value of
the US dollar:
http://www.economist.com/displayStory.cfm?story_id=3329902

------------------------------------

I hope this information meets your needs.  Let me know if you need clarification.

Hibiscus