Fiscal Drag measurement

When I saw this post from Econbrowser, it made me wonder about how economists define and calculate fiscal drag:

Fiscal Drag in 2013

From Torsten Slok at Deutsche Bank:

[F]iscal drag in 2013 is 2.4%, ie if GDP growth in 2013 ends up being 1.7% then if we had not had the fiscal drag then GDP growth would instead have been 4.1% (=1.7% + 2.4%). ..

…Translated into nonfarm payrolls this means that instead of having nonfarm payrolls at 186k – the average monthly number so far for this year – then nonfarm payrolls would have been more than 400k…


Posted by Menzie Chinn at November 27, 2013 09:00 AM

So I looked to see if I could find how Mr. Slok did it.  No luck (I really didn’t look very hard).

Then I looked for fiscal drag in general and found this post from September.  Interestingly, Rex Nutting (how come all these fiscal drag guys have such cool names??) has kind of a two part analysis of the effect of government spending on GDP, and what is fiscal drag.  One definition appears to be the net GDP contribution from government.  The second part is a comparison of the government increase compared to previous recoveries.

Today’s fiscal drag is therefore defined as the amount that government spending has not increased since the recovery started.  If that is the case, then I think it’s really a misleading kind of statistic.  Imagine that!

FRED Graph

This graph shows both total government spending and federal spending through and since the recession.  To me, this is showing exactly what Keynesians are supposed to support – spend more during recession then slow down when not a recession.  Am I missing something?  In fact, I think you are supposed to try to save when not in recession, which we are clearly not doing.

This graph shows that at the start of the recession, we started deficit spending in a big way, and although it has started to subside somewhat, maybe, it still continues at a level way beyond prior to the recession.

FRED Graph

So, what part of this is fiscal drag?  It seems like we have stabilized spending at a higher level.  Certainly not compared to GDP, that is, GDP keeps increasing, so the overall spending as a % of GDP is falling.  Same with the deficit – it is definitely going down as a % of GDP.

But who is to say that this is bad?  Or wrong policy?  Why is it called “fiscal drag”?  Why not “government savings”?

It just seems like a misleading name for something that is basically an opinion, not a fact.  And then reported with a number attached, as if it is a fact.  It should really say, “if we did it like before, we would have 2.4% higher GDP.”  Or “I wish government would spend more, because then GDP would increase more.  2.4% more.”  As if that is the only factor.


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