Gloom and Boom

My economics professor once said that fiscal and monetary policies have their time and place.  Like telling a joke, the timing and delivery of the punch line is very important; therefore when implementing fiscal and monetary policies, timing is everything.

As rule of thumb, he said, "When we are in a glooming economic condition..i.e. financial crisis and the great depression, fiscal policy is very effective.  When in boom, monetary policy is more effective in influencing the economy."

Therefore, current economic conditions merit fiscal policy rather than monetary policy since there is not any policy traction from the Fed.  At the same time, fiscal stimulus policy is running against the wind of the fiscal hawks who fear the budget deficit will undermine ecocomic growth in the long run.

Ineffective monetary policy + no fiscal stimulus for fear of a high budget deficit = depression-like economic conditions.

CBO budget and economic outlook

It seems like the federal budget deficit for 2010 will be projected at $1.3 trillion, 9.1 percent of gross domestic product.  To put it into perspective, budget deficits are usually 3-4 percent of GDP, which is roughly 1/3 of $1.3 trillion; that equates to $300 billion under normal economic conditions.

Keeping current tax laws and appropriation spending constant, it is forecasted that the budget deficit will be reduced to 4-5 percent of GDP in the next 2 years.

I think the projections are too optimistic given the high unemployment rate.