US economy needs fiscal policy for soft landing on student loans, tax cuts

Good pictures

  • Piper Sandler's chief global economist said if the U.S. wants a soft landing, it should implement fiscal measures like student-loan forgiveness and tax cuts.
  • According to Nancy Lazarus, the drivers of US growth seen during the soft landing of 1995 are no longer present, so government spending may be needed to boost GDP.
  • „Fiscal stimulus this year could facilitate an additional 1.5% boost to GDP,” he wrote.

If the US economy wants to stick to a soft landing, the government needs to loosen the purse strings.

Piper Sandler's Chief Global Economist Nancy Lazar says. He argues that without the traditional drivers of growth that stimulate the economy, avoiding a recession will require some fiscal largesse, such as student-loan-forgiveness programs and tax cuts.

„A soft landing in 2024 would require additional fiscal stimulus (such stimulus would certainly keep the economy strong, lasting into 2023),” Lazar wrote in a note on Monday.

The US has managed a soft landing three times, in 1967, 1985, and 1995. But Lazar points out that certain factors that helped the economy land soft in those periods are not present today. Commercial-bank-lending standards (all three current), real earnings for corporations (current in 1995) and inverted yield curve (current in 1995).

If general boosters of the US economy don't boost growth in 2024, it will have to come from somewhere else. That's where government comes in, according to Lazarus.

Possible measures include student-loan forgiveness, grants under the CHIPS Act, and proposals like the Wyden-Smith tax cuts currently sitting in the Senate, he says. There are other factors such as job retention credit.

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„Putting all of the above together could facilitate an additional 1.5% boost to GDP from fiscal stimulus this year,” he wrote.

That would raise Piper Chandler's real GDP forecast to a 0.5% expansion this year, instead of a 1% contraction. In terms of context, they are at the more rugged end of the spectrum Congressional Budget Office It currently expects a more robust growth of 1.5% in 2024. Meanwhile, economists polled by Bloomberg see a 2% expansion this year.

A drawback of this approach is that it will be more difficult for the central bank to cut interest rates against such a strong economic backdrop. In an earlier instance in 1967, Fed Chair Bill Martin raised GDP, lowered unemployment and sent stocks soaring—not ideal conditions for rate cuts.

Lazar cites 1967 as a cautionary tale, in the event that the central bank enacts monetary measures to further stimulate the economy. After booming in the late 1960s, America eventually struggled with inflation.

„Easing amid economic stimulus would risk repeating the mistake of the Martin Fed…which set the stage for the disastrous deflationary cycle of the 1970s,” he wrote.

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