In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that “deficit-financed tax cuts work best among these three scenarios to improve G.D.P.”Well, DUH. One more thing: tax HIKES during a recession are a bad idea, no?My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.
The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.
All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Boccini University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.”
These studies point toward tax policy as the best fiscal tool to combat recession, particularly tax changes that influence incentives to invest, like an investment tax credit.
Monday, December 14, 2009
Nerd Analysis By Harvard Econ Prof: Tax Cuts Better Than Government Spending to Cure Recession
Via TaxProfBlog comes the link to this piece by Harvard econ prof Greg Mankiw. Here's a blurb that's full of links to other nerd analyses:
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The study is Junk Science (if applied to the current USA situation).
They take 72 observations (not 91) from 20 foreign countries. Only ONE observation is from the USA. They limit the data to post 1970 so that they IGNORE THE NEW DEAL and the 1950s.
Lastly, they define "success" not in terms of JOBS or WAGES (which is what people actually need) , but in terms of "GDP" and "Debt Reduction".
We tried tax cuts before. Every time we did, we got high unemployment and/or asset bubbles.
Why would anybody want to stimulate investment when we are currently at 30% unused production capacity?
Ayn Rand was wrong, people need to get their heads around that fact.
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