More Fiscal Stimulus?

All along I have tried to emphasize the point that I am for fiscal stimulus so long as it is the correct type. Increases in government spending that are (or are perceived to be) permanent are not successful policies. What’s more, not all spending is created equal. When spending is decided by self-interested politicians, I lack the confidence that the right kind of spending will be undertaken.

In contrast, macroeconomic theory has much to offer. Two proposals that I would support are (1) permanent tax cuts, and (2) temporary investment tax credits. The first of which is successful because, as we know from the permanent income hypothesis, individuals consume based on expectations of lifetime income. A permanent income tax cut reduces the future tax burden and leads to increases in consumption. The second policy is a “use it or lose it” policy that encourages businesses to undertake investment now rather than waiting.

Unfortunately, the fiscal policy undertaken has been based on old ideas that modern macro theory suggests are not successful (there is empirical support as well). Along these lines, Greg Mankiw has written an excellent piece in the NYT on what recent research has to say about fiscal policy that, to some extent, expands on the points above. I only wish he had written this months ago.

One response to “More Fiscal Stimulus?

  1. It couldn’t have been written months ago because we needed to see if spending *could* work. I think the purpose of this article is to have the administration try tax cuts instead of more spending.

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