Three weeks ago I referenced Stanford economist John Taylor’s op-ed “Why Permanent Tax Cuts Are the Best Stimulus”.
Here is more in-depth background on why fiscal policy should focus on the long term [PDF], relying on the automatic stabilizers for the short-term.
Abstract: Recent changes in policy research and in policy-making call for a reassessment of countercyclical fiscal policy. Such a reassesment indicates that countercyclical fiscal policy should focus on the automatic stabilizers rather than discretionary actions. Monetary policy has been reacting more systematically to output and inflation; long expansions in the 1980s and 1990s demonstrate the effectiveness of such a policy. It is unlikely that discretionary countercyclical fiscal policy could improve things, even if there were less uncertainty about fiscal impacts. A discretionary countercyclcal fiscal policy could make monetary policy-making more difficult. Rather discretionary fiscal policy should focus on long run issues, such as tax reform and social security reform.
Alan Blinder argues there are cases where fiscal policy can boost the impact of the primary tool of monetary policy: “The Case Against the Case Against Discretionary Fiscal Policy”.
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