SeekerBlog

I’ve posted several times on John Taylor’s research on effective fiscal stimulus — e.g., here on permanent tax cuts. On Nov 19 Taylor testified before the Senate Budget Committee, offering more sound advice:

…After years of study and debate, such arguments led many economists to conclude that discretionary fiscal policy actions, such as temporary rebates, are not a good policy tool. Rather fiscal policy should focus on the “automatic stabilizers,” which are built into our tax and transfer system, and on longer term more permanent fiscal changes that will positively affect the long-term growth of the economy. Indeed, this was the conclusion of my research, as summarized in Taylor (2000), and that of many others. As Eichenbaum (1997) put it, “there is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible,” or, according to Feldstein (2002), “There is now widespread agreement in the economics profession that deliberate ‘countercyclical’ discretionary policy has not contributed to economic stability and may have actually been destabilizing in the past.”

To be sure, that consensus apparently broke down during the debates about the fiscal stimulus early this year when a number of economists testified to the effectiveness of such a temporary stimulus program (see Elmendorf and Furman (2008) and Council of Economic Advisers (2008), for example)). One reason for that change in views by some economists might have been the apparent success of rebate payments made in 2001. However, those were part of, or the first installment of, more permanent multiyear tax cuts passed that same year. Hence, they were not temporary. In my view the recent evidence shows that the consensus going into this decade remains valid, and that policy makers need to be wary of such short term stimulus programs. They are unlikely to help the economy and will increase the deficit and debt as they did this past fiscal year.

So far the Obama plan leaks look mostly like the old static Keynesian stuff “temporary, targeted, and timely” instead of what Taylor proposes “permanent, pervasive, and predictable“.