Activist Fiscal Policy

Abstract

During and after the "Great Recession" that began in December 2007, the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.

Two-sector perspectives on the effects of payroll tax cuts and their financing

“…Contrary to what is perentorily asserted by the supply-siders, the general discovery of the paper is that payroll tax cuts do not necessarily stimulate hours worked in the long-run, as found in Auerbach and Kotlikoff (1987), and Hoon and Phelps (1996). A long-run labor stimulation at aggregate level strictly depends on the budgetary regime and the type of economy.…”

“…This is because the accompanying budgetary regime -whether based on government spending or alternative distortionary taxation or deficit financing options-is not inconsequential for the macroeconomic effects of labor taxation. Several articles that have analyzed the consequences of labor taxes through intertemporal optimizing frameworks support this consideration by showing that widely different conclusions are reached according to the financing regime assumed; see, e.g., Auerbach andKotlikoff (1987), Judd (1987), Kotlikoff and Summers (1987), Hoon and Phelps (1996), Daveri and Tabellini (2000), Prescott (2004), Petrucci and Phelps (2005), and Van der Ploeg (2006). 1 For example, in a model with infinitely lived agents and a competitive labor market, Judd (1987) finds that a rise in labor income taxes reduces the labor supply and the capital stock when tax revenues are lump-sum distributed to consumers; 2 with government expenditure financing, instead, Turnovsky (1992) shows that labor and capital are ambiguously affected by wage taxation if preferences are nonseparable in consumption and leisure.…”

“…employing a life-cycle simulation model of a closed economy, Auerbach and Kotlikoff (1987) discover that a higher tax on labor accompanied by a rise in public expenditure is detrimental for capital formation, but is steady state neutral for the labor supply; such a fiscal shift contracts both employment and investment if the labor market is unionized -see Daveri and Tabellini (2000). In a similar demographic setting, Hoon and Phelps (1996) show that a payroll tax used to substitute a value-added tax leads to a reduction in labor and nonhuman wealth in the closed economy case, while it leaves labor invariant in the small open economy case.…”

A Preliminary Review of the American Recovery and Reinvestment Act’s Clean Energy Package

“…2 A timely package pumps resources into the economy when it is most in need, i.e., when there is a large output gap. A timely stimulus would have ideally begun in 2008 and legislative enactment likely represented the most significant "avoidable delay" for fiscal stimulus (Auerbach et al 2010).…”

Transitional dynamics of dividend and capital gains tax cuts

“…Our analysis is in the spirit of Abel (1982), Auerbach (1989), Auerbach and Hines (1987), and Auerbach and Kotlikoff (1987), who analyze the dynamic effects of permanent and temporary corporate tax changes. Existing literature lacks a similar analysis of dividend tax policy.…”