Fighting words

It would appear that the tax cut multiplier is larger than the government spending multiplier.

And that thus the correct method of creating fiscal expansion, of boosting AD, is to cut taxes, not raise spending.

Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments.

1 thought on “Fighting words”

Leave a Reply

Your email address will not be published. Required fields are marked *