Tax Cuts Vs Fiscal Stimulus

Even more proof that tax cuts are better at stimulating the economy than fiscal stimulus. Bruce Bartlett describes the recent research by Harvard economist Robert Barro:

Harvard economist Robert Barro is out with a new paper that undoubtedly will get a lot of attention from conservatives.  First, he finds that the multiplier effect from government purchases is well less than one; meaning that each dollar of government spending adds less than a dollar to GDP and is, therefore, contractionary rather than expansionary. Second, he finds very powerful effects from cuts in marginal tax rates; a one percent cut raises the growth rate of GDP per capita by 0.6%. Barro also provides a very useful time series of average marginal tax rates, including Social Security and state taxes, from 1912 to 2006.

The full post can be found here. In short,  as conservatives argued at the beginning of the fiscal stimulus debate: tax cuts are better at stimulating the economy than fiscal stimulus. This research confirms earlier research that found the fiscal multiplier of Obama’s recent fiscal stimulus to be zero, see here.

6 Responses to “Tax Cuts Vs Fiscal Stimulus”

  • It’s the telephone game!

    Barro: “Defense spending doesn’t help much to get us out of the recession.”
    Bartlett: “Barro says government spending doesn’t help much to get us out of the recession.”
    HispanicPundit: “Barro says that government spending is less effective than tax cuts.”

  • Hahaha. You are my favorite commenter LaurenceB – by far! Seriously. 😀

  • I feel honored. 🙂

  • Robert Barro’s paper has finally hit the blogosphere. Luckily for me, it does argue precisely what I claimed it did (though admittedly, I jumped the gun too soon earlier).

    This is how McArdle summarizes his paper:

    In the Wall Street Journal, Robert Barro and Charles Redlick discuss the findings of their new paper, which suggests that the multiplier for defense spending is about .6 or .7 at trend unemployment, rising towards one around an unemployment rate of 12%. They think that the multiplier for non-defense spending is smaller–though this is colored by the fact that it’s very difficult to extract the stimulative effects of non-defense spending. As they note in the article, defense spending tends to happen mostly independent of the economy, which makes it relatively easy to see the effect. Non-defense stimulus tends to occur when the economy is already tanking.

    Barro and Redlick also suggest that tax cuts are preferable to spending, a finding broadly consistent with the Romer and Romer paper that found substantial multipliers for tax cuts/increases. However, they note that this effect is harder to pin down over long time horizons.

    Here is the article in the WSJ, here is McArdle’s commentary on it, and here is Mario Rizzo’s commentary.

  • Would this be a good time to remind everyone that a hefty tax cut was included as a part of the stimulus?

  • Over fiscal stimulus proponents objections. I say more should have went towards tax cuts and less towards fiscal stimulus.

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