Large changes in fiscal policy: taxes versus spending.

On Irish Economy they are linking to a paper by Alberto Alesina and Silvia Ardagna – Large changes in fiscal policy: taxes versus spending.

The abstract makes interesting reading


We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

  • Greenflag

    Mack ,

    ‘Alberto Alesina and Silvia Ardagna’ ???? Which conference ? They don’t say . Any reason why ? If you expect people to trawl through it a ‘source’ might be in order ? seriously .

    Back in the real world following several decades of tax cuts in the USA under successive GOP administrations and one Democratic administration the number of ‘hungry ‘ American children has risen to 17 million from 11 million two years ago. A phenomenal achievement thus far only replicated in third world countries .

    Here’s the latest news on how ‘trickle down ‘ prosperity works in the real world as opposed to how it should work according to the ‘elite’ ensconced behind the ivory towers of academia or supping from the feeding troughs of right or left wing think tanks !

    WASHINGTON November 16, 2009, 04:52 pm ET

    More than one in seven American households struggled to put enough food on the table in 2008, the highest rate since the Agriculture Department began tracking food security levels in 1995.

    That’s about 49 million people, or 14.6 percent of U.S. households. The numbers are a significant increase from 2007, when 11.1 percent of U.S. households suffered from what USDA classifies as “food insecurity” — not having enough food for an active, healthy lifestyle.

    Researchers blamed the increase in hunger on a lack of money and other resources.

    President Barack Obama called the USDA’s findings “unsettling.” He noted that other indicators of hunger have gone up, such as the number of food stamp applications and the use of food banks. And he said his administration is committed to reversing the trend.

    “The first task is to restore job growth, which will help relieve the economic pressures that make it difficult for parents to put a square meal on the table each day,” Obama said in a statement.

    Agriculture Secretary Tom Vilsack said the numbers could be higher in 2009 because of the global economic slowdown.

    “This report suggests its time for America to get very serious about food security and hunger,” Vilsack told reporters during a conference call.

    The USDA said Monday that 5.7 percent of those who struggled for food experienced “very low food security,” meaning household members reduced their food intake.

    The numbers dovetail with dire economic conditions for many Americans. And they may not take the full measure of America’s current struggles with hunger: Vilsack and the report’s lead author, Mark Nord with USDA’s economic research service, both emphasized that the numbers reflected the situation in 2008 and that the economy’s continued troubles in 2009 would likely mean higher numbers next year.

    The report also showed an increasing number of children in the United States are suffering. In 2008, 16.7 million children were classified as not having enough food, 4.3 million more than in 2007.

    Hunger advocates said they were not surprised by the numbers, and said the problem among children, in particular, is lamentable.

    “What should really shock us is that almost one in four children in our country lives on the brink of hunger,” said David Beckmann, the President of Bread of the World, an advocacy organization.

    Vilsack said that it would take a concerted effort to reduce the number of Americans who face a lack of food and said he hoped that the stark reality of Monday’s report would inspire action. The numbers could have been much worse without adequately funded food aid programs, such as food stamps, he said.

    “There’s an opportunity here for the country to make a major commitment to focus on ways we can improve this process and make sure that food is safe and available for everyone,” he said.

  • Greenflag

    Meanwhile also back at the ranch Monsanto and other large American agricultural corporations continue to scour the globe in pursuit of greater profit from genetically engineered foods and the acquisition of hundreds of thousands of acres of formerly peasant worked land .

    And also back at the ranch in Rome – the World Food conference on the plight of the billion people around the world who are quite literally starving not one of the western world’s leader’s has managed to attend bar the host country’s Berlusconi . ? Throwing hundreds of billions at crooked bankers and criminal insurance companies obviously sits easier on the consciences of our western leaders .

    We Irish should understand how the ‘laissez faire ‘ system works for the ‘poor’ of the world should we not ?

    For large American corporations it’s not a problem if a quarter of American children are underfed or poorly nourished as long as they can reap the huge profits to be made from the rest of the world .

  • Mack

    Greenflag –

    They are Harvard economists.


    With regard to your second point – are you objecting, in principle, to corporations (or Asian governments as it happens) – leasing land to farm it more productively? (The alternative is that most of the world remain mired in poverty living -at best- a subsistence existence). More productive farming will reduce the cost of food, and ultimately mean more of it is available to feed the €6bn odd people that populate the planet..

  • Greenflag:

    Nowhere have you tackled the substance of the paper. All you have said is (to paraphrase) – the Americans have low-tax and America is bad, therefore low tax is bad. Correlation /= cause.

  • Greenflag

    ‘They are Harvard economists.’

    Thanks Mack for the info . I’ll give it a considered read later this evening and comment further . Your ‘economists’/gypsy fortune tellers may of course be beholden to the Heritage Foundation – and given the poor performance of Harvard’s ‘investment’ fund these past two years 😉 they may have had to come to the eh ideologically correct findings for their ‘scientific ‘ research ?

    ‘With regard to your second point – are you objecting, in principle, to corporations (or Asian governments as it happens) – leasing land to farm it more productively?’

    Not at all . If they do manage to farm more productively then these poor countries will with their food surpluses not only be able to feed themselves in a few years time, but may also able to export food to the USA’s ‘starving ‘ children who by then should number 35 million instead of 17 million as a result of the recent ‘recession’ which was built on a pyre of tax cutting ‘growth ‘ policies since the 1980’s 🙁

    Why am I reminded of the Indian and Irish famines ? Ah yes now I know . Food is exported to wherever it can reap the greatest profit -thus Irish oats and dairy products were exported to England under armed guard while a million died and the same happened in India -20 years later while 27 million died . Creative destruction or structural adjustment ? To the pile of dead bodies it doesn’t matter .

    BTW I’m aware that Government does not ‘create’ jobs other than the non productive public sector at least in the direct wealth creation sense . Given the current almost 20% unemployment in the USA is this the result of too much Government or not enough effective Government particularly in the financial services sector over the past two decades ?

  • Greenflag

    andrew gallagher ,

    ‘Nowhere have you tackled the substance of the paper.’

    I haven’t had time to read it but will .

    ‘ All you have said is (to paraphrase) – the Americans have low-tax and America is bad, therefore low tax is bad. Correlation /= cause. ‘

    True I could also have said that the Scandinavian countries have high tax and Scandinavia is good therefore high tax is good but I did’nt ! . I could also have added that as Scandinavian children do not go hungry and all their children have access to proper healthcare and that as a result their economies are non competitive globally , that they need to adopt American standards of Child welfare and child hunger to become competitive internationally but I did’nt .

    more anon later .

  • Mack

    Why am I reminded of the Indian and Irish famines ?

    Perhaps worth a refresh of other more recent severe famines of the modern ages – devasting subsistence farmers in sub-saharan Africa, or those of the Great Leap Forward when Chinese subsistence farmers couldn’t increase productivity of communal farmland when Mao decreed they must. 40 million deaths later and with a more enlightened leader (Deng Xiaopeng) and the Chinese learnt the lesson – they returned ownership to the farmers and the farmers invested in technology and hugely boosted farm productivity.

  • aquifer

    Government throwing money from a helicopter is probably a bad thing, expecially after the pilot and navigator get their cut. Government creating jobs doing useful socially stuff like insulating houses could be much better, if it gets wages into people’s pockets:
    wages squeezed

  • aquifer
  • Greenflag

    Without wishing to disparage the academic achievements of Alberto Alesina and Silvia Ardagna’s – 10 pages of ‘proving ‘ that cutting government spending and reducing taxes will reduce deficits and increase ‘growth’ seems overdone . The authors are of course ensconced behind the academic curtains and do not have to face the electoral process as those dealing with the economic and political realities of the moment have to !

    Their conclusions are of interest more for what they omit than to what they suggest . I’m not denying some validity to their findings -merely that they miss the bigger politico economic picture in which their observations take place . What they pass over as ‘exogenous’factors .Lovely word that eh ?

    Some comments below on their conclusions .

    ‘Rather than reviewing again our result it is worth elaborating, or perhaps speculating
    on the current and future fiscal stance in the US.’

    More speculating I’d say than elaborating .

    ‘As we well know a very
    large portion of the current astronomical 12 percent of GDP deficit is the result
    of bailout of various types of the financial sector. This is an issue on which this paper has nothing to say.’

    And why would they not mention the other large portion which contributes to the deficit . Spending on the Iraqi War alone is almost at 1 trillion dollars and spending on the the Afghan War is in the hundreds of billions with no end in sight . Whatever you say say nothing when you talk about you know what does – not only apply to NI . They seem to have also omitted the fact that the previous Bush administration were not slow about ramping up public spending over their 8 years in office . Fiscal conservatism went out the window the moment Bush moved into the White House in 2000.

    ‘ In this respect (fiscal package )the US stimulus plan seems too much based upon
    spending. ‘

    What other option was politically possible ?

    ‘For instance, American families were saving too little before the crisis.’

    It might have struck the authors that one reason for this lack of saving was because Americans haven’t had a real pay rise since the 1970’s . When average household income is compared as between the 1970’s and 2000 and the ‘extra working womens’ contribution taken out there has been a very small increase if any in real per capita income per person . The ‘productivity growth ‘ in industry over the past several decades has not been matched by an increase in real wages. The median American household earning circa 48,000 dollars now faces college expenditure of a minimum of 100,000 dollars if their 2 children go to college. If they are not made desitute by that bill and one of the family say has an accident and they are not covered by health insurance then at 200,000 dollars for a major operation that should speed the path to both destitution and bankruptcy, unless of course they have’nt previously been emisserated by negative equity or carved out by the shrinking of any retirement funds they might have had by the collapse of the stock market ?

    ‘An income tax cut might have just simply been saved and might have had not a big impact on
    aggregate consumption.’

    Of course . If the median or even average American is paying little tax as it is then any tax cut will only benefit the top 20% of earners

    ‘However, more saving might have reinforced the financial sector, think of the credit card crisis for instance.’

    During the period 1980-2007 call it the tax cut era following on from Reaganomics -American public and private debt quadrupled . Again the fact that productivity gains were not reflected in real increased earnings and the desire of the american ‘middle ‘ class to keep up with the joneses drove these people into ‘borrowing ‘ against the future in favour of the good life today .

    ‘The analysis of the present paper suggests that primary spending needs to
    be kept under tight control otherwise increasing taxes running after ever increasing
    spending will not work.’

    This comment describes almost perfectly the Irish situation in the mid 1980’s and it’s not yet clear that we are not in for a repeat .

  • Greenflag

    continued

    ‘The assumption by the authors of a couple of more years of high unemployment of 10% plus (real unemployment being closer to 20%) seems to suggest that they have no conception of the vast ‘creative destruction’ wrought on american manufacturing industry and now ‘financial services ‘ over the past decade or two for the former and the past year or two for the latter .

    They state

    ‘The budget outlook looks rather grim on the spending side’

    They ought to have added that the outlook on the other side of the coin i.e ‘revenue ‘ side looks even grimmer . As most of the States of the Union face sharp reductions in tax revenue due to increased unemployment and reduced tax take then they are forced to pile on the ‘pain’ to americans .

    I’m not sure if the USA may be facing into a double dip recession but with several million more foreclosures on the way and no end to war borrowing the outlook is not just not rosy but bleak. And coming into an election year it’s unlikely that President Obama will have anything to offer voters apart from trying to convince them ‘it could have been worse ‘

    I don’t doubt for millions more it would have been but that will be for the voters to decide and not the academicians

  • Greenflag

    mack .

    The ‘modern famines ‘ you refer to are just as much the result of ‘ideology’ triumphing over common sense and humanity as the Irish and Indian famines . You can throw in political stupidity , greed , and self preservation on the part of ruling elites into the mix as well .

    And while it’s true that the Chinese move of land ownership back to the peasants was instrumental in their recovery to sufficient food production we must not forget the huge contribution to agricultural yield’s made by the green revolution imported form the west in the 1970’s and 1980’s . That revolution enables both China and India to feed 2.5 billion people whereas before they could ‘naturally ‘ only feed half that number .

    The Green revolution did not of course help Zimbabwe or Ethiopia to avoid their politically inspired and locally created ‘artificial ‘ famines .

    And with the ‘water supply ‘ to the Chinese and Indian agricultural heartlands under threat from fast melting glaciers in their hinterlands irrigation groundwater in India rapidly disappearing the spectacle of future mass famines in these countries has not gone away .