NBER Study and the Stimulus

October 29, 2009

A new NBER study from two Harvard economists analyzed substantial fiscal policy changes and the economic consequences in twenty-one OECD countries from 1970-2007. Their findings are at odds with the approach of U.S. policymakers who insist that the government can tax and spend the country back to prosperity.

From the study: 

Our results suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus. Based upon these correlations we would argue that the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts. For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.


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