Raoul_Luke
I feel a bit lightheaded. Maybe you should drive.
And I (of course) was right:
The argument that austerity could be expansionary—that government spending cuts could be followed by increased GDP growth—was pilloried by Krugman. “[E]xpansionary austerity was highly implausible in general, and especially given the state of the world as it was in 2010 and remains two years later,” he wrote. The belief that spending cuts would signal to individuals and businesses that better, more fiscally prudent times lay ahead was, Krugman claimed, like believing in “the confidence fairy.”
But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.
So, if spending is less effective and deficits and debts more onerous than Krugman argued and austerity can, in some circumstances, be expansionary, should it be based on tax increases or spending cuts?
The authors of Austerity are clear on this point.
Tax-based plans lead to deep and prolonged recessions, lasting several years. Expenditure-based plans on average exhaust their very mild recessionary effect within two years after a plan is introduced…
The component of aggregate demand that mostly drives the heterogeneity between tax-based and expenditure-based austerity is private investment
That “confidence fairy,” in other words. Investment responds positively to spending cuts and wilts in the face of tax hikes.
https://fee.org/articles/paul-krugman-s-predictions-about-austerity-aren-t-aging-well/?utm_campaign=FEE Daily&utm_source=hs_email&utm_medium=email&utm_content=73471163&_hsenc=p2ANqtz-_biHRln3qX1F7faMAocuVWn_Mc3IH80Ktf4IMX4Tqtr6lHfmPf_Jss5z9vM2FYEkl
As I have repeatedly pointed out - Spending = Taxes (current + deferred), so cutting taxes (without also cutting spending) is not expansionary, because a rational market sees it for what it is, a deferred tax hike. Cutting spending, even while keeping tax rates the same, will act precisely like a tax cut, because that is precisely what it is. See Bill Clinton for reference.
Not rocket science.
The argument that austerity could be expansionary—that government spending cuts could be followed by increased GDP growth—was pilloried by Krugman. “[E]xpansionary austerity was highly implausible in general, and especially given the state of the world as it was in 2010 and remains two years later,” he wrote. The belief that spending cuts would signal to individuals and businesses that better, more fiscally prudent times lay ahead was, Krugman claimed, like believing in “the confidence fairy.”
But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.
So, if spending is less effective and deficits and debts more onerous than Krugman argued and austerity can, in some circumstances, be expansionary, should it be based on tax increases or spending cuts?
The authors of Austerity are clear on this point.
Tax-based plans lead to deep and prolonged recessions, lasting several years. Expenditure-based plans on average exhaust their very mild recessionary effect within two years after a plan is introduced…
The component of aggregate demand that mostly drives the heterogeneity between tax-based and expenditure-based austerity is private investment
That “confidence fairy,” in other words. Investment responds positively to spending cuts and wilts in the face of tax hikes.
https://fee.org/articles/paul-krugman-s-predictions-about-austerity-aren-t-aging-well/?utm_campaign=FEE Daily&utm_source=hs_email&utm_medium=email&utm_content=73471163&_hsenc=p2ANqtz-_biHRln3qX1F7faMAocuVWn_Mc3IH80Ktf4IMX4Tqtr6lHfmPf_Jss5z9vM2FYEkl
As I have repeatedly pointed out - Spending = Taxes (current + deferred), so cutting taxes (without also cutting spending) is not expansionary, because a rational market sees it for what it is, a deferred tax hike. Cutting spending, even while keeping tax rates the same, will act precisely like a tax cut, because that is precisely what it is. See Bill Clinton for reference.
Not rocket science.