Andrew Mountford and Harald Uhlig recently released a working paper called, What are the Effects of Fiscal Policy Shocks.  The paper looks at the affects of various fiscal policies on GDP, which is an important topic given the current Congressional debate on the need for further stimulus spending. 

The three were: deficit spending;   deficit financed tax cut; and balance budget spending expansion.  Their conclusion was deficit financed tax cuts provided the highest short-run returns to GDP—the opposite of the fiscal stimulus passed by Congress in February.

In the paper section of this site, there is a link to a recent working paper by Andrew Mountford and Harald Uhlig at the National Bureau of Economic Research which looks at the effects of fiscal policy shocks.  At the blog Sparty, the author provides some thoughts on the Obama administration’s stimulus package.

Harvard economists N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan recently published a paper which looked at the “interplay between tax theory and tax policy.”  It rightly shows that there is a wide dichotomy between the tax theories proposed by academic economists and what is actually implemented in Washington and the state capitals.  The authors hope to close the gap between the two extremes by offering “lessens policymakers might take from the academic literature on how taxes ought to be designed.”  It is a paper worth ready by those who participate in the formation of tax policy.

Most experts agree the cause of the current economic downturn—the bursting of the housing bubble in 2007.  Some economists argue the creation of the bubble was the result of government intervention in the housing market, e.g. low interest rates, support of Fannie Mae and Freddie Mac, and through the tax code with the deduction of interest payments and property taxes on a home owner’s federal taxes. 

Economists refer to tax deductions as tax expenditures, which are defined as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”

This paper by Yale law professor Yair Listokin looks at tax expenditures from the stand point of their impact on the business cycle.  Listokin’s conclusion is tax expenditures are pro-cyclical.  This means when the economy is growing, they add to the growth, but when the economy slides into a recession, they deepen the contraction. 

The paper comes from the Keynesian viewpoint that government intervention in the economy can smooth the business cycle, i.e. dampen the peaks and troughs.  Listokin believes it is better for government to use government spending rather than manipulation of the tax code to achieve its policy goals.  Though the paper does not advocate a decline in the size of the federal government, free-market economists, who believe the use of targeted tax deductions distorts the economy, would benefit from reading this paper.