Saturday, January 13, 2018

If the recession is imminent then Congress cut taxes at the perfect time

Fiscal policy is the obvious alternative, [to cure rcessions] but Congress has cut taxes at the worst possible time, leaving no room for stimulus when it is needed. Adding $1.5 trillion more to the federal debt will create an understandable reluctance to respond to a downturn with further tax cuts. As my Berkeley colleagues Christina and David Romer have shown, fiscal policy is less effective in countering recessions, and less likely to be used, when a country has already incurred a high public debt.

But, Prof.  Eichengreen, we know that cutting taxes after the fat is too late, the damage done. So, as your colleagues imply, better to just keep the budget trim. Unfortunately, we have not kept our budget trim, under the recommendation of your colleagues, and now we are stuck.

Not to worry, the sandbox has a pit boss code for that.

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