Government Spending < Tax Cuts

Another blow to the zombified dead horse that is Keynesianism:

A study of 91 fiscal stimulus programs in 21 developed economies between 1970 and 2007 by Harvard’s Alberto Alesina found tax cuts were more stimulative than government spending….

Economists who say Mr. Obama should have relied more on tax cuts cite research of an unlikely source: Ms. Romer, his adviser. In a study she and her husband, David Romer, conducted before she joined the administration, Ms. Romer found large multipliers from tax cuts, which she concluded “have very large and persistent positive output effects.” Tax increases, she also found, hurt growth.

FILED UNDER: Economics and Business, Taxes, , , ,
Dodd Harris
About Dodd Harris
Dodd, who used to run a blog named ipse dixit, is an attorney, a veteran of the United States Navy, and a fairly good poker player. He contributed over 650 pieces to OTB between May 2007 and September 2013. Follow him on Twitter @Amuk3.


  1. legion says:

    Dodd, that’s pretty ridiculously simplistic. If taxes are high, and actually interfering with or discouraging investment & entrepreneurism, then yes – cutting them makes sense. But if taxes are already low, then cutting them will – at best – have a much lower return, and at worst critically damage government revenues, requiring significant cuts to services & other unintended consequences. Additionally, government spending is much more fluid – it can be increased or decreased along a much wider spectrum than taxation…

  2. grampagravy says:

    Which 21 countries? What segment of those countries’ economic strata got the tax cuts? These two questions and a lot more might answer how those positive effects took place.
    If taxes are cut for those who use the savings to purchase products and services then the cuts would certainly stimulate the economy. If taxes are cut for those who use the savings to gamble more on Wall St. or feed their offshore accounts, you get what we have now. Cutting taxes so we can lay off teachers and let bridges fall down is not the way to go and I very much doubt that reading Romer’s entire report would leave one with the impression Dodd is shooting for here.

  3. Gerry W. says:

    There is a lot more to this world than tax cuts. If tax cuts were so great and we had then under Bush, then why did we lose between 2 million to 4 million jobs during this time that went overseas?

    And the same with the fed. The fed has lowered interest rates to their lowest levels, but yet, the economy can’t get moving.

    So the two stimuli that is supposed to create economic growth seems to be not working. Have we used up all our ammunition? So something else must be in play in which we have to address.

    How about investigating cheap labor and the effects it will have on the world. And we are not alone. I listened to a local Canadian station and people are calling about jobs and the loss of manufacturing. But I could be wrong. After all, 2 billion cheap laborers in the world is just a figment of my imagination.

  4. reid says:

    Clearly, the answer is to eliminate all taxes so that government revenue shoots to infinity. Problem solved!

  5. Brummagem Joe says:

    I think Mr Dodd must live in a different world than the rest of us. We’ve just come through a period when just about every government in the world including the the former Republican administration and Fed essentially used Keynesian methods to avoid a repeat of the great depression. As someone once said we’re all Keynesians now.

  6. Drew says:

    From where I sit, Dodd is the only one of you guys grounded in reality.

    The “taxes don’t matter” crowd always makes me chuckle. In point of fact – in the most underreported stories of the year – an incredible amount of activity is taking place as we speak due to tax planning. Businesses are being bought and sold ahead of changes in cap gains and carried interest tax law changes. I fully expect a stock market selloff before end of year that is tax driven. Small businesses are hunkered down for fear of wealth taxes, employment taxes etc. Its real, people.

    I also find it bizarre that people discount Ms Romer’s work, the very advisor to Obama.

    As for Keynesian stimulus, recent academic work, just now being published, is showing it had a positive, but somewhat muted effect. Further, as we see the economy starting to sputter, and with the costs of said stimulus still to be born, we have to ask – why?

    Gerry – think NAFTA and Bill Clinton. Think AZ borders and Obama. Then go purchase a first book in macro and read about the monetary base and velocity. Then think about bank reserves and get back to us.

    “If taxes are cut for those who use the savings to purchase products and services then the cuts would certainly stimulate the economy.”

    Only if permanent. Further, if the money is saved, then the cost of time financed purchases is lowered through the capital markets. Mortgage, car loan and credit card rates are not zero.

    ” If taxes are cut for those who use the savings to gamble more on Wall St. or feed their offshore accounts, you get what we have now.”

    Mindless drivel.

  7. Drew says:
  8. Gerry W. says:

    We had NAFTA and the WTO under Clinton and backed up by economists and republicans. But beyond the agreements, the fact remains after Communism, countries opened up and there is some 2 billion cheap laborers that want our jobs. It is that size of number (2 billion) that is overwhelming. And that is putting pressure on our jobs and wages.

    For years, everything is on the cheap and we are dependent on it. Tax cuts, cheap dollar, cheap labor, low interest rates, and borrowing and inflating. Now, how long this will all go on is anyones guess.

    But if there are mistakes, do you think the next president could correct them? No. All we heard under Bush is that free trade is good while I saw our jobs leave the country. And they keep it up today.

    Veronique De Rugy, economist from George Mason Univ., was recently on C-span and a caller called in and asked about jobs, and her answer (at 30 minutes into the video) is that it was okay for our jobs to leave the country and that Wal Mart is creating twice as many jobs.

    Carlos Gutierrez, former Commerce Secretary under Bush, says dynamics have not changed. This shill for business is a liar. The dynamics have changed. It is globalization and it is taking away middle class jobs. They know it, and they have systematically ruined the middle class. After all, if we need to compete with other countries then we need to get paid a dollar an hour. That is what they won’t tell you.

    Now we had tax cuts under Bush and all we heard was “stay the course” as he piled up the deficits and debt. As he spent the money in Iraq. As our jobs some 2 to 4 million that left the country. As we did not invest in our country to insure that future jobs would happen. Because as we know is that, tax cuts is for the here and now, and did nothing for our future.

    Those 2 to 4 million jobs that left the country cannot be made up. So when pundits talk of support for small business, these business won’t hire 100, 500, or a 1000 people that worked in the factories. These small businesses will not pay what the factories paid. And in my town, you cannot have small business as the factories closed as you need the traffic. Now, I am not blaming small business or even tax cuts. But we wasted eight years under Bush as he continued to damage and neglect our country. And it will take some 10 to 20 years to recover.

    It reminds me of the roaring 20’s. Everyone partied and did not worry about the future. It seems to me, that we have the same thing today-a near depression.

    And let us add two more points. The fed has stimulated and cannot stimulate anymore. We have had tax cuts, and tax cuts has limited stimulation today. So, we are trapped in a box and it will be most difficult to get out of.

    Cities and states struggle with tax incentives, cash for clunkers, extension of unemployment benefits, and casinos to hang on or create jobs. But cities and states are no match against 2 billion cheap laborers who want our jobs. And that is where our problem lies.

    We saw what republicans do. It is just tax cuts and it is laissez-faire thereafter. In theory it should work, in theory in a world of our own I suspect it would work. But again, you cannot ignore 2 billion people and what it is doing to our middle class.

    And other things have changed. Half the products we buy are foreign made. So putting money in the hands of people to buy things, has a limited effect. Another problem is the Reagan relaxation of anti-trust laws in which we are losing jobs.

    And we have to ask, what widgets can be made here and not in China or some other countries.

    And you will get the picture that we have lost a lot of time competing (or not competing) in the world in which we lost so many jobs. We lost so much in tax revenue to cities, states, and the federal government to keep our economy going. We are going to lose a generation of 50 year olds that cannot adjust to any new jobs and jobs that pay less.

    So all these questions and more have to be asked. And as i said. All I saw, under Bush, was eight years of tax cuts, but we lost our jobs. We sent our money to Iraq. And our country was neglected.

    It is true, the private sector creates jobs, but our government must make the environment for jobs. Whether we look at immigration and job creation, and whether we invest in our country, in our people, and in the future.

    Bush never cared about science and it shows today. If tax cuts have limited effects then maybe we better start investing in future preliminary sciences that the government has the money for so that the patents can be bought by the private sector.

    All we are doing today is competing with one another and knocking the other guy out. How many different ways can you make a chocolate chip cookie? There is no upward movement for employees who lose their jobs with consolidation and mergers. So the middle class loses again. And that is where our government comes in with preliminary science, and you have to have immigrants who will create new jobs.

    So let us get away from ideology and move on to reason, logic, and objectivity.

  9. grampagravy says:

    “From where I sit, Dodd is the only one of you guys grounded in reality.”
    Where you sit, Drew, is clearly right next to Dodd=Where “mindless drivel” is an argument.
    Try to say something more specific than who are you going to believe, your lying eyes or Drew.
    Your “go read what I read and get back to me” approach suggests a rather lazy sense of superiority and a lack of real substance.

  10. Drew says:


    I just call it the way I see it grandpa, and invoking “Wall Street gambling” and “offshore accounts” is, well, just mindless drivel. It may work out fine at the local beer hall as you high five your buddies, but not with someone who actually understands capital markets.

    BTW – you stole my “lying eyes” snark. Who did you used to be?

    And lastly, I’m not here to teach first level Money and Banking classes. You can dismiss it as a sense of superiority or laziness if it makes you feel better. But its really just an observation that people who are not even remotely facile in basic concepts ought not take such strident postions. Speaking of lazy: here’s the clues – monetary base, velocity, interest rates. Information is widely available. Are you up to it?

  11. Drew says:

    Gerry –

    You completely missed my point. You have saved all your invective for Bush. The dynamics at work re: globalization and employment are far more complex than just tax cuts, and span numerous Administrations and Congresses.

    Have yourself a good stiff bourbon, take a deep breath, settle down, and try to separate politics from good economic policy.

  12. grampagravy says:

    Uh, wasn’t it a bunch of yahoos who understood capital markets (and had their dupe-in-chief in office for eight years) who brought us the wonderful mess we’re in now.
    Oh, and the only thing I need to know about capitalism I learned playing monopoly. Sooner or later one player owns it all and the rest have nothing. I’ve been watching us head down that happy road since Nixon.
    Treating your conclusions as premises isn’t an argument, it’s hubris.

  13. Drew says:

    Yep, I thought so.  I’ll take that as a complete and total capitulation from someone who has no command of the facts, and no capacity to argue the issues.  A shame to go through life as an ignorant and angry fool.

    Bye-bye Grandpadopey.