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Encouraging Growth and Recovery or Reducing Goverment Deficits and Debt

January 11, 2013

Encouraging Growth and Recovery or Reducing Goverment Deficits and Debt: Not a Trade Off Last week in “Thoughts on Capital-Based Macroeconomics”, Part III  (drafted in early November) I made an argument that a Rothbardian anti-recession policy of slashing government spending while cutting taxes, “particularly taxes that interfere with saving and investment”, would be a win-win policy for addressing simultaneously the size of government/government debt/deficit problem and the on-going slow recovery. This recommendation is bolstered by interpretations of new empirical work on multipliers and the relative fiscal impact of tax changes relative to spending changes. Other economists (see below) have recently come to make similar policy recommendations again based on a wealth of empirical work which supports this anti-Keynesian argument.

On Wednesday the Denver Post ran a reasonable column by Vincent Carroll, Ducking reality on the deficit on this continuing fiscal fiasco. I sent Mr. Carroll the following letter making this point.

Vincent: Great column today (01-09-2013). I would add if we are to redistribute like Europe and if we must tax and spend like Europe and the result will be permanent relative stagnation like Europe. Compared to a relative less hampered economy with a smaller more efficient government there will be less innovation and prosperity. Recently many economists have been arguing, based on relevant empirical research examining the impact of fiscal changes on the economy, i.e., government spending and tax changes, that there is a win-win policy for both the debt-deficit crisis and the slow recovery; tax reform that lowers marginal tax burdens accompanied by spending reductions.

See: Robert Murphy, FEATURED ARTICLE | JANUARY 7, 2013 What Economic Research Says About Fiscal Austerity and Higher Tax Rates at http://www.econlib.org/library/Columns/y2013/Murphytaxrates.html. Jeffrey Miron, “Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma” at http://www.cato.org/publications/policy-analysis/should-us-fiscal-policy-address-slow-growth-or-debt-nondilemma And John P. Cochran, “Thoughts on Capital-Based Macroeconomics”, Part III  at http://mises.org/daily/6307/Thoughts-on-CapitalBased-Macroeconomics

Of course, like you conclude, this sort of honesty is unlikely to appeal in Washington where those on both sides of the isle are always seeking the easy way out with deals, not good policy.

For a good discussion on the how and why to use empirical research in Austrian analysis see Robert Higgs, “Austrian Economics and the New Economic History” in Austrian Economics Newsletter vol. 15, no.1, at [Full Edition of Vol. 15, No. 1].

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