Summary of Fiscal Policy in Good Times and Bad

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Typically, governments apply stimulus when an economy is in decline and then reverse course when conditions strengthen. But the 2017 US Tax Cuts and Jobs Act, implemented well into the eighth year of America’s expansion, seeks to boost and extend robust output. According to economists Tim Mahedy and Daniel J. Wilson in this brief but cogent analysis, evidence suggests such incentives are less effective during economic upswings than they are during downturns. getAbstract recommends this insightful research to economists and analysts.

In this summary, you will learn

  • How governments normally apply fiscal policy,
  • Why the 2017 US Tax Cuts and Jobs Act is unusual, and
  • What research says about the potential outcomes of the 2017 tax cuts.
 

About the Authors

Tim Mahedy is an economist at Bloomberg LP, and Daniel J. Wilson is an economist at the Federal Reserve Bank of San Francisco.

 

Summary

Federal fiscal policy is a tool for controlling the primary deficit – the difference between government spending (minus debt service) and government revenue as a percentage of GDP. Traditionally, fiscal policies imposed to reverse a downward turn in economic activity are countercyclical. In a decline, the goal is to spend money to rouse the economy from its doldrums. The US government typically spends more during a downturn due to “automatic stabilizer programs” such as food stamps and unemployment benefits, as well as due to “discretionary” expenditures, and that increases the deficit. In a rising economy, however, the objective is to cut disbursements – and the deficit.


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