Or so it might seem, given the research by Christina Romer. From former UWO student, David Henderson,
President-elect Obama's candidate for chairman of the Council of Economic Advisers, Christina Romer, herself a Keynesian, has done research that undercuts the Keynesian view of good fiscal policy. Some of this research is in a March 2007 paper, "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," co-authored with her husband, fellow University of California, Berkeley, economist David Romer.
They find that tax cuts to offset a recession are ineffective, but their reasoning would also apply to government spending increases to offset a recession. In other words, if she believes her own research, Christina Romer should be a strong critic of her new boss's policies. ...
The Romers carefully sift through all federal tax cuts and tax increases from 1947 to 2005 to figure out, based on the discussion at the time, whether the changes in tax policy were motivated by a desire to offset the business cycle or by other goals. ...
The Romers write, "[C]ountercyclical fiscal policy is not achieving its intended purpose." Why? "[I]t is difficult for fiscal policy to respond quickly to economic developments." The two largest countercyclical tax changes between 1947 and 2005 were Lyndon Johnson's 10% surcharge on income taxes, implemented to "cool off" the economy, and Gerald Ford's 1975 tax rebate, implemented to boost the economy.
The Romers point out that the surcharge was first proposed in January 1967 but wasn't passed until June 1968. And, although the 1975 tax rebate was passed within three months of being proposed, they note that it was not proposed until 14 months into the 1973-75 recession. They could have noted that the recession ended in March 1975, the same month the rebate was proposed and three months before it was passed.
As I constantly tell my students, the "recognition lag", the "decision lag", the "implementation lag", and the "effect lag" combine to stack the deck against counter-cyclical policies, both monetary and fiscal, but are especially problematic with fiscal policy.
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