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Fiscal Policy: Its Macroeconomics in Perspective

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President George W. Bush is preparing a drastic permanent reduction in federal income and estate taxes. He cites as precedents tax cuts by Kennedy-Johnson 1962-64 and Reagan 1981. In those cases, however, the economy was operating well below full employment and needed a "demand-side" stimulus (even though Reagan advertised his tax reduction as "supply-side"). In 2001, however, the economy is very close to full employment, and if it needs a stimulus at all, it is a quick modest temporary one instead of the large permanent one proposed. And why can't monetary policy do the job of stabilization, as it did successfully in the 1990s? A policy mix that assigns short run demand stabilization to the central bank is for several reasons preferable to a tight-money-easy-fiscal mix. In the case of Reagan and Bush the younger, federal tax cuts are advocated on philosophical and ideological grounds, diminution of the size and scope of government. But formulation of the issue as government versus people is a misunderstanding of democracy and of the reciprocities between public and private sectors.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1301.

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Length: 9 pages
Date of creation: May 2001
Handle: RePEc:cwl:cwldpp:1301
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