Arnold Kling

Countercyclical Fiscal Policy

Arnold Kling, Great Questions of Economics
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John S. Irons discusses a CBO report on how much of the larger deficit is due to the faltering economy and how much is discretionary.

roughly one-third of the projected decline in the total surplus between 2000 and 2003 results from "automatic stabilizers" the automatic response of the budget to the business cycle. Most of the remaining two-thirds is attributable to legislative action: primarily EGTRRA [2001 tax cuts], JCWAA, and increases in discretionary spending

In the short run, EGTRRA can be viewed as discretionary policy to fight the recession. And JCWAA was a package of spending to fight the recession, including increased jobless benefits. So, including the discretionary anti-recession component of policy, much of the near-term deficit increase is in response to the economic slump. However, the long-term tax cuts cannot be viewed as an attempt to fight the near-term recession.

Discussion Question. Has the use of fiscal policy been too aggressive or too cautious in fighting the recession?

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