Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Previewing the Long-Term Effects of TariffsThe dominant effect of the Trump tariffs will be to raise production costs on almost every American manufacturing firm.

It’s TDS to Suppose These Tariffs Are WorkingTrump has pushed the U.S. into an economic downturn that will be especially hurtful to Hoosiers.

Trump’s Tariff Recession Is HereMy new forecast, completed in late April, predicts a national recession began as early as March in reaction to Trump’s tarriffs.

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

View archives

Top Tags

jobs and employment 262
economics 203
state and local government 188
education 186
indiana 173
economic development 171
taxes 146
budget and spending 145
law and public policy 144
workforce and human capital 139
Browse all tags
Reporter / Admin Login

July 19, 2010

To Spend or Cut Taxes, That Is the Question

We are at a point in the economy where two truths collide. The first is that the size of federal government debt is so enormous as to seriously dampen a generation of economic growth. The second is that immediate steps to reduce the debt (spending cuts and tax increases) will dramatically slow the economy. What to do?

I recommend taking a deep breath. The polemics about the size of the debt and the poor state of the economy are both wrong. The debt is huge, and the economy bad, but we’ve handled much worse of both in living memory and without catastrophe. After that, it is helpful to review recent policy.

We’ve been through more than a year and a half of effectively zero interest rates, without a burst of credit activity. Clearly borrowers and lenders are scared of the future. The Stimulus and array of bail-outs have, thus far done little to boost the economy. Neither is there good evidence they kept things from getting worse. I say this with anguish and disappointment since I endorsed a smaller version of the stimulus.

I caveat the effect of the stimulus because I believe most of it is yet unspent. Sadly, the Federal government reports the money as spent as soon as a check is cut to a state or local government, university of not-for-profit entity. That does not mean it has led to any new hiring. I think few of my fellow economists and even fewer in Federal policy circles have any understanding of the Sisyphean task of translating Federal spending into a new job. Neither do they appreciate the time lag of employment from these programs. While the tax cuts are already spent, I do not believe even half the stimulus will have hit the streets until this time next year. Most recent economic research on this matter supports this argument. This still doesn’t tell us what to do now?

A tax increase or spending cut in the next 18 months will slow the economy. Yet he looming debt grows, slowing the economy and perpetuating the uncertainty that has gripped the country for two years. It is noteworthy that nations who have shown an appetite for fiscal austerity have rebounded more robustly than those without the political resolve to address their budgets. It is here where the crux of the problem lies.

Right now, the relatively slow recovery is a problem, and until the economy recovers more fully, it is the whole problem. At the other end, the debt, in and of itself is not an immediate problem. It is uncertainty about federal policy that accompanies it which cripples growth. This stagnation can be kept at bay if, and only if, there is that rare combination of a ‘stay the course’ fiscal policy in the short run combined with an expectation of fiscal responsibility in the long run. That takes something not included in economic models: leadership and trust. Until we have more of both we must expect further disquieting news.

Link to this commentary: https://commentaries.cberdata.org/520/to-spend-or-cut-taxes-that-is-the-question

Tags: bailout and debt, recession, taxes, federal government


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close