Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma

7/30/2019 Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma

1/12

Executive Summary

The United States faces two economic chal-lenges: slow growth and an ever-increasing ratioof debt to GDP. Many policymakers believe theyface a dilemma because the policy solutions tothe two problems are opposite. To address theslow recovery, standardKeynesianeconomicssuggests further fiscal stimulus in the form oflower taxes or higher spending.But that recom-mendation runs head-first into the economys

second crucial challenge, the long-run fiscal im-balance.

Yet policymakers are wrong to see this as adilemma. The Keynesian model does not evalu-ate government expenditure using the standardmicroeconomic concepts of economic efficien-cy (cost-benefit analysis); rather, it assumes thatall expenditure is beneficial. Some governmentpurchases, however, are not a productive use ofresources, and transfer payments distort eco-nomic incentives and thus can reduce economicoutput. In contrast, broad-based tax cuts, espe-

cially those that lower marginal tax rates, en-hance economic growth.

The implication is that tax cuts are the mostappealing kind of fiscal stimulus because theyare beneficial on both Keynesian and efficien-

cy grounds. Higher transfers and governmentpurchasesincreased expendituresare ques-tionable because any Keynesian benefits mustbe balanced against potentially large efficiencycosts.

Thus the United States should cut unpro-ductive expenditures while keeping tax rateslow. A high deductible for Medicare would savemoney and improve the efficiency of the health

care market. With rising life expectancies, SocialSecurity is more generous than necessary to ac-complish any reasonable goal of the program.Much military spending goes to programs notrelated to the defense of the United States. Busi-ness subsidies, drug prohibition, and pork-bar-rel spending should be cut.

The United States therefore has a simplepath to a brighter economic future: slash expen-ditures and keep tax rates low. Reducing expen-ditures will improve the debt outlook and makethe economy more productive, implying higher

levels of output and further debt reductions forany given tax rates. Keeping tax rates low willimprove the incentives for labor effort, savings,and entrepreneurship, which promotes a moreproductive economy.

Should U.S. Fiscal Policy AddressSlow Growth or the Debt?

A Nondilemma

by Jeffrey Miron

No. 718 January 8, 2013

Jeffrey Miron is a senior lecturer in economics at Harvard University and a senior fellow at the Cato Institute.


2/12

2

The standardKeynesian

argument forgovernment

spending as ananti-recession

tool is misguided;the efficacy of

most stimulus isdebatable at best,

and much currentexpenditure

should beeliminated

regardless of thedebt.

Introduction

The United States faces two economicchallenges.

Since June 2009, when the recession end-

ed, output has grown more slowly than inprior recoveries, leaving the level of outputwell below its long-term trend. Likewise, un-employment remains above the level usuallyconsidered full employment. Thus, althoughthe recovery began more than three years ago,policymakers still seek further measures tostimulate the economy. And since monetarypolicy is probably out of ammunition, atten-tion is focused on fiscal stimulus, meaningtax cuts or spending increases.

Looking forward, however, the United

States faces an ever-increasing ratio of debtto GDP, which will eventually generate afiscal crisis and sovereign default. This out-come is not inevitable; appropriate policychanges can avoid a fiscal meltdown, and

any crisis might be decades away. Projec-tions by the Congressional Budget Officehowever, show that under current policies,the United States debt path is not sustain-able. That implies a need for spending cuts

and tax increases, the opposite of what issuggested by the slow recovery.It might appear, therefore, that the Unit-

ed States is stuck between a rock and a hardplace. Policymakers can fight the slow re-covery with tax cuts or spending increases,but that means leaving the debt for anotherday and in the meantime making it worseOr policymakers can address the debt, butat the risk of slowing the economy or evengenerating a new recession.

Yet policymakers face no such dilemma

the United States can have its (policy) cakeand eat it too. That is because the stan-dardKeynesianargument for governmentspending as an anti-recession tool is mis-guided; the efficacy of most stimulus is de-

7

7.5

8

8.5

9

9.5

10

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Log (Real GDP) Trend

Figure 1Log of U.S. Real GDP, Quarterly, 1947:12012:3

Source: Data are from http://www.bea.gov/national/xls/gdplev.xls, linked from http://www.bea.gov/nationalindex.htm.Note: The trend is estimated by regressing the log of real GDP on a constant plus a time trend.

Log(RealGDP)


3/12

3

Cutting both

expenditure andtaxes can speedthe recovery inthe short run anfoster growth inthe long run.

batable at best, and much current expendi-ture should be eliminated regardless of the

debt. This means that cutting both expendi-ture and taxes can speed the recovery in theshort run and foster growth in the long run,while simultaneously putting the U.S. fiscalhouse in order.

The issues addressed here remain timelybeyond the fiscal cliff discussion of taxhikes and expenditure cuts, as the UnitedStates still faces serious long-term fiscal debtissues. In the mainstream view, both the taxhikes and the spending cuts are undesirablebecause they will slow the economy, yet they

are necessary to address the debt. In the viewpresented here, however, only the tax hikesare problematic; most (perhaps all) of theexpenditure cuts are beneficial. Thus if poli-cymakers cancel (or expand) the tax hikesbut retain (or expand) the expenditure cuts,they can address the short run and long runproblems in one fell swoop.

The Challenges Facingthe U.S. Economy

To understand the controversy over fis-cal policy, it is useful to review several factsabout the U.S. economy.

Figure 1 shows (the log of) real outputover the post-WWII period. The figure alsoshows the trend growth in output implied bythese data. The striking fact is the steady in-crease in output over this horizon, at roughly3.2 percent per year. Output has sometimesfallen below its long-term trend, but it hastypically then grown faster and caught up to

trend within a few years. Output was essen-tially back on trend, for example, about fivequarters after the trough of the 19811982recession.

Output has not yet returned to trend,however, some three years after the bottomof the 20072009 recession. Figure 2 makesthis point more clearly by showing the same

9.3

9.35

9.4

9.45

9.5

9.55

9.6

9.65

9.7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Log (Real GDP) Trend

Figure 2Log of U.S. Real GDP, Quarterly, 2002:22012:3

Source: Data are from http://www.bea.gov/national/xls/gdplev.xls, linked from http://www.bea.gov/national/index.htm.Note: The trend is estimated by regressing the log of real GDP on a constant plus a time trend.

Log(RealGDP)


4/12

4

The solutionof addressing therecovery now, viafiscal expansion,

and the debtlater, via fiscal

contraction, is apipe dream; theright time for

fiscal contractionwill never arrive.

data as in Figure 1, but for just the past 10years. Output has increased in every quartersince the end of the recession in June 2009,but average growth has been only 2.2 per-cent. That implies a growing gap between

the 3.2 percent trend line and the level ofreal output.Figure 3 makes a similar point by show-

ing the unemployment rate for the post-warperiod, along with a line indicating the aver-age value over this period. Unemploymentrose as output fell during the recession andthen declined as output recovered. But justas real output is still well below trend somethree years after the recessions end, unem-ployment is still well above its long-run aver-age.

To address this slow recovery, Keynesianeconomics suggests further fiscal stimulusin the form of lower taxes or higher spend-ing.1 But that recommendation runs head-first into the economys second crucial chal-lenge, the long-run fiscal imbalance.

Figure 4, based on CBO data and analy-sis, documents the magnitude of this imbal-

ance. The graph shows past debt-to-GDPratios along with CBOs forecasts under itsAlternative Fiscal Scenario. These fore-casts assume that Congress extends a num-ber of expiring tax cuts while avoiding

several scheduled spending cuts. These as-sumptions are consistent with Congresssrecent behavior.

Under CBOs alternative fiscal scenario,the debt-to-GDP ratio increases indefinitely,implying a fiscal crisis and default. The al-ternative scenario is not the only plausibleforecast, and the fiscal meltdown implied bythis scenario may take decades to material-ize. But even if these forecasts are somewhatpessimistic, the situation is still dire.2

Thus, the apparent dilemma for policy-

makers is that what is required to deal withthe slow recovery is the opposite of what isrequired to address the exploding debt. Andthe solution of addressing the recoverynow, via fiscal expansion, and the debt later,via fiscal contraction, is a pipe dream; theright time for fiscal contraction will neverarrive.

0

1

2

3

4

5

6

7

8

9

10

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

Unemployment Rate (Seasonally Adjusted) Average over entire period

Figure 3U. S. Unemployment Rate, Monthly, January 1948October 2012

Unemployment(%)

Source: Data are from http://data.bls.gov/pdq/SurveyOutputServlet.


5/12

5

In theKeynesian viewpolicymakersface a dilemma.But this dilemmis more apparenthan real.

Determination of the appropriate pathfor fiscal policy is pressing, given the loom-ingand delayeddeadlines for the debt ceil-ing and the sequester.3 The fiscal cliff deal

didnt solve any of the fundamental fiscal is-sues. Taxes will rise for high-income taxpay-ers, with some possible negative effects oninvestment and growth. Possible spendingcuts have been deferred yet again and mustbe addressed in March. Nothing has beendone about the anticipated growth rates intransfer payments. Supporters claim the dealwill reduce the 10-year deficit by $600 billion,a negligible impact on trillion-dollar-a-yeardeficits.4

In the Keynesian view, therefore, policy-

makers face a dilemma. But this dilemma ismore apparent than real.

Why There IsNo Policy Dilemma

To understand why the United States

does not face a tradeoff between accelerat-ing the recovery and avoiding a debt crisis,consider the logic behind the Keynesian per-spective on fiscal policy.

The Keynesian model assumes that, inthe short-term, most prices and wages aresticky at their existing levels. This is incontrast to the standard neoclassical as-sumption that prices in each market adjustquickly to equilibrate supply and demand.If prices and wages are (temporarily) stuck,then the main factor determining output isthe demand for goods and services.

Aggregate demand in any economy comesfrom consumers (consumption), firms (in-vestment), government (government pur-

chases), and the rest of the world (net ex-ports). In the long run, prices and wagesadjust to changes in demand, so the amountof output is determined by the technology,the available factors of production (laborand capital), and government policies. In theshort run, however, output can fall below po-tential if demand is insufficient.

Figure 4Historical and Projected Ratios of U.S. Debt-to-GDP

Source: Data are from the Summary 1 tab of http://www.cbo.gov/sites/default/files/cbofiles/attachments/43539-AugustUpdate-Data_underlying_figures.xls, linked from http://www.cbo.gov/publication/43539. See alsohttp://cbo.gov/sites/default/files/cbofiles/attachments/06-05-Long-Term_Budget_Outlook_2.pdf.


6/12

6

The Keynesianmodel does

not evaluategovernment

expenditure andtax policies using

the standardmicroeconomic

concepts ofeconomic

efficiency (cost-benefit analysis).

In the Keynesian model, therefore, re-cessions reflect a decline in the demandfor goods and services. This might occurbecause consumers or firms become pes-simistic and stop spending or investing. It

might occur because government decides toretrench, or because other countries switchtheir purchases from the United States toelsewhere. A decline in demand might alsooccur if a financial crisis impairs the abilityof consumers and firms to obtain loans forproductive spending and investment.

The Keynesian model therefore suggeststhat government can reduce or eliminaterecessions by stimulating the demand forgoods and services whenever private demandlags. One method is cuts in taxes or increases

in transfer payments; that puts more dispos-able income in the hands of consumers, whothen spend more. A second mechanism istax credits that encourage investment nowrather than later. And a third approach is in-creased government purchases of goods andservices, whether on roads, defense, educa-tion, R&D, or green energy. The increase ingovernment demand helps offset the declinein private demand, thereby stabilizing out-put.

The Keynesian model is taught in most

college and high school economics coursesaround the world. It is accepted wisdom inthe halls of government. But a key implicitassumption, not mentioned so far, deservesfurther discussion.

The Keynesian model does not evaluategovernment expenditure and tax policies us-ing the standard microeconomic conceptsof economic efficiency (cost-benefit analy-sis). Instead, the model assumes the policygoal is to increase measured GDP. Thismight sound sensible and not inconsistent

with economic efficiency. In fact, the meritsof fiscal stimulus measures can differ radi-cally between these two perspectives.

Government expenditure has two com-ponents: purchases of goods and services(such as for roads, education, research anddevelopment, or the military) and transferpayments (such as for unemployment in-

surance, welfare, foods stamps, MedicaidMedicare, and Social Security).

The problem with the government pur-chases component is that the National In-come and Product Accounts (NIPA) values

government purchases as equal to expen-diture on these purchases. This means thatbridges-to-nowhere or military expendituresaimed at an imaginary alien invasion areboth desirable policies from the Keynesianperspective because they cause measuredGDP to increase (one component of GDP isgovernment expenditure on goods and ser-vices). Yet such expenditures make no sensefrom a cost-benefit perspective.

For some government purchases, thecost-benefit assessment is more favorable

so the point raised above does not meanthat additional expenditure can never makesense as stimulus. But it shows that the casefor such spending depends on whether itwould be desirable independent of the reces-sion, and that spending more just to spendmore is problematic. Plus, the case for addi-tional spending depends on the existing sizeof government. Even if some expenditure ona particular program passes a cost-benefittest, this does not mean additional expendi-tures will pass as well.

Transfer payments are also problematicas stimulus because they distort economicincentives. Unemployment insurance dis-courages work effort, which reduces laborsupply and keeps wages artificially highSocial Security encourages early retirementMedicare and Medicaid induce moral hazardin health insurance, reducing the efficiencyof the health care market. Thus, even if in-creased transfers have the textbook Keynes-ian effect of stimulating consumer spendingtheir net effect on the economy is, at a mini-

mum, unclear.For tax cuts, the efficiency consequences

are normally beneficial rather than harmful,since lower tax rates improve economic in-centives and reduce distortions, thereby pro-viding an additional mechanism by whichtax cuts can stimulate. Exceptions to thisrule of thumb exist; tax cuts that favor one


7/12

7

The UnitedStates should cuunproductiveexpenditurewhile keeping tarates low.

industry over another, for example, are usu-ally bad for economic efficiency. Likewise,tax cuts that increase progressivity can re-duce the incentive to work and develop hu-man capital. Broad-based tax cuts, and ones

that lower marginal tax rates, however, willnormally enhance economic growth.This discussion has two implications. Tax

cuts are the most appealing kind of fiscalstimulus because they are beneficial on bothKeynesian and efficiency grounds. Highertransfers and government purchasesin-creases in expenditureare more problem-atic because any Keynesian benefits must bebalanced against potentially large efficiencycosts.

Consistent with this characterization, the

evidence suggests that tax cuts consistentlystimulate economic growth, while expendi-ture cuts have modest if any negative impacton GDP growth.5 The impact of tax cuts andexpenditure cuts varies from one episodeto another, as the discussion above implies:some kinds of expenditure makes more senseon efficiency grounds than others. Overall,however, the evidence does not confirm theKeynesian prediction that expenditure cutsare a major impediment to economic recov-ery; at the same time, it makes a strong case

for the efficacy of tax cuts.

What Should FiscalPolicymakers Do Now?

The discussion above implies that theUnited States should cut unproductive ex-penditure while keeping tax rates low. Thequestion is then whether the United Stateshas enough inefficient expenditure to makea real difference to the debt path.

Yes, it does.Medicare, which accounts for 13.5 per-

cent of the federal budget, is far more ex-pensive than implied by the economic argu-ment for government provision of healthcare.6 This argument, based on asymmetricinformation and adverse selection, suggestsonly that government guarantee access to

a high-deductible policy that covers large,unanticipated expenditures; this argumentdoes not justify insurance that covers virtu-ally all health care expenses. Yet Medicaremakes modest use of deductibles, reimburs-

ing beneficiaries for most expenses and forall kinds of health costs, large or small.The cost of Medicares low-deductible ap-

proach is heightened moral hazard, whichis the tendency for people with insurance topurchase more health care than is implied bya balancing of costs and benefits. Medicaretherefore generates inefficiency in the healthcare market, as when doctors order tests orprocedures that do little to diagnose or treatpatients. The extra expenditure also encour-ages government to limit reimbursements to

health care providers or to ration care, andproviders respond with creative accountingand other nonproductive behavior to raiserevenues. The limits on reimbursementsthen discourage innovation and reduce thesupply of talented people who want to bedoctors and other health care professionals.

The way to reduce moral hazard is to raisethe Medicare deductible substantially. An in-crease of $6,400 per person, with roughly 40million elderly beneficiaries, would generatesavings of more than $250 billion per year.7

More importantly, a far greater fraction ofdecisions about health care would reflect abalancing of costs and benefits, implying amore efficient health care system.

Social Security, which accounts for 20.3percent of the federal budget, is also farmore generous than necessary to accom-plish any reasonable goal of this program.8When the United States adopted Social Se-curity in 1935, life expectancy was 63, twoyears younger than the age of eligibility.Thus most Social Security recipients were in

poor health and unable to work. Now, withlife expectancy around 78 and health-statusat age 65 much improved, many recipientscould extend their working lives withoutundue hardship.9 Thus it makes sense to cutSocial Security, whether by increasing theage of retirement or by slowing the growthin benefits. Once phased in, these modifica-


8/12

8

Many currentor past military

and national

security activitieshave large and

certain costs buthard-to-measure,

intangiblebenefits, if any.

tions could easily yield $100 billion in re-

duced expenditure per year.National defense, which accounts for

19.6 percent of federal expenditure,is againfar larger than necessary.10 National defenseis the classic public goodsomething thateveryone values but that free markets areunlikely to provideso some expenditureon national defense makes sense. Yet manycurrent or past military and national secu-rity activities have large and certain costsbut hard-to-measure, intangible benefits, ifany. Examples include the invasion and oc-

cupation of Iraq, the ongoing occupationof Afghanistan, provision of national secu-rity for Western Europe and other parts ofthe globe, not to mention misguided weap-ons systems, redundant military bases, andmore.11 Saving $100 billion per year shouldbe easy.

A substantial fraction of nonmilitary, dis-cretionary expenditure also fails any reason-able cost-benefit test and ought to be cut:drug prohibition, the National Endowmentsfor the Arts and Humanities, the Corpora-

tion for Public Broadcasting, NASA, ear-marks, the Post Office, Amtrak, foreign aid,agricultural subsidies, the Small BusinessAdministration, and more. Even for expen-diture categories that are defensible in mod-eration (e.g., transportation), many specificprojects are wasteful (bridges-to-nowhere,the Big Dig, high-speed rail, and more).

Many of these programs are small, but the

number is large, so together they account forsignificant expenditure. Eliminating $100billionwhich will simultaneously improveeconomic efficiencyis a no-brainer.12

Last but not least, much of the implicitexpenditure that occurs via the tax code isinimical to economic efficiency. A prime ex-ample is the tax-preferred status of employerpaid health-insurance premiums. This givesemployees an incentive to buy more gener-ous insuranceespecially policies with lowco-pays and deductibleswhich then means

excessive purchase of health care. A secondexample is the deductibility of home mort-gage interest, which spurs excess investmentin residential capital rather than nonresiden-tial capital like business plants, equipmentand R&D. The Office of Management andBudget estimates that elimination of thesetwo tax expenditures would yield $235 bil-lion per year in additional revenue, thus fa-cilitating reductions in marginal tax rates.13

Thus any honest analysis of federalspending will conclude that, even accepting

the standard goals of this spending, the cur-rent amount is far in excess of what is neces-sary to achieve these goals. Table 1 summa-rizes the expenditure savings suggested herewhich come to at least $800 billion per yearPolicymakers should cut these expendituresregardless of the debt or the state of the eco-nomic recovery, because this expenditure

Table 1Expenditure Savings from Reductions in Inefficient Programs

Program Savings ($ billion)

Medicare 250

Social Security 100

National Security 100

Nondefense Discretionary Spending 100

Tax Expenditure 250

Total 800

Source: Authors calculations.


9/12

9

The UnitedStates has asimple pathto a brighter

economicfuture: slashexpendituresand keep taxrates low.

makes the economy less productive, lowersoutput, and slows economic growth.

Conclusion

The United States has a simple path toa brighter economic future: slash expendi-tures and keep tax rates low. Lower expen-ditures will improve the debt outlook andmake the economy more productive, imply-ing higher levels of output and further debtreductions for any given tax rates. Keepingtax rates low will improve the incentives forlabor effort, savings, and entrepreneurship,which also promotes a more productiveeconomy.

These lessons apply not just to the UnitedStates but to European countries as well. In-debted countries are being told to adopt aus-terity measureslower spending and highertaxesas a condition of debt relief. Predict-ably, given the analysis and evidence pre-sented here, these measures have done littleto ease the debt crisis because the tax hikesharm economic growth. Instead, therefore,debtor countries should undertake largerreductions in expenditures combined withconstant or lower tax rates (plus labor mar-

ket reforms in many cases). The direct im-pact on fiscal balance would be similar, butthe effects on economic productivity wouldbe far better. The debtor countries wouldrecover more quickly, yielding increased taxrevenue and smaller debts.

Many economists do not view the Keynes-ian perspective on government spendingthat it should be used to boost the econ-omyas inconsistent with the standardmicroeconomic perspectivethat spendingshould be determined by the costs and ben-

efits of the expenditure in question. Thatis because many economists explicitly orimplicitly endorse the view that the rightamount of government spending, based oncost-benefit considerations, is much abovecurrent levels. If one accepts that view, thenarguing for more spending stimulus is easy;additional bridges, weapons, schools, and

the like appear beneficial regardless of therecession.

But that view assumes that the U.S.and other rich countries get more benefitthan cost from current spending, despite

convincing evidence that a large fractionis wasteful and that the standard goals ofspendingsuch as providing a social safetynet or national defenseare accomplishedat much lower levels of expenditure. Indeed,substantial reductions would make senseeven if the current debt outlook were muchbetter than it is now because this spendingdoes substantial harm over and above thefact that it is unaffordable.

Regardless of ones view of the appropri-ate size of government, however, any objec-

tive observer must recognize that currentdebt projections, even if not fully accurate,are cause for great concern. And any set ofpolicies that is grotesquely unaffordableover the long haul cannot possibly be sen-sible on cost-benefit grounds. Nor can rea-sonable people believe that higher tax rateson the rich, no matter how draconian, canremotely address the looming debt explo-sion.14 Thus the case for substantial expen-diture reductions is compelling.

Notes1. Some economists favor additional mon-etary expansion, but many doubt that furthereasing will have much impact. See, for example,Phil Izzo, Economists Skeptical on More FedEasing, Wall Street Journal Online, September 12,2012, http://online.wsj.com/article/SB10000872396390444017504577647522852235502.html?mod=googlenews_wsj.

2. The CBOs projections account for both theexplicit debt and the implicit debt due to futurespending on entitlements.

3. David Malpass, Nothing Is Certain ExceptMore Debt and Taxes, Wall Street Journal, January2, 2013.

4. Congressional Budget Office, Estimate ofthe Budgetary Effects of H.R. 8, the AmericanTaxpayer Relief Act of 2012, as passed by the Sen-ate on January 1, 2013, January 1, 2013, http://cbo.gov/sites/default/files/cbofiles/attachments/


10/12

10

American%20Taxpayer%20Relief%20Act.pdf.

5. See especially Alberto Alesina, Carlo Favero,and Francesco Giavazzi, The Output Effects ofFiscal Consolidations, NBER Working Paperno. 18336, 2012; Robert J. Barro and Charles J.Redlick, Macroeconomic Effects from Govern-

ment Purchases and Taxes, Quarterly Journal ofEconomics, 126, no. 1 (2011): 51102; ChristinaD. Romer and David H. Romer, The Macroeco-nomic Effects of Tax Changes: Estimates Basedon a New Measure of Fiscal Shocks, AmericanEconomic Review 100, no. 3, (2010): 763801; and

Valerie A. Ramey, Can Government PurchasesStimulate the Economy? Journal of Economic Lit-erature 49, no. 3 (2011): 67385.

6. The 13.5 percent figure is from authorscalculations for 2011 based on Table 3.1, Officeof Management and Budget, http://www.whitehouse.gov/omb/budget/Historicals.

7. The number suggested in the Obama Factscampaign advertisement as the additional amountseniors would have paid under the Romney-RyanMedicare plan was $6,400.


9. Social Security no longer has a single re-tirement age; instead, those who are eligible forSocial Security can begin collecting benefits asearly as age 62 or as late as age 70, with benefits

an increasing function of age. In addition, the so-called normal retirement age is gradually beingincreased from 65 to 67.


11. See, for example, Benjamin Zycher, Un-founded Hand-Wringing over Military Spending,

Cato Institute Commentary, September 21, 2012,http://www.cato.org/publications/commentary/unfounded-handwringing-over-military-spending-cuts; Christopher Preble, Are Military Spend-ing Cuts Good for the Economy? Cato@Liberty(blog), August 8, 2012, http://www.cato-at-libertyorg/are-military-spending-cuts-good-for-the-economy/; and Benjamin H. Friedman and Chris-topher Preble, Budgetary Savings from MilitaryRestraint, Cato Institute Policy Analysis no. 667,September 21, 2010.

12. For further discussion, see http://www.downsizinggovernment.org/.

13. Data for 2011 from Table 17-1, Office ofManagement and Budget, http://www.whitehouse.gov/omb/budget/Supplemental. Many othertax expenditures are difficult to justify on efficien-cy grounds. Some, however, make sense under con-sumption rather than income taxation (e.g., provi-sions that allow faster than normal expensing ofinvestment, assuming these apply broadly), so theypotentially increase economic efficiency.

14. See, for example, Jackie Calmes, Tax Arith-metic Shows Top Rate Is Just a Starter, New YorkTimes, December 8, 2012, http://www.nytimescom/2012/12/09/us/politics/tax-arithmetic-

shows-top-rate-is-just-a-starter-in-talks.html?smid=pl-share.


11/12

RECENT STUDIES IN THECATO INSTITUTE POLICY ANALYSIS SERIES

717. China, America, and the Pivot to Asia by Justin Logan (January 8, 2013)

716. A Rational Response to the Privacy Crisis by Larry Downes (January 7,2013)

715. Humanity Unbound: How Fossil Fuels Saved Humanity from Nature andNature from Humanityby Indur M. Goklany (December 20, 2012)

714. On the Limits of Federal Supremacy: When States Relax (or Abandon)Marijuana Bans by Robert A. Mikos (December 12, 2012)

713. India and the United States: How Individuals and Corporations Have

Driven Indo-U.S. Relations by Swaminathan S. Anklesaria Aiyar (December 11,2012)

712. Stopping the Runaway Train: The Case for Privatizing Amtrak by RandalOToole (November 13, 2012)

711. Grading the Governments Data Publication Practices by Jim Harper(November 5, 2012)

710. Countervailing Calamity: How to Stop the Global SubsidiesRace by ScottLincicome (October 9, 2012)

709. The Economic Case against Arizonas Immigration Laws by Alex Nowrasteh(September 25, 2012)

708. Still a Protectionist Trade Remedy: The Case for Repealing Section 337 byK. William Watson (September 19, 2012)

707. The Impact of Charter Schools on Public and Private School Enrollmentsby Richard Buddin (August 28, 2012)

706. Economic Effects of Reductions in Defense Outlays by Benjamin Zycher

(August 8, 2012)

705. Libertarian Roots of the Tea Partyby David Kirby and Emily Ekins (August 6,2012)

704. Regulation, Market Structure, and Role of the Credit Rating Agencies byEmily McClintock Ekins and Mark A. Calabria (August 1, 2012)

703. Corporate Welfare in the Federal Budgetby Tad DeHaven (July 25, 2012)


12/12

702. Would a Financial Transaction Tax Affect Financial Market Activity?Insights from Futures Markets by George H. K. Wang and Jot Yau (July 9,2012)

701. The Negative Effects of Minimum Wage Laws by Mark Wilson (June 21, 2012)

700. The Independent Payment Advisory Board: PPACAs Anti-Constitutionaland Authoritarian Super-Legislature by Diane Cohen and Michael F. Cannon(June 14, 2012)

699. The Great Streetcar Conspiracyby Randal OToole (June 14, 2012)

698. Competition in Currency: The Potential for Private Moneyby Thomas L.Hogan (May 23, 2012)

697. If You Love Something, Set It Free: A Case for Defunding Public

Broadcasting by Trevor Burrus (May 21, 2012)

696. Questioning Homeownership as a Public Policy Goalby Morris A. Davis(May 15, 2012)

695. Ending Congestion by Refinancing Highways by Randal OToole (May 15,2012)

694. The American Welfare State: How We Spend Nearly $1 Trillion a YearFighting Povertyand Failby Michael Tanner (April 11, 2012)

693. What Made the Financial Crisis Systemic? by Patric H. Hendershott andKevin Villani (March 6, 2012)

692. Still a Better Deal: Private Investment vs. Social Securityby Michael Tanner(February 13, 2012)

691. Renewing Federalism by Reforming Article V: Defects in the ConstitutionalAmendment Process and a Reform Proposalby Michael B. Rappaport(January 18, 2012)

690. Reputation under Regulation: The Fair Credit Reporting Act at 40 and

Lessons for the Internet Privacy Debate by Jim Harper (December 8, 2011)

689. Social Security, Ponzi Schemes, and the Need for Reform by Michael Tanner(November 17, 2011)

Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma

Documents

Transcript of Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma