November 20, 2009

LAFFERING ALL THE WAY TO THE BANK:

Notions of 'fairness' should not dictate fiscal policy (JIM O'LEARY, 11/20/09, Irish Times)

[T]he first point to make is that the State’s solvency must be paramount: a bankrupt state is no use to anyone, not least those who rely on it for their incomes. When solvency is threatened, fairness (even assuming that it could be objectively assessed) becomes a matter of second-order importance.

Beyond that, notions of fairness must cede some ground, if not priority, to considerations of what works best.

On this question, analysis of the large reservoir of experience in dealing with fiscal crises, accumulated by governments worldwide over the past four decades, is unambiguous: adjustments based on spending cuts are more effective and more likely to boost economic activity than those based on tax increases.

The large corpus of research on this question has recently been added to and its main conclusions reiterated by Harvard economists Alberto Alesina and Silvia Ardagna (Large Changes in Fiscal Policy: Taxes Versus Spending (October 2009)).

One of their findings is that successful and expansionary fiscal adjustments are associated with cuts in transfer payments, whereas unsuccessful and contractionary adjustments are associated with increases in transfers.

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Posted by Orrin Judd at November 20, 2009 6:54 AM
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