Fiscal Policy in an Era of Austerity

Abstract

We face a time of stagnant economic growth, severe unemployment, massive budget deficits, and an increasingly competitive global economy. These daunting challenges are the legacy of a number of unwise policy decisions in both the public and private sectors. Although the good news is that unsound policies can be changed, the bad news is that no single step will do the trick. It is a challenge to rely on monetary policy when interest rates are near zero. There also is uncertainty – and a heated debate among economists – about the effectiveness of a Keynesian stimulus. One thing we know is that a stimulus is quite difficult to execute effectively. For example, it is a challenge to identify shovel ready projects that contribute to long-term economic growth, particularly on short notice. There is no uncertainty, though, about the need to address a broad range of specific problems contributing to our economic woes. We have to promote economic growth and fiscal stability over the long term. To do so, we should reform our housing and mortgage markets, our entitlement programs, our tax code, and much more. A short Article for a special issue cannot delineate all the challenges Congress is facing or provide definitive guidance about how to address them. As an illustrative example, this Article emphasizes the perils of maintaining the highest corporate tax rate in the Organisation for Economic Co-operation and Development (OECD) in a competitive global economy. Cutting our corporate tax rate would encourage businesses to invest and hire more employees, while also reducing incentives to engage in wasteful tax planning and to shift taxable income and jobs overseas

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