A paper on the effects of government cutbacks

Tap here to turn on desktop notifications to get the news sent straight to you. Conservatives chant that taxes and government "take money out of the economy" and we need to " cut and grow ," meaning if government spending is cut way back the economy will grow as a result. How is this experiment working out?

A paper on the effects of government cutbacks

January By John E. The electorate made it clear in November: Congress should cut up the federal credit card and restore fiscal sanity. Road maps on how to do that were seldom mentioned. With the current economy recovering slowly, the federal government raises in current revenues about 57 cents to 63 cents for every dollar it spends.

Even in good times, it raises only 90 cents for every dollar spent. Given the existing tax system and the way Medicaid, Medicare and Social Security are designed, that structural deficit is destined to increase steadily. But what programs do we cut and what taxes do we raise?

The answers unleash a political fight too large for this humble column to take on. But we know one thing: State and local governments are deeply tied to federal finances, and they will feel the pain from federal cost cutting and revenue increasing. The billions in federal programs directed toward state and local governments -- and the multitude of tax preferences that benefit them -- will provide fertile grounds for filling the deficit hole.

Via their taxpayers, states and localities receive indirect benefits through federal tax deductions and credits. These preferences are on the chopping block, and their loss or reduction would prove costly to state and local governments whose citizens would find their tax burden increasing.

A paper on the effects of government cutbacks

Finally, there are indirect cost-cutting or tax-increasing measures. Under federal tax laws, homeowners now write off their mortgage interest costs.

A paper on the effects of government cutbacks

Over the years, this favoritism has driven up housing prices. Real estate values, now in very bad shape, serve as the foundation for local property taxes. That makes it an attractive target for reducing the federal deficit. But such a step might permanently bend down future growth in housing prices and accordingly, the property tax base.

Expanded use of user charges and sales taxes to enhance federal revenue would mean intense intergovernmental competition for revenues. But that would curb the ability of states to raise such taxes, even in the event of declining revenues. Ultimately all tax collectors go to the same well for water.

State and local officials must prepare for the fiscal Armageddon. This admonition may come as a shock to newly elected governors and state legislators who rode into office astride promises to cut back government. They are likely to find that that job will be done in Washington. Overnight, they may have a lot less money to spend and more needs to spend it on.Many states chose sizeable budget cuts over a balanced mix of spending reductions and targeted revenue increases.

These damaging effects may be exacerbated by the relative lack of knowledge among low-income families about the admissions and financial aid process. Low-income students tend to overestimate the true cost of higher education. Science policy issues have recently joined technology issues in being acknowledged to have strategic importance for national ‘competitiveness’ and ‘economic security’.

Measuring Economic Policy Uncertainty Scott R. Baker, Nicholas Bloom, and Steven J. Davis NBER Working Paper No.

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October JEL No. D80,E22,E66,G18,L Preliminary versions of economic research. Did Consumers Want Less Debt? Consumer Credit Demand Versus Supply in the Wake of the Financial Crisis. For more on government spending, read Brian Reidl's new paper "Why Government Does Not Stimulate Economic Growth" For more information, see the supplemental appendix to this paper.

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The Society of Government Economists