Does Fiscal Policy Matter?

Abstract

Strange proposititions are commonplace in macroeconomic commentary these days; the world has been turned upside down. The federal government is about to increase real defence spending over the next several fiscal years by 9 per cent annually, to cut personal income tax rates by 10 per cent both this year and next, and to phase in drastic reductions in taxation of business investments in equipment and structures. Similar budgets in the past have invariably made the economy more prosperous, creating jobs and lowering unemployment, speeding the growth of production, raising profits. Consider, for example, 1940–41, 1950–52 and 1966–69.

This chapter is a seminal analysis of lessons to be learned from the US experience of the late 1970s and early 1980s. The chapter was presented by the laureate in 1982 at the Research Center of Stanford University, California. Due to its relevance even today it is being published here with the permission of the contributor with some minor style changes (Editor).