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Fiscal Policy in an Era of Austerity


David Schizer


Columbia University - Law School

October 17, 2011

Columbia Law and Economics Working Paper No. 408

Abstract:     
We face a time of stagnant economic growth, severe unemployment, massive budget deficits, and an increasingly competitive global economy. Monetary policy is tapped out, and there is a great deal of uncertainty about the effectiveness of a traditional Keynesian stimulus – and, not surprisingly, a heated debate among economists. One thing we do 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. As an illustrative example, this Article emphasizes the perils of having 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 will 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.

In addition to these problems with our substantive law, we also face problems of process that are undercutting our government’s effectiveness. An important (and familiar) one is that politicians are consistently tempted to accommodate organized interest groups, especially if the costs of these favors can be quietly passed on to the general public. This is all the more true if special interest deals can be financed with deficit spending, so that the bill will not come due until long after our current political leaders have retired. Various measures can constrain this familiar political dynamic, and this Article sketches three strategies as illustrative examples. First, we should make the costs of special interest deals more visible through better budgetary accounting. Second, we should enlist specific institutions within our government to target waste and pork. For example, we should empower special House and Senate committees to cut particular budget items or, alternatively, to sever them from the rest of the budget and subject them to a separate public vote. Third, we should create stronger institutional barriers to deficit spending. Scarcity focuses the mind, so that our leaders will have greater incentive to reject initiatives that are not cost-justified.

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Date posted: October 25, 2011  

Suggested Citation

Schizer, David, Fiscal Policy in an Era of Austerity (October 17, 2011). Columbia Law and Economics Working Paper No. 408. Available at SSRN: http://ssrn.com/abstract=1948692 or http://dx.doi.org/10.2139/ssrn.1948692

Contact Information

David M. Schizer (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212 854 2675 (Phone)
212 854 9740 (Fax)
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