To Starve or Not to Starve the Beast?
September 1, 2010
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Summary
For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.
Subject: Consumption, Discount rates, Expenditure, Financial services, Government consumption, National accounts, Real interest rates
Keywords: budget deficits, Consumption, contractionary consumption effect, discount factor, Discount rates, eliminated government spending, expenditure adjustment, factor of firm, Global, Government consumption, government debt, government spending cut, non-Ricardian behavior, present discounted value, Real interest rates, share parameter, spending cuts, Starve-the-beast, tax cuts, utility function, welfare analysis, WP
Pages:
36
Volume:
2010
DOI:
Issue:
199
Series:
Working Paper No. 2010/199
Stock No:
WPIEA2010199
ISBN:
9781455205295
ISSN:
1018-5941
