Evidence from state “fiscal laboratories” shows spending cuts hurt growth and jobs

Owen Zidar is an Economics Ph.D. student at UC Berkeley focusing on public finance topics at the intersection of labor economics and macroeconomics. He recently worked at the Council of Economic Advisers on housing, finance, and tax policy.

Owen Zidar is an Economics Ph.D. student at UC Berkeley focusing on public finance topics at the intersection of labor economics and macroeconomics. He recently worked at the Council of Economic Advisers on housing, finance, and tax policy.

By tracking the results of different states’ fiscal policies, economists are finding out what kind of economic medicine helps – and harms – job creation. Economist-to-be Owen Zidar recently highlighted some recent findings from these laboratories of democracy. As the economy slowly climbs out of the recession, here are three fiscal “lessons learned” for local and national leaders to keep in mind:

1) Demand is the problem – not “uncertainty”:

If uncertainty about prospective government regulation and taxes is the primary reason for the sluggish recovery, then states where policy uncertainty is high should tend to have lower job growth. Using state-level data from National Federation of Independent Businesses, however, they found almost no relationship between job growth and the share of small businesses that cite regulation and taxes as their top concern.

2) Spending money creates jobs – cutbacks make recessions worse:

…focused fiscal relief during hard times can effectively stimulate employment. An important and timely implication of this finding is that the contrary policy of cutting spending during hard times can reduce employment. Nonpartisan private forecasters, like Macroadvisers, agree – in an analysis last week of the prospective impact of the mandatory spending cuts known as sequestration, it estimated that the spending cuts due to the sequester will result in 700,000 lost jobs by the end of next year.

3) Modest upper-income tax increases to offset sequester-related spending cuts would help preserve jobs:

…modestly sized tax increases on upper-income taxpayers have a negligible to small impact on job creation. These magnitudes are much smaller than those of cutting government spending in hard times, which suggests that using modest upper-income tax increases to offset some required spending cuts would help cushion the impact of the sequester on the labor market.

Read Zidar’s entire post at the New York Times Economix blog.

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