Just read through it quickly.
Assumptions:
First, they use a full Ricardian assumption- lower taxes now ‘price in’ the higher taxes later to keep the budget balanced long term
Second, because real rates go up as nominal rates hit zero expectations are for lower prices and therefore spending goes down.
Third, as real wages go up with payroll tax cuts, the desire to work is assumed to go higher, putting downward pressure on wages and costs, reducing prices on the supply side, also raising real rates as the nominal rate can’t go any lower.
Without the Ricardian assumption it all comes apart, best i can tell so far.
And most economists reject that assumption as it means you could cut taxes all you want with no effect as people don’t spend in anticipation of higher taxes later. So that argues for cutting taxes to 0, since it won’t change spending.
So what they do is break the world into Ricardian and non Ricardian agents, and then try to determine effects of deficit changes, etc.
It gets very silly. Especially when recognizing there is no ‘natural force’ that balances the budget over time, while there are ‘natural forces’ (further influenced by institutional structure) that promote the accumulation of net financial assets in the non govt sectors which can only be supplied by govt deficit spending.
It comes from not understanding the currency itself is a (simple) public monopoly, and not just a numeraire in a relative value new Keynesian model.
A new analytical low for the cycle and a black mark for the NY Fed:
Link
Federal Reserve Bank of New York
Staff Reports
What Fiscal Policy Is Effective at Zero Interest Rates?
Gauti B. Eggertsson
Staff Report no. 402
November 2009
Abstract
Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.
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