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Fiscal Policy in Good Times and Bad

Tim Mahedy and Daniel J. Wilson

FRBSF, 2018

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Typically, governments apply stimulus when an economy is in decline and then reverse course when conditions strengthen. But the 2017 US Tax Cuts and Jobs Act, implemented well into the eighth year of America’s expansion, seeks to boost and extend robust output. According to economists Tim Mahedy and Daniel J. Wilson in this brief but cogent analysis, evidence suggests such incentives are less effective during economic upswings than they are during downturns. getAbstract recommends this insightful research to economists and analysts.

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Federal fiscal policy is a tool for controlling the primary deficit – the difference between government spending (minus debt service) and government revenue as a percentage of GDP. Traditionally, fiscal policies imposed to reverse a downward turn in economic activity are countercyclical. In a decline, the goal is to spend money to rouse the economy from its doldrums. The US government typically spends more during a downturn due to “automatic stabilizer programs” such as food stamps and unemployment benefits, as well as due to “discretionary” expenditures, and that increases...

About the Authors

Tim Mahedy is an economist at Bloomberg LP, and Daniel J. Wilson is an economist at the Federal Reserve Bank of San Francisco.

Fiscal Policy in Good Times and Bad

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