Economists, like psychologists, are stuck with the unenviable task of proving with data things that the rest of us intuitively already suspect to be true. It makes intuitive sense, for example, that a sharp, immediate program of tax hikes and spending cuts would be more destructive than the same-size hikes and cuts drawn out over several years.
A new working paper by Steven Pennings of New York University and Esther Perez Ruiz of the International Monetary Fund puts some limited evidence behind this intuition. Fiscal policy prescriptions rely on “multipliers,” assumptions of how much effect a given dollar change in taxes or spending will have. Larger multipliers assume greater changes. The working paper looks at the multipliers of 63 “adjustment episodes”—political decisions to carry out tax hikes, spending cuts, or both—between 1978 and 2009 in the 17 economies of the Organization for Economic Cooperation and Development.
