Fiscal imbalances can have adverse long-term macroeconomic consequences. Designing responsible, effective economic and social policy—and understanding its true costs and economic impact—requires dispassionate, scientific analysis of the intertemporal dimensions of taxes and government expenditures over time.
The Becker Friedman Institute's fiscal studies initiative works to nurture more credible evaluations of current and alternative fiscal policies, engaging some of the leading thinkers on the topic who explore it through a broad array of macro- and microeconomic research.
Through rigorous research, conferences, and public panels, the initiative stimulates and supports new lines of inquiry that will help fill important knowledge gaps in this area. Efforts focus on three fundamental questions:
1. What do we learn going forward about fiscal histories from the US and from Latin America?
2. What are the fundamental interactions between fiscal and monetary policy?
3. What are the problematic components to tax systems and what improvements will remove counterproductive disincentives and improve economic efficiency?
This initiative is supporting ongoing work by Thomas Sargent and George Hall to author a comprehensive fiscal history of the United States. They are gathering data on every U.S. bond ever issued going back to colonial days, and drawing important lessons about how the nation has financed wars, railroads, and other investments. Sargent, a Distinguished Research Fellow, has presented aspects of this work several times at institute events. He made the case that the fledgling government's agreement to take on the debts of states was, in effect, a quiet political revolution that forged a unified nation. More recently Sargent and Hall have focused on the history of federal debt limits, finding that Congress stuck to limits up until 1939.
In this vein, our new Fiscal Insights series featured Honoring Public Debts, Thomas J. Sargent's article exploring the historical and political forces shaping decisions about debt and taxes and the lessons they offer us today.
Another major component of this initiative is a comprehensive comparative study of the fiscal and monetary history of Latin America. Since the 1970s, the region suffered economic stagnation and decline while most other nations enjoyed steady growth. To understand why, this project will examine the impact of past aggregate fiscal and monetary policies on the region's poor growth performance. Teams of economists will analyze economic data from the nine largest economies in the region, meeting periodically to review findings. The project will result in published histories that will offer lessons for future fiscal policy.
- April 11-12, 2014: Initial Conference (Chicago, IL)
- Aug. 18, 2015-Aug. 12, 2016: Case Studies (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uraguay, Venezuela)
- Jan. 8, 2016: Case Studies (Colombia, Ecuador, Mexico, Paraguay, Uruguay) 2015-Summer 2016:
The Becker Friedman Institute gratefully acknowledges support for this initiative provided by Donald R. Wilson Jr., AB’88, Edward R. Allen, PhD’92, and Claudio Haddad, PhD'73.
A major effort in this area was a conference entitled The Next Steps for the Fiscal Theory of the Price Level (April 2016), which explored research examining how fiscal policy and the resulting debt levels influence inflation. The theory suggests that the traditional roles of managing inflation with monetary policy and stabilizing debt with fiscal policy can be reversed. In a period where central banks' monetary options are limited by interest rates stuck near the zero lower bound, the fiscal theory offers a potential option for managing economies.
Optimal Taxation, Incentives, and Growth
Richard Blundell, a Distinguished Research Scholar with the Institute, leads ongoing research in this area. He was an organizer in The Facts About Taxes: The Empirical Foundations of Supply-Side Economics (September 2013), an institute conference that gathered some of the world's leading experts to explore the evidence on how people and firms respond to various tax policies. By examining how taxes shift decisions about labor supply, skill formation, savings, capital income, and business activity, the conference shed light on optimal tax policies that encourage growth and ensure sufficient revenue. Aimed at policy makers and opinion leaders as well as researchers, the conference aimed to inject facts into public discussions of tax reform.
Working papers and other fiscal studies-related research shared with the institute are compiled and available here.