Tuesday, June 29, 2010

Applying the Chilean fiscal model to California state budgets

I've been meaning to blog about this idea for a while:  the Chilean counter-cyclical fiscal strategy could be used at the state level here in California and elsewhere.  The very simple idea is to run a governmental surplus in good times and a deficit in bad times, so the governmental spending reduces overheated economic bubbles and helps speed recovery from recessions.  They also used independent panels of experts to make sure the government isn't just skewing forecasts so it can spend as it desired.

As the link mentions, the panels correctly determined that copper exports were driven up by a bubble and saved the money, which came in very handy when the price collapsed.  So much for the excuses by many Bush-era policymakers that you can never tell if you're in a bubble until it collapses - you can tell (like the gold price bubble we're experiencing now), you just can't predict exactly when it will collapse.

I think the idea would work better if it begins implementation during a non-recession time period, but I'm not sure that's absolutely required.  It would also be interesting whether local level governments could apply it.

1 comment:

  1. No, no, no, you've got it all wrong. You cut taxes during a recession so you attenuate the burden on the taxpayers, and you cut taxes during growth so you don't stifle it.

    Also, something about tax cuts for the rich.


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