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Publication Detail
AER 2007-02: Pragmatism in US Public Finance

In 1985, during the heyday of Reaganomics when the mantra was to reduce taxes and balance the budget by reducing the size of government and its expenditures, the US Congress passed the Gramm-Rudman-Hollings (GRH) Law. It required the reduction of the US budget deficit on a staggered basis until a balanced budget was attained by 1991. If the president and Congress failed to agree on which budget items to reduce, an automatic across-the-board reduction of expenditure on certain eligible categories would apply. Be that as it may, the GRH law has a certain provision in case of economic downswings that was in Section 254, titled “Special Procedures in the Event of a Recession.” Accordingly, the deficit reduction is to be suspended when a recession is (1) forecasted by the Congressional Budget Office (CBO) or Office of Management and Budget (OMB) or both, or (2) forecasted by the Bureau of Economic Analysis (BEA). In this way, the total expenditure of the economy does not slow down economic activity. It may even increase economic activity. The effect will supposedly either minimize the magnitude of the coming recession or even totally prevent the economy from plunging into recession. It reflects certain pragmatism in US fiscal policy with its willingness to set aside neoclassical prescriptions for a dose of Keynesian thinking. It is also pragmatic in the sense that it was willing to set aside ideology on predictions of government agencies, the scientific methods of which, though not full proof, are the closest they can get to crystal- ball forecasting. It is also pragmatic in the sense that though such policy shift may be late in preventing economic contraction, such lateness may still come handy to avoid a second wave of contraction.

Action for Economic Reforms
Authors Keywords
Dumlao, Luis F.; fiscal policy; Keynesian economics; neoclassical economics;
Download PDF Number of Downloads
Published in 2007 and available in the AER website or Downloaded 483 times since November 25, 2011
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