Fiscal Policy in the Aftermath of 9/11
This paper investigates the nature of U.S. fiscal policy in the aftermath
of 9/11. We argue that the recent dramatic fall in the government surplus
and the large fall in tax rates cannot be accounted for by either the state of
the U.S. economy as of 9/11 or as the typical response of fiscal policy to a
large exogenous rise in military expenditures. Our evidence suggests that,
had tax rates responded in the way they ‘normally’ do to large exogenous
changes in government spending, aggregate output would have been lower
and the surplus would not have changed by much. The unusually large fall
in tax rates had an expansionary impact on output and was the primary
force underlying the large decline in the surplus. Our results do not bear
directly on the question of whether the decline in tax rates and the decline
in the surplus after 9/11 were desirable or not.
