284 research outputs found
"The Investment-Finance Link: Investment and U.S. Fiscal Policy in the 1990s"
No full textIn this working paper, Steven Fazzari presents new empirical research that attempts to measure the relative strength of fiscal policy on investment through the cost of capital, firms' financial circumstances, and sales growth. Fazzari argues against the crowding-out effect and claims that even if the connection between the national budget deficit and interest rates is valid, the linkage between interest rates and private sector investment is at best, misguided. While neoclassical empirical studies have found a statistically significant relationship between investment and the cost of capital, Fazzari contends that high degree of explanatory power yielded by many of these investigations is due to the fact that they fail to separate the effects of sales or output growth from the cost of capital in determining investment, which renders the source of their significance unclear. The focus of fiscal policy is therefore difficult to determine.
"Capital Gains Taxes and Economic Growth, Effects of a Capital Gains Tax Cut on the Investment Behavior of Firms"
No full textResearch Associate Steven M. Fazzari and Benjamin Herzon assess the effect of a capital gains tax cut on firms' decisions to undertake new investment projects and the possible effect of such projects on economic growth and employment. Their analysis takes into account such factors as projects' degree of uncertainty, investors' degree of risk aversion, whether capital gains losses are deductible against capital gains income, whether the market value of an investment project is affected by the imposition of capital gains taxes, and whether the project is financed by internal or external means. Fazzari and Herzon find that there is little theoretical or empirical basis for the view that lowering the capital gains tax rate would have a substantial effect on economic growth or level of economic activity. They estimate that the current proposal to lower the highest capital gains tax rate from 28.0 percent to 19.8 percent would have a long-term effect on the level of output no greater than the impact of roughly two months of normal economic growth, and it would take years to realize even this small benefit. Indexing the rate to inflation would have a somewhat larger, but still small, effect. Fazzari and Herzon conclude that capital gains taxes have a negligible influence on investment decisions and dispute the claim that a lower capital gains tax rate would have large beneficial effects on output, growth, or entrepreneurial activity in the U.S. economy.
Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints
No full textKaplan and Zingales [1997] provide both theoretical arguments and empirical evidence that investment-cash flow sensitivities are not good indicators of financing constraints. Fazzari, Hubbard and Petersen [1999] criticize those findings. In this note, we explain how the Fazzari et al. [1999] criticisms are either very supportive of the claims in Kaplan and Zingales [1997] or incorrect. We conclude with a discussion of unanswered questions.
Rising inequality is holding back the U.S. economy
No full textWhy has the U.S. economy been so sluggish to return to growth in the aftermath of the Great Recession of the late 2000s? In new research, Barry Z. Cynamon and Steven M. Fazzari find that the current level of household demand is more than 17 percent lower than its pre-recession trend, preventing a stronger recovery. They argue that in the lead up to the Great Recession, households compensated for rising inequality and stagnant wages by borrowing more, something that became unsustainable when the financial crisis hit. For the U.S. to achieve robust growth rates once again, the gap in demand that opened with the collapse of household spending in the Great Recession will have to be closed, preferably through wage growth across the board
"Capital Income Taxes and Economic Performance"
No full textTax reform that reduces tax rates on capital income, no matter how successful it is in reducing the user cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the U.S. economy.
Financial fragility and income inequality
No full textAfter the financial crisis of 2007/2008 academics and policymakers have turned their attention to how private debt can affect, significantly, the economic performance of a country.
In the period of the “Great Moderation”, the increasing level of income inequality, together with structural transformations, has created an environment where a large portion of the private sector was more prone to rely on bank credit in order to finance its expenditure. While borrowing can have a first expansionary impact, because of the increase in the purchasing power of the borrowers, the increase in the stock of debt in the “medium-term” can have different negative effects. Debt repayment transfers resources to “high propensity to spend” agents (borrowers) to “low propensity to spend” agents (lenders). The impact of this income transfer can have a negative impact on final expenditure and, thus, on GDP. The increase in the stock of debt leads to an increase of the fragility of the household sector because of its increase in the vulnerability to different kind of shocks such as: an increase of the interest rates, a sudden decrease of the disposable income, a collapse of the assets used as collateral, and to possible changes of the attitudes of the lenders.
Starting from this, we developed three different theoretical models in order to describe the impact of an expansion of household debt, in an environment of high-income inequality
Tax reform and investment: blessing or curse?
No full textTax reform ; Capital investments ; Corporations - Taxation
"The Investment-Finance Link, Investment and U.S. Fiscal Policy in the 1990s"
No full textFazzari offers evidence that policies aimed at stimulating private sector investment through interest rate reductions are, at best, misguided. He concludes that because of the nebulous effect of interest rates on investment, while there may be benefits from policies aimed at increasing saving or lowering the budget deficit, a higher level of business investment is not one of them. Rather, because of the sizable effects of the business cycle and financial channels on investment, such a program will weaken the economy in the short run and curtail investment, with lower interest rates having little counteracting effect. A similar argument can be made about programs that attempt to reduce interest rates by promoting a rise in saving. If policymakers aspire to raise investment, they should look to actions that affect firms' access to internal finance directly, such as an investment tax credit.
Tax reform and investment: how big an impact?
No full textCapital investments ; Corporations - Taxation ; Tax auditing
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