Question: In his 1964 presidential campaign, Barry Goldwater argued that a reduction in both government spending and taxes would boost economic growth. His views were disparaged by most economists and he was overwhelmingly defeated. The winner of that election, Lyndon Johnson, initially cut spending and taxes, returning the government budget to surplus, and the economy prospered. Later, he raised spending and taxes, and the economy plunged into recession.
(A) Based on positive economics only - i.e., ignoring your political persuasion - do you think there is enough evidence to support the Goldwater position?
(B) If your answer to (A) is yes, why do you think the overwhelming majority of economists opposed his plan? If your answer is no, explain what other factors would be required to explain what really did happen.
(C) In 1981 and 1982, the Reagan Administration boosted spending and cut taxes, and shortly thereafter the economy entered an extended period of expansion. Was that the correct fiscal program to undertake?
(D) In 1993, the Clinton Administration reduced spending and raised taxes, and the economy entered another extended period of expansion. Was that the correct fiscal program to undertake? If so, how does that compare with your answer to (C)?
(E) It should be clear from the answers to (A)-(D) that factors other than fiscal policy are responsible for determining economic performance. Indeed, those factors will be discussed in the remainder of this book. At this point, based on the material in this chapter, what other factors need to be considered?