Fiscal Policy without Incentives: IMF version

The IMF had a recent conference on rethinking macroeconomics. I was not invited and did not attend, but watched the video. Conspicuously absent from the fiscal policy presentations is any acknowledgement that transfer spending in practice reduces the reward to work and as a result is "destabilizing." Nobody raises this issue, let alone explain why marginal tax rates and related incentives should be ignored. It is just common knowledge in this part of the macro community that marginal tax rates are so far down on the list of factors to be considered that they are not even worth one tenth of one percent of the presentation time.

The closest any presenter gets to this issue is that Professor Perotti takes 5 seconds to note that ALL of the econometric evidence on "government spending multipliers" are really estimates of government purchase multipliers and tell us nothing about the effect of transfers on GDP (see page 15 of the pdf containing his slides). Professor Roubini mentions "moral hazard" (approx the 60 minute mark of the video), but he is referring to incentives for government behavior, not inventives faced by households and nonfinancial businesses.

Professor Gordon talks about determinants of hours per capita (75 min mark), but fails to mention marginal tax rates or anything like a substitution effect! In his reply to Gordon, Professor Roubini takes 20 seconds to mention that "In France ... unemployment benefits are ridiculously high" (79:25), leaving open (but unsaid) that high unemployment benefits in other countries may be a factor.