President George W. Bush is preparing a drastic permanent reduction in federal income and estate taxes. He cites as precedents tax cuts by Kennedy-Johnson 1962-64 and Reagan 1981. In those cases, however, the economy was operating well below full employment and needed a "demand-side" stimulus...

This is a critical survey of the literature on the implications of government financial policy for economic activity. The central question is whether the choice of how to finance a given path of government expenditures (i.e., through taxes, nonmonetary debt or money creation) has any real...