choice problem into two distinct questions about the future course of the economy. the first is a collective one for american society : given the projected path for macroeconomic aggregates like consumption, output, and employment, are there alternative ( but resource - feasible ) paths that would be preferred? the second is a technical one for economists : given a desired path, what policy choices ( specifically, taxes and subsidies ) would give rise to that desired path? the answer to this second technical question is typically model - dependent. however, i suggest that a long - favored prescription of public finance economists – to lower the tax rate on physical investment – would give rise to higher output, consumption, capital, and employment in a wide range of models. this potential approach seems especially relevant given hall ’ s focus on the decline in capital over the past five or six years. 1 just to be clear : i ’ m not suggesting that the declines in economic activity described by hall are attributable to increased tax rates. bis central bankers ’ speeches mid - 20th century evidence the first part of my discussion centers on the evolution of macroeconomic data during and after the great depression. the great depression started in the united states in 1929. by 1933, key macroeconomic aggregates like tfp, real output, employment, and capital had declined sharply relative to their historical trends. the unemployment rate had soared from under 5 percent to over 20 percent. i examine the recovery of each of these variables in turn. i ’ ll begin with total factor productivity. cole and ohanian ( 1999 ) document that, by 1933, tfp was about 15 percent below trend. 2 it might well seem intuitive that such a profound decline would be challenging to reverse. but during the depression, tfp grew so rapidly that it had recovered to its pre - depression trend within three years after bottoming out in 1933. 3 there was also a dramatic turnaround in real output, employment, and unemployment, but this turnaround was much more delayed. ten years after the start of the great depression, real output remained about 25 percent below trend, employment was about 18 percent below trend, and the unemployment rate remained above 15 percent. it would have been natural to conclude that such persistent changes would prove to be permanent. of course, such was not the case. real gross domestic product ( gdp ) almost doubled from 1939 to 1944. 4 the unemployment rate fell by 13 percentage points in three years, falling from nearly 15 percent in 1940 to under 2 percent by

? the answer is that the marginal societal trade - offs implied by that desired allocation may not align with the marginal private incentives that arise in equilibrium. 9 but this problem can be fixed by choosing a system of taxes and subsidies that fills in the gaps between marginal societal and private trade - offs. given that system, the desired allocation then emerges as an equilibrium outcome. 10 as i say, in the abstract, this is all well - understood in public finance. in macroeconomics, this basic approach has been used to great effect by a number of authors since the pioneering work of lucas and stokey ( 1983 ). of course, the problem with this abstract approach is that it is hardly model - free. different models imply different marginal private incentives, and those give rise in turn to different i ’ m abstracting from the kinds of informational restrictions on tax systems that are explored in some detail in kocherlakota ( 2010 ). for plausible models of individual heterogeneity, these informational restrictions impose few limits on the set of aggregate outcomes that are achievable by a society. however, these informational restrictions do impose limits on social insurance and redistribution, and so may well affect societal preferences over aggregate outcomes. i ’ m assuming that the government has access to affine taxes, so that potential budget imbalances can be solved through an appropriate choice of an intercept for the tax system ( as in werning 2007 ). i ’ m also ignoring the potentially important issue of implementation ( to guarantee that there is no other undesirable equilibrium allocation ). bis central bankers ’ speeches implications for appropriate taxes and subsidies. given the current economic situation, i would – overly crudely – divide the empirically relevant models into two classes : demandconstrained and supply - constrained. the demand - constrained models imply that the key private incentives have to do with the willingness of households and firms to spend given the current real interest rate. the supply - constrained models imply that the key private incentives have to do with the willingness of businesses to expand production given their assessments of costs ( including taxes and regulation ). the two kinds of models can have very different implications for appropriate taxes and subsidies. for example, the supply - constrained models typically imply that employment will rise if there is a temporary cut in the payroll tax rate paid by employers. eggertsson ( 2011 ) shows that this implication is, in fact, reversed in demand - constrained models. fortunately, there is ( at least