What does a conventional (estimated) macroeconometric model imply for a sustained 7.7% increase in government consumption and investment as a share of GDP in terms of output.
There are at least two ways of proceeding. One could repeat the following mantra endlessly:
[T]he government taxes or borrows the resources used to build infrastructure projects. Government spending crowds resources out from the rest of the economy. More federal spending comes at the expense of a smaller private sector.
These factors explain why the 2009 stimulus failed. So did Japan’s decade-long attempt to stimulate its economy through infrastructure projects. The Japanese wound up with massive debt, superhighways in underpopulated rural districts—and an anemic economy.
Professor Tyler Cowen’s anti-Keynesian manifesto has been ably discussed by Professor Simon Wren-Lewis at Mainly Macro. I thought what merited additional attention is Professor Cowen’s first assertion:
1. Keynesians predicted disaster following the American fiscal sequester, and the pace of the recovery accelerated.
In 2010 as the Great Recession was releasing its grip on the world’s economy, the United Kingdom’s newly elected Conservative-Liberal government embarked upon a policy of fiscal consolidation—higher taxes and drastically reduced spending—with the aim of stabilizing the ratio of government debt to gross domestic product (GDP) while spurring economic growth….
If a collapse in aggregate demand is not at fault, then was an aggregate supply shift? A quick-and-dirty evaluation using some back-of-the-envelope calculations
OK, nothing about birthers, but some comments on truths held deeply, but unjustifiably, by certain types of people.
Today we are fortunate to have a guest contribution written by Jeffrey Frankel, Harpel Professor of Capital Formation and Growth at Harvard University, and former Member of the Council of Economic Advisers, 1997-99. He is currently a member of the National Bureau of Economic Research (NBER) Business Cycle Dating Committee.
It was five years ago that the ARRA was passed…and thence arose a fierce storm of criticisms, ranging from the idea that the stimulus would occur after the recovery was complete (e.g., Ed Lazear), to the Treasury view (government spending would crowd out completely private spending, e.g., Eugene Fama). Time to take stock. The Council of Economic Advisers has released its last report on the ARRA, and other stimulus measures, discussed in a blogpost by CEA Chair Jason Furman.
Contractionary fiscal policy is … contractionary
There has been some dispute over the robustness of the finding that countries that embarked upon fiscal contraction experienced lower growth. There’s also been some dispute over the proper time horizon (I used 2010-12 in this post.) Here I provide some additional information.