Misinformation in the talk-show world. From today’s Rush Limbaugh show (which is titled “A Teachable Moment on Tax Hikes”):
CALLER: Thank you for taking my call. I just wanted to point out something to you about your comments on taxing, and Obama’s own economic advisors agree with you, and it’s in a report that I found online. It’s the Economic Report of the President. It’s issued by the Council of Economic Advisors, which were appointed by Obama, and there’s an entire section in that report that says lowering tax rates stimulates economic growth.
RUSH: That was then. They have removed that from the website. What’s the woman’s name that wrote that? I’m having a mental block. Romer. Christina Romer. She wrote that. She put it on their website and once Obama won: Bam! It came off, and now in its place is: “Spending a dollar generates a dollar and a half.” It used to be, “Reducing taxes every dollar generates a dollar and a half,” or a half a dollar. They’ve totally reworked it. She’s been neutered, as it were.
There is are several errors in this exchange, but let me just identify a few of the most glaring.
- The Economic Report of the President, 2009 that is being referred to (and which I just got in the mail the other day, and is discussed in part in this post) is the last Economic Report of the President issued by the Bush Administration.
- While it is true that the White House website that had that particular CEA document online came down on January 20th, so did all the old WH websites (to my knowledge). That is standard operating procedure when the new administration comes in (I remember the 2000-01 switchover as I was there).
- Regarding “What’s the woman’s name…”, Professor Romer still has the paper I think Mr. Limbaugh means to refer to (although I admit it is hard to tell since he mangled the descriptions so badly) on her website. It is also still on the NBER website.
I thought these assertions needed correction, especially as I suspect that these conspiracy-oriented interpretations will creep into more popular discourse over time. In any case, not such a “teachable moment” I think.
You’re going to begin countering Rush Limbaugh now? Conspiracy-minded? Where has Econbrowser been the last 8 years as these types of things flooded the progressive air-and blog-waves? The focus on Limbaugh on the left is bizarre to me.
There are blowhards everywhere, I’m a little disappointed that econbrowser is descending into this kind of muck.
MM: Thank you for your constructive comments. I wrote on this subject — not because of Limbaugh — but rather because I get news alerts on the Economic Report of the President, and (as a contributor do one of the editions) I do not appreciate misrepresentations of the document, especially as I think it has been a useful publication, regardless of which Administration published it.
It is true that Romer has done research on tax cuts that don’t support what Obama is saying.
The Obama team multiplier is 1.57 for government spending and 0.99 for tax changes.
Here is what a research paper by Romer says,
“Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent.”
See Greg Mankiew’s January blog archives for more on this. This suggests that Rush Limbaugh is accurate. Romer is going against her own findings and supporting tax policies that will hurt the country. What say you?
methinks you dignify the issue too much by giving it serious consideration. Rush is probably of the mind that there is no such thing as bad publicity.
don: pavan’s remarks validate the reasons for putting up this post. The misinformation is already all over — and the fact that people choose to read blogs about papers, rather than reading the actual papers themselves is what allows these errors to propagate. So, I suggest people actually read the Romer and Romer paper, as opposed to bits of the abstract and intro.
Here’s an interesting article from The Economist.
http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=13185415&source=features_box3
Frankly no one cares what Rush Limbaugh has to say, but the fact is that Obama does paint a much rosier picture of his policy implications than does the general economics community. This should not surprise anyone. It’s in his self-interest to paint a rosy picture for himself. If his policy actually works. Great. He’ll boast of his great accomplishment. If it doesn’t work, he’ll use it as an excuse to ask the American people for more stimulus money. It’s a win-win situation for Obama and the Democrats. Unfortunately, I see this as ultimately being a lose-lose situation for the American people.
Christina Romer…in her own words…FRIDAY, 27 February 2009.
The Case for Fiscal Stimulus:
The Likely Effects of the American Recovery and Reinvestment Act
Christina D. Romer
February 27, 2009
http://news.uchicago.edu/files/newsrelease_20090227.pdf
Obama missed a huge opportunity. He acknowledges the politicians’ share of responsibility for the crises, yet we continue to allow them to not only assume their share of responsibility, but the Obama-lead government is desperately failing to set the proper example and share some of the pain. Workers and busines people throughout the country are forced to make major sacrifices now. Entrepreneurs are taking the brunt of the tax increases and will be saddled with a disproportionate share of the recovery bill later in the form of higher taxation and higher interest rates in future periods. Yet, we see little initiative on the part of government and politicians at every level to make similar sacrifices, to set an example, and to make an economic impact by reducing their very overhead, which serves as a drag on the economy for all. Obama missed a major opportunity to challenge Congress and every Federal, State and local government office and politician to reduce their spending, to do more with less, to cut out travel, entertainment, meals non-essential staff and perks. Finally, mandatory salary reductions at every level of government should be put into immediate effect, the higher the salary the larger the reduction. Staff numbers should be trimmed or cut back through 3- or 4-day work-weeks as possible. These are the very measures that businesses are taking in order to survive. The government is far more bankrupt than the average business, yet continues to fail to take responsible steps. It is disheartening to see Congress ostensibly congratulating themselves throughout Obama’s recent speach, seeming to pat themselves on the backs as our saviors, in light of the missed opportunity to put their own house in order by looking inward first and by restructuring our own bankrupt public institutions, starting with dramatic cost reductions at every level. It is time, US Government, to do more with substantially less, just as we are all being forced to do.
Discussions about multipliers are what happens when economic policy is viewed as a mathematical exercise rather than as the physical manifestation of ethical principles.
There are two basic ethical views in play these days. In one view people are responsible for their own lives and government’s role is restricted to enforcing property rights in the broadest sense. This leads to support for policing, a legal framework for commerce, a military and only enough social services to prevent anarchy.
Disturbances in the capitalist system are to be handled at a macro level via broad-brush policy adjustments such as those dealing with taxes. Suffering by individuals is tolerated for the “greater good” which will happen – eventually.
The second view is that government is an expression of the public desire for empathy and compassion. Individuals sacrifice by paying taxes, restraining themselves from committing acts of theft or cheating (even when they will be undetected) and helping the less fortunate.
In this view, taxes are not a burden, but more like a tithe that we have agreed to because certain functions must be managed at a society-wide level.
So back to multipliers. If we give money directly to those in need, whether through payments or tax cuts, then these people will be less in need. It’s that simple. Humanitarian aid helps humans. Whether this ultimately is the best course of action to affect things like the GDP is not a primary consideration.
All that need concern us is whether money spent on large-scale infrastructure programs has lasting value or not. So building F22’s does not, building high speed rail does. This type of multiplier is relatively easy to determine.
Why we have such a large group in positions of influence who are bereft of any feelings of empathy for those in need is something for social scientists or philosophers to ponder.
I’m constantly reminded of the last days of the French royalty. The aristocracy was clueless as to the state of society. They even built themselves fake farms with clean animals so that they could experience the rural life. Their version of Disneyland.
Advancement of careers and programs was done on the basis of cronyism, bribes and flattery at court. We know how that ended.
Bring down social and economic disparity and things will get better. While you are doing it there will be less suffering. After you have reached your goal society may be back at the prior level of GDP or it may not, but at least all will be sharing a common fate.
Methinks it is quite odd that a debate over fiscal policy is even being waged at all given the larger economic crisis that faces our planet. To me, it is akin to happily making my daily egg pickup and not realizing that the hen house is burning.
I have been trying to figure out how a resolution as to the best way to strategize fiscal policy has anything to do with resolving the most serious financial crisis since the Great Depression?
Isn’t there a real possibility that some large complex financial institutions are insolvent? That is, the face value of the liabilities exceed the current value of their assets? Shouldn’t we be talking about what the proper role of government should be in whether or not to nationalize the banks? Isn’t the real set of problems/questions here more a function of basic system viability including either rebalancing or collapse than it is dwelling on how policy is constructed? If the system is no longer viable, does it really make sense to debate the merits of policy inputs/outputs?
Most of my friends are a little scared right now. One of the things that I hear a lot is “I don’t know who to believe.” My advice to them is not to believe anyone who has an ideological axe to grind. That said, I and my friends really think it important not to lose sight of what is really important here: what factors have led us to this point, what are all of the possible outcomes, and what new arrangements will we have to consider. I’m just a college dude with little knowledge of all of this, but these are some of my questions?
It looks as if Rush Limbaugh is a lot closer to the truth than the Obama administrations seems to be. Romer used to favour tax cuts over government spending as a way to stimulate growth and government spending has never been a solution to economic problems.
“government spending has never been a solution to economic problems”
and neither has been “cutting taxes”(another myth). Hence no fats isn’t any closer to the truth. Sadly, misunderstood that.
VangelV: I’m curious to see where C. Romer makes the statement that she prefers tax cuts to spending increases. I look forward to seeing the URL.
It is true that if you cut taxes while you increase spending the economic problems will get worse.
For an effective strategy taxes and government spending need to be cut. That is exactly what Harding did to quickly end the post WWI Wilson depression. By increasing both taxes and spending Hoover/FDR managed to turn what should have been a sharp but brief correction into a Great Depression. Sadly, Obama has chosen the Hoover/FDR route and is ignoring Harding’s great example. As such, one would expect similar results to those that were seen in the 1930s and the most that can be accomplished is to temporarily blow up some other bubble that will prevent the necessary liquidation of malinvestments that cannot be supported by economic reality.
The simple fact is that both major parties in the US are in favour of big government and have no trouble with spending as much as they can to obtain political power regardless of the long term implications for Americans. If Americans want to be free and prosperous they need to reject both major parties and go back to the libertarian roots that made the country great in the first place.
And for the record, it is no secret that Christina Romer has observed that tax cuts have a larger multiplier effect than spending increases. You can find that in the paper below.
http://www.econ.berkeley.edu/~cromer/draft1108.pdf
This discussion is as garbled as the Limbaugh exchange with his caller. They shifted back and forth between Obama’s election web site and the White House site, and between Christine Romer’s comments on tax cuts and GDP.
Reading here there is also the switching back and forth between the effect being on tax cuts and on GDP.
But this is worse than a talk show because it is supposed to be intelligent people doing proper research and posting truth. I guess I am still wearing my rose colored glasses.
Thanks Movie Guy for being about the only one to post something consistent and intelligent.
“But this is worse than a talk show because it is supposed to be intelligent people doing proper research and posting truth. I guess I am still wearing my rose colored glasses.”
It is supposed to be about proper research and truth. Sadly for many of the statists the truth is that bigger government and higher taxes have never worked. While Rush Limbaugh said some good things about the need to reduce government expansion and increasing economic liberty he was a Bush supporter when the president expanded government spending and decreased liberty.
As for Christine Romer, her paper made the observations very clear. “Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5%. We also find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.”
It seems to me that an intelligent debate would include real world observations that are backed up by sound theory, not politically motivated spin that is based on economic theories discredited a very long time ago. My money is on the economists who saw the crisis coming a long time ago and who patiently explained why the monetary system in the US would crate a massive problem that would make Americans much poorer. On the political front the only person that has consistently supported such views and has argued for both social and economic liberty has been Ron Paul. Rush Limbaugh and Barrack Obama may have a few ideas that are good but they are the opposite side on the anti-liberty statist coin. Both need to be rejected by rational thinkers but voters have proven that they are not exactly rational.
VangelV: Isn’t this the same paper that says: “Government spending, especially large military actions, can have a powerful impact on output.” I challenge you (and Anonymous 6:49AM) to find in that paper a statement to the effect that “tax cuts are better than spending”, which is what you originally asserted Romer said. I think it more proper to say that’s your assertion, not hers.
Menzie long ago gave up proper research and truth, prefering istead to engage in raw political spinning with pseudo-technical justification: it’s so sad, really.
This blog once was a great source of econ info and thought; now, JDH mostly keeps up his end while Menzie runs around waving his flag. Too bad he doesn’t do it well enough to earn an opinion column in the real press.
Movie Guy, thanks for that reference.
Menzie, do you have a comment on that interview? I like the humble approach she takes where she points to omitted variable bias and says that there is a lot of uncertainty in these estimates.
Somehow I suspect that the number of instances in which there were tax cuts or increases that were clearly exogenous by the Romers’ criteria has been so small that it’s likely the effects they saw were due to pure chance.
If so, their analysis has mathematical defects far more fundamental and important than “missing variables”. Romer writes that, “To address the problem of omitted variables, David and I used narrative evidence to isolate tax changes uncorrelated with other factors affecting output.” Thinking back over the last four decades of history I’ve lived as an adult, I find it very difficult to recall any time when there were significant tax changes in the absence of other major events that could have influenced GDP over the next few years. Unless their methodology was able to control perfectly for all such effects — technological breakthroughs, financial crises, the fall of communism, etc — which seems unlikely, then if their number of instance is small, which seems likely, the results they saw could easily be due to pure chance. It’s not unusual to get four heads in a row when flipping coins. But as Menzie says, I should read the paper, not just snipe at the abstract.
Dr. D: You are right. I shouldn’t have written that post on the real business cycle approach.
MikeR: I think we should all be humble about multiplier estimates. That’s why I posted this table of the range of multipliers from the CBO (as well as the range of impacts, in this post and in this post, respectively). I think I’ve tried to be honest about the range, and when I have cited implied changes in output from stimulus, I’ve used the mid-point of CBO ranges, not my own selection of maximal multipliers. What more can I do?
“VangelV: Isn’t this the same paper that says: “Government spending, especially large military actions, can have a powerful impact on output.” I challenge you (and Anonymous 6:49AM) to find in that paper a statement to the effect that “tax cuts are better than spending”, which is what you originally asserted Romer said. I think it more proper to say that’s your assertion, not hers.”
I refer you to Romer’s papers, where she observes that tax cuts have a higher multiplier. (I provided the link to one such paper.) If the objective is stimulus it is obvious that the real world observations favour tax cuts over spending.
It is time that big government Republicans and Democrats started to look to objective evidence (and morality) over ideology.
Vangel: But I’ve read the paper. Nowhere does it say that tax multipliers are bigger than government purchases multipliers. If you can point out the specific passage (and quote), I would be much obliged.
“I think we should all be humble about multiplier estimates. That’s why I posted this table of the range of multipliers from the CBO (as well as the range of impacts, in this post and in this post, respectively). I think I’ve tried to be honest about the range, and when I have cited implied changes in output from stimulus, I’ve used the mid-point of CBO ranges, not my own selection of maximal multipliers. What more can I do?”
I take it that you have not kept up with the discussions. The multiplier for government spending has been found to be between 1 and 1.4. (I think that the range is too high but will accept the numbers for now.)
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
Romer found that the tax multiple was much higher.
“In terms of consequences, there are six main findings. First, tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent. Second, these estimated effects are substantially larger than those obtained using broader measures of tax changes, such as the change in cyclically adjusted revenues or all legislated tax changes. This suggests that failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent. The behavior of inflation and unemployment suggests that this persistence reflects long-lasting departures of output from its flexible-price level, not large effects of tax changes on the flexible-price level of output.”
If you think about it, a multiple of 3 is preferred to a multiple of 1-1.4, even if you thought that government spending could provide a positive effect on growth.
VangelV: You’re trying to change the argument so you can compare apples and oranges. Recall you original statement (March 1, 8:23 pm):
Your quote in no way validates this assertion. What you’ve done is to say her estimates of the tax multiplier (for exogenous changes) is bigger than somebody else’s estimate of the government purchases multiplier. That is distinctly different from what you orginally asserted.
The reason you can’t validate your original assertion is because it isn’t true. So please just admit it.
Now if you want to say Romer’s estimate of the exogenous tax change multiplier based upon a narrative/VAR approach is bigger than Greg Mankiw’s (or Joe Blow’s) estimate of the government purchases multiplier, that would be legitimate.
“Your quote in no way validates this assertion. What you’ve done is to say her estimates of the tax multiplier (for exogenous changes) is bigger than somebody else’s estimate of the government purchases multiplier. That is distinctly different from what you orginally asserted.”
Of course it validates the assertion. The idea of stimulus is to get the economy moving. Romer and others have observed that tax cuts have a higher multiplier than government spending. (Please note that it is my assertion that government spending has a negative multiplier. I maintain that the government misallocates limited resources and when it taxes to spend (which it must unless it just printes the money) the real economy takes a hit and underperformes. I know that all of you Keynesians are still enamoured with government spending but history shows that it does not work.
Vangel: Proof by repeated assertion in the absence of evidence is a time honored tradition, but not one that flies here. You still have not provided the specific quote from Romer and Romer wherein they argue that their estimates of the tax cut multiplier is larger than their corresponding estimate of the exogenous government purchases multiplier.