Category Archives: budget

Lessons from the Past (i.e., the Last Recession)

Remember “austerity” and “expansionary contraction” stories? Well, if you don’t, then gird yourself for another round of claims (primarily by non-macroeconomists) about how state and local governments need to tighten up their finances, by cutting spending (and cutting taxes to necessitate further spending cuts). Perhaps, we should consider expanding federal transfers to the states and localities…From the fourth round survey of the IGM/Fivethirtyeight Covid-19 panel:

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Ma, Rogers, Zhou: “Global Economic and Financial Effects of 21st Century Pandemics and Epidemics”

Addendum, A new paper by Chang Ma, John H. Rogers and Sili Zhou:

We provide perspective on the possible global economic and financial effects from COVID-19 by examining the handful of similar major health crises in the 21st century. We estimate the effects of these disease shock episodes on GDP growth, fiscal policy, expectations, financial markets, and corporate activity. Simple time-series models of GDP growth indicate that real GDP is 2.57 % lower on average across 210 countries in the year of the official declaration of the outbreak and is still 2.96 % below its pre-shock level five years later. The negative effect on GDP is felt less in countries with more aggressive first-year responses in government spending. Consensus forecast data suggests a pessimistic view on real GDP initially that lasts for two months, an effect that is larger for emerging market economies. Stock market responses indicate an immediate negative reaction. Finally, using firm-level data, we find a fall in corporate profitability and employment, and an increase in debt, the last of which is further reflected in higher sovereign CDS spreads.

Addendum, 4/1:

Impact on GDP growth expectations are illustrated in Figure 3:

One interesting (among many) policy relevant findings:

In countries with large responses of government expenditures, real GDP initially falls by 2.68% but the effect dies out in the second year. For the low government expenditure response countries, real GDP initially falls by 2.84%, an effect that is very persistent. Meanwhile, responses in government tax revenues do not make much of a difference.

Where Did All the Stimulus Go?

By April 2018, the Tax Cut and Jobs Act and the Bipartisan Budget Act of 2018 had been put into law. The CBO projected a bump in GDP growth, relative to counterfactual. (According to the CBO, the TCJA alone should have pushed output 0.6 percentage points above baseline in 2019.) However, the actual record has been fairly plodding, as shown in the below figure.

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When the Textbook Is Right: Implications of the Trump Fiscal/Trade Regime

Today we learned that through March, the Federal budget deficit was 15% larger than the corresponding point in the last fiscal year — as expected given a not particularly stimulative tax cut (so much for tax cuts paying for themselves, as Stephen Moore claimed) and the ending of spending restraints. The dollar remains at elevated levels, as interest rates have risen. The trade deficit, excluding petroleum, continues to deteriorate. As I explained to my macro class today… it’s all textbook (notes).

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The Reagan Tax Cuts and Defense Buildup: Supply-Side Miracle or Keynesian Stimulus?

I keep on hearing about the supply-side miracle associated with the the Reagan era tax cuts. What do changes in estimated potential versus actual output suggest?


Figure 1: Year-on-year growth rate of real GDP (blue), and of potential GDP (red), calculated as 4th differences of logged values. Dashed lines at effective dates for Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986. Source: BEA, CBO.

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