I’ve been thinking about why the numbers that are typically bandied about in policy circles (at least that I’m familiar with) have so little impact on the overall general and blogosphere debate (see some examples here and here). I think it’s part ideological, and part methodological. I can’t do much about the first (e.g., tax cuts good, spending on goods and services bad — unless on defense; or alternatively “let the market adjust no matter how long it takes”). But at least I can lay out why reasons why there is disagreement on the size of the multipliers.
Category Archives: multipliers
Budget Surplus? Tax Cut! Budget Deficit? Tax Cut! High Energy Prices? Tax Cut! Deep Recession? More Tax Cuts!
I see a pattern. For some people, the answer to every question is…a tax cut! From WSJ on 29 January:
There’s a serious debate in this country as to how best to end the recession. The average recession will last five to 11 months; the average recovery will last six years. Recessions will end on their own if they’re left alone. What can make the recession worse is the wrong kind of government intervention.
Multipliers, again
From CBO Director Doug Elmendorf’s testimony yesterday, some numbers relevant to the ongoing debate over fiscal policy efficacy [1] [2]:
Five Reasons Why Fiscal Policy Might Be Completely Ineffective: A Textbook Exposition
It’s been frustrating to me that so much virtual ink has been spilled about why the fiscal package will or will not be effective, with so little clarity. Lots and lots of words are being thrown around, [1] [2] when a lot of the arguments can be summarized pretty easily in terms of four cases, and hence four graphs (I won’t deal with the fifth, in detail). There are numerous excellent critiques; here in the interest of specificity, the exposition will be fairly dense.
1. With prices predetermined, the interest sensitivity of money demand is zero, or the income sensitivity of money demand is infinite.
2. With prices predetermined, the interest sensitivity of investment or the sensitivity of net exports to interest rates are infinite.
3. With prices predetermined, the sensitivity of money demand to wealth is high.
4. Output is at full employment levels.
5. Neo-Ricardian equivalence, as put forward by Barro, holds.
One of My Favorite Papers on Multipliers
Germane to some of the ongoing debates over fiscal policy effectiveness [1] [2]:
Fiscal policy multipliers are central to Keynesian macroeconomics. In this paper I explore a
possible microeconomic foundation for one fundamental theory of income determination, the
‘Keynesian cross’. My model deviates from a Walrasian equilibrium model only by the assumption
of imperfect competition in the goods market. I show that textbook fiscal policy multipliers arise as a
limiting case.
Estimated Impact of “American Recovery and Reinvestment Plan”
By way of Paul Krugman, here is the estimated impact on employment provided by C. Romer and J. Bernstein.
Pocketful of Multipliers (II): Options for Stimulus Packages
As the debate over the nature and size of a stimulus package wends its way through the Congress [0], [1], [2], I thought it would be useful to bring numbers into the debate, especially as we are considering fiscal stimulus in a time when the Bush Administration has constrained, by dint of previous profligacy, our options. In particular, I want to return to the issue of multipliers, discussed in nearly a year ago. Here, I want to provide a little more specificity, regarding the impact depending upon the type of outlays.
More Thoughts on Fiscal Stimulus: Business Incentives
What does the literature say about the efficacy of incentives for investment?
A Pocketful of Multipliers
…or putting some bounds on the magnitudes of effects.
knzn at Economics and… had an interesting post the other day on “The Indirect Effects of Export Demand”, which seems particularly germane to the current situation. After all, net export demand is one of the few bright spots in the US economy.