Friday, December 18, 2009


From Harvard econ prof Greg Mankiw in the December 13th New York Times:
When devising its fiscal package, the Obama administration relied on conventional economic models based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy. The report in January put numbers to this conclusion. It says that an extra dollar of government spending raises GDP by $1.57, while a dollar of tax cuts raises GDP by only 99 cents. The implication is that if we are going to increase the budget deficit to promote growth and jobs, it is better to spend more than tax less.

But various recent studies suggest that conventional wisdom is backward.

One piece of evidence comes from Christina D. Romer, the chairwoman of the president’s Council of Economic Advisers. In work with her husband, David H. Romer, written at the University of California, Berkeley, just months before she took her current job, Ms. Romer found that tax policy has a powerful influence on economic activity. According to the Romers, each dollar of tax cuts has historically raised G.D.P. by about $3 -- three times the figure used in the administration report. That is also far greater than most estimates of the effects of government spending.

Other recent work supports the Romers’ findings. In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that "deficit-financed tax cuts work best among these three scenarios to improve G.D.P."

My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded -- that is, those that were actually followed by robust growth -- with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.
As I've said.

(via Mankiw's Blog)


OBloodyHell said...

> But various recent studies suggest that conventional wisdom is backward.

"Keynesian" wisdom.

It's sorta like "liberal" logic.


Oh, my. I don't think I've ever had a more On Topic word verif: "trope".

A_Nonny_Mouse said...

And it makes sense when you think about it: a dollar spent by the government is probably $5 taxed from a live human, sent to the IRS, credited to the General Fund, allocated to "whatever special department", then disbursed. The thing is, every time that $5 is touched, a small part must be appropriated into somebody's salary.

I suppose that's why the word "bureaucracy" gets mentally translated to "waste and fraud" : the many, many hands touching each dollar as it moves through the system; receiving it one place and balancing those books; depositing it somewhere else and balancing THOSE books; transferring it to some Office of Disbursements, where it's moved to yet another department.... accounting for it & then allocating it, over and over again-- and each handler of all those dollars earns a salary, so in essence everybody who touches the money in any way collects a tiny bit for the work expended in doing so.