Thursday, July 01, 2010

Chart of the Day

From Christina Romer & David Romer, The Macroeconomic Effects Of Tax Changes: Estimates Based On A New Measure Of Fiscal Shocks (April 2009), at 18-19:
Figure 4 summarizes the results . . . by showing the implied effect of a tax increase of 1% of GDP on the path of real GDP relative to normal (in logs), together with the one-standard-error bands. Because of the simple structure of the regression, the implied effect after m quarters is just the sum of the coefficients on the contemporaneous value and the first m lags of the tax variable.

source: Romer & Romer, Figure 4

The figure shows that the effect is consistently negative. In the quarter of the tax change and the next two quarters, the effect is small and not significant. It is then steadily and rapidly down for the next two years before rebounding slightly in the final two quarters. The maximum effect is a fall in output of 3.08% after ten quarters (t = -3.53). In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.
Bush knew this. Obama doesn't, despite the fact that Christina Romer is Chairman of his Council of Economic Advisers. Instead, the President wants to out-spend Europe.

The deficit's already a disaster. Should Obama enact "Stimulus III", the next step might be a Greece-style sovereign debt crisis.

1 comment:

MaxedOutMama said...

It is an interesting paper but our current government policy refuses to acknowledge the findings.