Long but interesting read on stimulus economics

[volinbham]

Crisis Economics > Publications > National Affairs

I found this part particularly interesting:

And, as we have seen, the Obama administration's economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts.

But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama's Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper ("The Macroeconomic Effects of Tax Changes") that sought to measure the influence of tax policy on GDP. Crucial to the Romers' method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such "exogenous" tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions.

The Romers' conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 — in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama's advisors assumed it was during their policy simulations.

 

[droski]

mulitpliers really are garbage projections (spoken from someone that used them every day when i worked for an economic consulting firm). that isn't to say i preferred obama's solution. edit: good article though

 

[lawgator1]

This question is totally apolitical.

How valid are these studies? It seems to me that the number of variables is so astronomically high in any given situation that a snapshot of the economy at a completely different time could yield an enormously different result. Again, apolitical. I guess I just doubt all of the studies on the effects of either stimulous or tax increases or cuts.

 

[OrangeEmpire]

D@#m straight! Tax the successful b@$tards who work!

 

[droski]

frankly i can't think of way you could really accuratly project multiplier effects practically. a better way is to look at the initial spending i.e. factor gov't waste and usage of the money with spending and consumer spending habits with tax decreases.

 

[OrangeEmpire]

frankly i can't think of way you could really accuratly project multiplier effects practically. a better way is to look at the initial spending i.e. factor gov't waste and usage of the money with spending and consumer spending habits with tax decreases.

:lolabove::lolabove::lolabove::lolabove::lolabove::lolabove:

 

[J-P]

This question is totally apolitical.

How valid are these studies? It seems to me that the number of variables is so astronomically high in any given situation that a snapshot of the economy at a completely different time could yield an enormously different result. Again, apolitical. I guess I just doubt all of the studies on the effects of either stimulous or tax increases or cuts.

Now if you would just apply a fraction of that skepticism to the Obama-meister, you might actually get your sanity back. :whistling:

 

[volinbham]

This question is totally apolitical.

How valid are these studies? It seems to me that the number of variables is so astronomically high in any given situation that a snapshot of the economy at a completely different time could yield an enormously different result. Again, apolitical. I guess I just doubt all of the studies on the effects of either stimulous or tax increases or cuts.

There is a reason the phrase ceretis paribus (all else equal) is well known among economists.

While I'm not an economist, it seems that study into "incentives/disincentives" is where the gold is. Tax policy is much closer to this than aggregate demand stimulation.

The problem with government trying to manage the business cycle (particularly Keyensians) is that they only want to manage the downsides but if their theories are true, they actually fuel the upside into bubbles that bring the resulting trough. The political fall-out from attempting to slow growth, slow asset value growth, etc. makes it untenable.