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Thread: Stimulus spending really work?

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    Senior Member TXduckdog's Avatar
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    Default Stimulus spending really work?

    Not according to these Harvard economy professors.

    Here's their take:

    The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure "multipliers" are greater than one—so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

    The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.

    The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending.


    If this is true.....how is it that government spending enthusiasts can reconcile their underlying philosophy on a macro-economic level?
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    This spending might make a short term bandaid, but it is just going to cause worse long term problems. The biggest problem is the size of the govt. and its spending, which is getting worse by only getting bigger.

    The best way out of a recession, and the way to avoid recessions is through innovating, and creating environments for innovations. Historically the big innovations that brought us out of previous recessions were the age of the railroad, age of the automobile, telecom in the 1970's.... Existing stuff will wear out, and need to be replaced by newer and better stuff, which will break the down cycle. We had too many industries lineup for one big down cycle, and no political force would break that without allowing innovations.
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    Senior Member YardleyLabs's Avatar
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    Quote Originally Posted by TXduckdog View Post
    Not according to these Harvard economy professors.

    Here's their take:

    The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure "multipliers" are greater than one—so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

    The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.

    The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending.


    If this is true.....how is it that government spending enthusiasts can reconcile their underlying philosophy on a macro-economic level?
    Actually, the article is by one very reputable Harvard economist (Barrow), and a recently graduated student (Redlick). Barro's analysis of the multiplier effect (if any) of government spending suffers from the fact that the many of the periods he studied were economic booms when the effect of multipliers -- whether for tax cuts or spending increases -- are reduced because there is no excess capacity in the economy. In those cases, a portion of the new capital generated by the stimulus activities flows into inflation. Barrow argues that the multiplier effect reaches 1 -- that is, every dollar of government spending leads directly to a $1 increase in economic activity, when unemployment is in double digits. He argues that reductions in marginal tax rates increase GDP, but has not been able to demonstrate that on any long term basis. (See http://www.hoover.org/pubaffairs/dai.../63076872.html)

    Using Barro's logic, a short term government stimulus program financed through deficit spending will in fact produce immediate positive economic results. Those results could be undermined if the resulting deficit is then recouped through increased marginal tax rates, but not if recouped through tax revenue growth in response to normal economic growth. However, Barro is correct that there is no "free lunch". That is, there is no way to grow the economy in some perpetual manner through government spending any more than one can grow the economy through perpetual tax cuts. In a steady state economy, government should stay out of the way, neither trying to stimulate or restrict economic activity. The time ofr government action is only when the economy goes completely off track -- either growing to rapidly and incurring outlandish economic risks, or when it is collapsing. In those cases, any government action should be temporary.

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    Senior Member TXduckdog's Avatar
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    So Jeff...the initial Tarp outlay would be the short term stimulus you mention?
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    Senior Member YardleyLabs's Avatar
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    Quote Originally Posted by TXduckdog View Post
    So Jeff...the initial Tarp outlay would be the short term stimulus you mention?
    No, and in theory all or almost all of that money should come back.

    The only potentially valid reason for the original TARP program was to avoid a complete implosion of our system for moving money. There are many ways to organize a system for managing financial transactions. We have elected to manage our system through private banks operating largely on trust with massive intraday credit being extended to any participating bank as needed.

    In the pre-Depression era, the complete banking nightmare was a run on the bank by depositors. The FDIC and the Comptroller of the Currency were established to prevent such runs from causing the system to fail again. Today, however, the fear of failure by a single regional concentration bank (i.e., a bank with a central role in processing regonal transactions) can cause all financial transactions to grind to a halt. The TARP was created because the risk of bank failures was causing such a collapse.

    Without the bailout, however clumsily handled, we might easily have found ourselves in a situation where money could not be moved efficiently and our economy would have collapsed. The interesting question is not why did we intervene, but why have we relied on private credit agreements as the basis for ennabling cross country financial transactions at all. I am not happy about the way the TARP was organized and implemented, but i believe that Bush's willingness to do it is the only reason we avoided a depression level collapse last year.

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    Senior Member Buzz's Avatar
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    Here is some interesting commentary from Krugman:

    http://krugman.blogs.nytimes.com/200...iers/#comments

    Mark Thoma, Menzie Chinn, and The Economist all have posts on the question of the size of the fiscal multiplier.

    Mark already provides links to my various commentaries on Barro. But let me repeat the gist. Barro makes a great deal of the fact that private spending fell during World War II, rather than rising the way it should in a classical Keynesian (oxymoron?) story.

    What I and others immediately pointed out was that this tells us very little about what would happen under current conditions: during World War II there, um, was a war on: consumption goods were rationed, construction required special permits, and so on. The government was, in other words, deliberately suppressing private spending, through direct controls. So WWII is not a useful data point for determining what the multiplier is under other conditions.

    Barro’s response to this, as far as I can tell, was … nothing. I don’t think he even acknowledged the nature of the complaint.

    On a happier note, this piece by Ilzetzki et al is interesting, and offers a wide range of multipliers depending on a country’s situation. The question for the United States is which estimate is most relevant.

    I’d say it’s the fixed exchange rate estimate. Yes, I know, we have a floating rate. But they explain the relatively high fixed-rate number by pointing to Mundell-Fleming, which says that fiscal policy is effective under fixed rates because it doesn’t drive up interest rates (capital flows in). We’re in a similar position for a different reason: fiscal expansion doesn’t drive up rates because we’re at the zero bound.

    Oh, we’re also relatively closed.

    The thing is that both the fixed rate and closed multipliers are around 1.5 — which so happens to be just about the number assumed by Christina Romer in her analysis for the Obama administration. Just saying.
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    Senior Member TXduckdog's Avatar
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    Romer can't do better than ASSUME?

    That's encouraging.

    I wasn't aware Krugman was capable of such intellectual discussion. Refreshing, now he just needs to work on his integrity.
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    Gov't spending to create economic stimulus is like taking a bucket of water from one end of the pool and dumping it in the other end of the pool while spilling some water on the way- Steve Forbes
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