The Berkeley View: Fiscal Stimulus Rules

Scott Sumner questions the validity of the majority on fiscal stimulus:

Most economists who talk about fiscal stimulus in the press seem to assume that economic theory predicts it’s effective whether you are at the zero bound or not.  So that’s my question; where do economists get this idea?  I know where I got the idea, I was taught the crude Keynesian fiscal stimulus model in college. But I later unlearned it.  Is it possible that most economists learned the model just as I did, and never unlearned it?

And he links to:

From Laura D´Andrea Tyson:

The table below highlights three of these tax changes — the Reagan tax cut of 1982, the Clinton tax increase of 1993 and the Bush tax cut of 2003 – and subsequent employment growth. Strong employment growth followed the Reagan cut, but the employment growth following the Clinton tax increase exceeded the employment growth following the Bush tax cut, which was comparable in size to the Reagan cut.

Another Berkeley star goes down the same route:

From Christy Romer:

Without knowing where the economy was headed in the absence of the stimulus, it’s impossible to judge what it contributed just from what happened afterward. That’s why empirical economists rely on other approaches.

One is to look at history. The stimulus legislation, technically known as the American Recovery and Reinvestment Act of 2009, was a mixture of tax cuts for families and businesses; increased transfer payments, like unemployment insurance; and increased direct government spending, like infrastructure investment. A growing literature examines the effects of such tax cuts and increases in government spending over history and across countries, and the overwhelming conclusion is that fiscal stimulus raises employment and output in the near term.

It is interesting to note that Christy Romer has at other times endorsed NGDP Targeting:

Mr. Bernanke needs to steal a page from the Volcker playbook. To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.

Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.

The charts below indicate she´s right on that count. So let us forget about ‘fiscal stimulus’, which more hinders than helps, and keep to the premier stabilization tool, Monetary Policy, preferably gearing it to target a level growth path for nominal spending.

One thought on “The Berkeley View: Fiscal Stimulus Rules

  1. Even as economists move past the initial “crude” model, much of the public hasn’t really been able to do so. Many still have the same (initial) impression I gained from a beginning macro lecture some years ago: that government should be able to do the “heavy lifting” in fiscal terms but since the process is slow and cumbersome, monetary policy is “quicker” with more immediate results. Small wonder it’s so easy for people to confuse fiscal and monetary policy! Plus the process has been made all the more difficult by both the dominance of creditism in recent decades, and overreactions to both fiscal and monetary policies.

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