The stimulus is about one-third tax cuts and two-thirds government spending. The trade-off is fairly simple: Tax cuts work quickly but ineffectively, because much of the money is saved. Most government spending takes longer to implement, but generates more impact because the money is spent.
Um, according to the Obama Party's own chief economic advisor, bullshit.
A key issue facing the new Obama administration is to what extent the economic stimulus should take the form of spending increases versus tax reduction. One way to think about the issue is the size of the fiscal policy multipliers. The multipliers measure bang for the buck--the amount of short-run GDP expansion one gets from a dollar of spending hikes or tax cuts.
So what are these multipliers? In their new blog, Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar. Similarly, the results in Valerie Ramey's research suggest a government spending multiplier of about 1.4. (Valerie does not present her results in multiplier form, but she emails me this translation: "The right column of figure 5A of my paper shows that for a log change of government spending of 1, log GDP rises by 0.28, implying an elasticity of 0.28. To back out the implied multiplier, we can use the fact that government spending averages around 20% of GDP. This implies a multiplier of 1.4.")
By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars. The puzzle is that, taken together, these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favorite textbook, spending multipliers necessarily exceed tax multipliers.
So when that blows up, again, the
Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.
Economists call it the "paradox of thrift." What's good for individuals — spending less, saving more — is bad for the economy when everyone does it.
Little did I know how much my grandparents hated America when they bought a house with cash and just used their old living room set; if they had been truly patriotic, they would have taken out a no-money-down subprime mortgage, maxed out their cards to fill it with furniture, and then demanded that their Social Security checks be increased to pay their interest costs.
And how evil and unpatriotic I am for buying a seven-year-old American-brand car with cash; had I really cared about the good of our country and self-sacrifice, I would have spent nine times the amount to impress the neighbors with an appropriate high-end brand, borrowed it all, and spent eight years paying through the nose for depreciation, interest, and insurance.
However, because of this treasonous behavior, our banks have one less toxic mortgage, bad credit card, and nonperforming auto loan -- and two rapidly-growing savings accounts. Meanwhile, my financial terrorism against the United States has made several hundred more dollars a month available for me to use in purchasing good, strong, dividend-paying value stocks and bonds.
In short, what we are doing is keeping toxic assets off the banks' books, injecting cash into the banking system, and providing companies and local entities with investment money for improvements. We are making all of these changes without it costing taxpayers a dime or requiring any bit of government intervention.
Which is likely why the Obama Party hates it.
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