The White house has estimates of the fiscal stimulus' impact on the economy through June 2009. Given that so little had been spent through June, I assume that their estimates imply that the multiplier is 20 or 50 or something like that.
Any multiplier bigger than 3 is not credible by anyone's standards, so any finding of a larger multiplier proves that the economy is recovering for other reasons.
Does anyone have the multiplier estimate implied by White House's estimates?
[Added: the white house seems to now be using the change in growth rates ... that is, attributing to the stimulus all of the difference between the Q1-Q2 growth rate and the Q4-Q1 growth rate. Supposing that's true -- that $60 billion worth of stimulus caused a permanent increase in the growth rate (or even an increase in the growth rate that lasts a year) -- doesn't that imply a huge multiplier? I don't see that any blogs have yet made the internally consistent calculation].
[Added: strangely, this post garners a huge number of hits, even though it merely poses a question. If you are interested in (my version of) an actual answer, please take a look at my "Dissecting the Multiplier" series.]
Any multiplier bigger than 3 is not credible by anyone's standards, so any finding of a larger multiplier proves that the economy is recovering for other reasons.
Does anyone have the multiplier estimate implied by White House's estimates?
[Added: the white house seems to now be using the change in growth rates ... that is, attributing to the stimulus all of the difference between the Q1-Q2 growth rate and the Q4-Q1 growth rate. Supposing that's true -- that $60 billion worth of stimulus caused a permanent increase in the growth rate (or even an increase in the growth rate that lasts a year) -- doesn't that imply a huge multiplier? I don't see that any blogs have yet made the internally consistent calculation].
[Added: strangely, this post garners a huge number of hits, even though it merely poses a question. If you are interested in (my version of) an actual answer, please take a look at my "Dissecting the Multiplier" series.]
There are two separate events that have occurred:
ReplyDeleteA. Stopping a Debt-Deflationary Spiral ( Panic )
B. Recovering from a low grade form of debt-deflation, which translates into a rather severe recession
A was stopped by:
1) Monetary Policy
2) Explicit Govt Guarantees shown by Bailouts
3) Automatic Stabilizers
4) The govt being perceived as responding to the crisis ( some call this a Placebo Effect )
These seem to have worked, so that we are now in B. To the extent that the stimulus included 3 & 4, it helped. But 1 & 2 were more important.
In B, the list is the same in my view. Infrastructure Spending is mainly 4. However, it can help going forward, especially if the money is well spent. Most of the Stimulus Money is going to be spent in the future, and should help with employment.
What's the multiplier? I've no idea. It might well be very low. I doubt that it can even be discovered. So why am I for a Stimulus?
First off, I was for a Sales Tax Holiday. The incentives for such a move are pretty straightforward.
But the main reason that I'm for a Stimulus is for the same reason that the signers of the Chicago Plan of 1933 were: namely, insurance. There is some reason to believe that 4, for example, although impossible to quantify, is very important. But the main reason is that, like those authors, I consider a Debt-Deflationary Spiral to be something that we avoid at all costs. Hence, just based on pragmatism, both economic and political, I think that it's worth a shot. After all, even Barro believed that defeating Debt-Deflation at all costs worked.
I don't mind people saying that, in theory, the stimulus was poorly spent. I don't mind people who don't believe that we were facing Debt-Deflation seeing my views as incorrect. I simply thank God that Bernanke doesn't agree with them. But, if you thought that we were facing a Debt-Deflationary Spiral, I think that the prudent response was the Chicago Plan of 1933. It is conceivable that QE and a Stimulus reinforce each other. That's good enough to try it facing Debt-Deflation.
So my quarrel with Barro, for example, is that he is underestimating the need of the Fed and Govt, in the real world, throwing the kitchen sink at Debt-Deflation. I didn't think that the argument against it was strong enough to not try and see if it could help.
Don the libertarian Democrat
A response. Menzie Chinn estimates a multiplier of 0.5 or lower.
ReplyDeleteThe rise in GDP growth from the first quarter to the second was the largest in almost a decade, and the second largest in the past quarter century. Private forecasters predicted or attributed the unusual behavior of real GDP to the Recovery Act. For example Macroeconomic Advisers in their Outlook Commentary on April 2, 2009 estimated that ARRA added 2.2% to GDP growth at an annual rate (p. 6). Economy.com estimated that ARRA added 3.0% to GDP growth at an annual rate in Précis: U.S. Macro, July 2009 (p. 6). Goldman Sachs in US Daily: Fiscal Stimulus: A Little Less in Q2, A Little More Later, August 4, 2009 estimated that ARRA added 2.2% to GDP growth at an annual rate. etc. etc. On average private forecasting firms think that ARRA added about 2.4% to GDP growth at an annual rate, or 0.6% at a quarterly rate.
ReplyDeleteGiven what is known about fiscal multipliers should this be surprising? According to recovery.org about $56 billion of the stimulus was spent by the end of June. Virtually all of that was in the second quarter. Nominal GDP was about $3.54 trillion in the second quarter. Thus the stimulus was about 1.6% of GDP. The fiscal multiplier thus comes to 0.6%/1.6% = 0.4. The initial projections of of the stimulus' impact by Romer and Bernstein gave it an average fiscal multiplier of 1.2. This seemingly worse than expected performance is due to one simple fact: a large part of the stimulus has so far been in the form of tax cuts which have a low fiscal multiplier.