Posts Tagged ‘fiscal policy’

Revision to GDP makes it clear Fiscal Multiplier was Gigantic

August 12, 2011 6 comments

Lots of conservative economists claim the stimulus didn’t amount to much.  Turns out – quelle surprise! (heh.) – that they were totally wrong.

Their claims were based on the initial measurement of the depth of recession – and these measurements turned out to be wildly optimistic.  The recession was far, far deeper than previously admitted.

The stimulus worked great.

It’s pretty clear if you use the exact same methodology used by prominent conservatives to show the stimulus didn’t work with the new, massive numbers on the depth of the recession, you’d get a multiplier for the fiscal stimulus that was totally huge.


I meant to write a TC post about it, but the Center for American progress did the work, and beat me to the post.

CAP’s Michael Linden via Kevin Drum:

“Using the most updated data, we can see that in 2009 there is actually about a $544 billion difference between what GDP would have been had it continued to contract as rapidly as it did during the fourth quarter of 2008 and what it actually was. As Holtz-Eakin points out, the total amount of fiscal stimulus during that year was $260 billion. This suggests the Recovery Act produced about $2.10 in economy activity for every $1.00 in spending or tax cuts. That’s a pretty good multiplier.

And if we apply the same methodology to the entire lifespan of the Recovery Act, not just to 2009, the multiplier becomes even more impressive. The total cost of the stimulus bill was about $800 billion, delivered over the course of two years. The difference between actual GDP through the first quarter of 2011 and what GDP would have been had it continued “falling off a cliff” is around $3.3 trillion—implying a multiplier of more than 4.”

A multiplier of more than 4.  This isn’t the Romer method, or the barro method.

But it is one method. and no matter what method you use, you need to use the new GDP data. Using that data will show that the stimulus was extremely effective, and was a 2 or 3 to 1 return on investment in a few short months.

This is more evidence that fiscal policy works great when monetary policy can’t get in the way.  A reminder: Monetary Policy sucks.

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The TC Rule and stuff that’s easy to see

August 4, 2011 7 comments

I’ve been meaning to write a post about this for a long time, and here Matt Yglesias beats me too it.

One reason to use inflation and unemployment as the inputs to any rules for fiscal policy is because they are easy to measure.  We can get robust measures of inflation and unemployment in real time.

That’s one good reason to use the TC rule for fiscal policy.

The TC rule uses inflation and unemployment as inputs to get a recommended level of fiscal policy.   The target of the fiscal policy would be the payroll tax.

It turns out some professional economists think the same thing.

I’d say another reason to use unemployment as a guide to policy is that there’s an ultimate and easily knowable limit.  At some point, there isn’t any more people to put to work.  You have at least one absolute known – you cannot put more people to work than people that are alive.

I consider this to be like the theory of relativity using the speed of light as the known rather than an arbitrary zero as the known.   We can know the maximum of employment, but knowing the “equilibrium” point of employment is probably impossible at any given moment.

P.S. I haven’t gone after the equilibrium real rate of interest yet like I promised.

But one of the core elements of the critique is that we can barely observe it.  it’s impossible to see in real time – you cannot use it to take action today.  Even in the future, it’s hard to determine what it was in the past.

If we can’t see the equilibrium real rate, what can we see?  Unemployment and inflation.

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Why Monetary Policy Sucks, Part 2: It promotes debt slavery

July 30, 2011 3 comments

I was thinking a ton about debt slavery during the day, and then my ol’ man beowulf chimed in:

“Michael Hudson’s made the point that banks want property taxes as low as possible so they can expand the share of income they can take in mortgage payments (and other monthly credit streams).”

Yep!  What another bad reason to use monetary policy.

I ended up with a whole list of reasons why monetary policy sucks, and Neil Wilson added another.  There will be another post with that full list.

But this post is about how monetary policy promotes debt slavery.

Monetary policy can only work by giving a middle man – banks and lenders – claims on our future income.  This is the expressed goal of monetary policy – increase or decrease the amount of credit in the economy, and therefore stimulate economic activity.

The primary way the economy expands is by people taking on more debt.

Now, I am not an enemy of debt, but I want to be clear.

The way monetary policy works is through increasing debt in the system.  Monetary policy only works by taking a portion of future income and giving it to banks.  

Of course this is great for the rentier class, but for the economy, not so much.  We’re basically taking an ever larger chunk of our earnings and giving it to lenders.

  • So why do we have a real estate tax exemption?  Higher housing prices for banks to lend against.
  • Why do we have banks pushing for low land taxes?  Higher housing prices for banks to lend against.

Higher prices for real estate means more money for banks and less money for people.  And it isn’t just a one off payment – its a stream of payments over years and years!

This is another big reason why monetary policy is a horrible choice to control our economy.





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