Recently in fiscal policy Category

From the Deseret News this past Tuesday.

So we avoided the fiscal cliff.  Forgive me if I am less than impressed with our political leaders.

The temporary Bush tax cuts passed in 2001 and 2003 are now permanent for incomes less than $400,000 per year.  The increase in taxes on incomes over this threshold is expected to net $617 billion over ten year.  To be exact, that is $617 billion more in revenue than would have been collected had tax rates on higher incomes remained unchanged.  On the spending side, automatic across-the-board cuts that would have gone into effect on January first will be delayed for two months.

i-Side Economics

Ike Brannon pointed me to a great op-ed piece by Andy Kessler in the Wall Street Journal last Tuesday describing comparing the New Keynesian spending policies of the Obama administration over the last three years to what he calls "i-side economics" ("i stands for "investment"), which is just a clever rebranding of the supply-side economics. The idea is that taking government funds (that have to come from somewhere) and giving them to someone does not create anything. It is investment that creates value and permanent new jobs. Very nice piece.

Problems with Pay-as-you-go

From the Deseret News, July 16th

The U.S Social Security system is in big trouble.  While the trust fund balance today is just over two and half trillion dollars, this amounts to about four years of benefits payments.  And while the balance on the trust fund has been rising every year since the fund was created in 1987, it will not be long before demographics cause that trend to reverse.  We need to reform Social Security and the longer we wait, the bigger the burden of reform we become.

This article comes out in the Deseret News tomorrow morning.

The U.S. economy has been through several rough years, beginning with a severe recession in 2008 and an anemic recovery since.  The economy has actually been growing since June of 2009, but it hasn't felt like it to many Americans.  Jobs have been slow to recover compared to most postwar recessions.  Despite the weakness of the recovery, things are not as bleak as they seem.  The longer the recovery remains weak, the greater the potential for future economic growth.

An op-ed piece that appeared at on May 4th, by Rick Evans, Larry Kotlikoff and Kerk Phillips and based on this paper.

Alex Tabarrok blogs about the piece at Marginal Revolution.

Fiscal sustainability and generational equity are two of the most pressing policy issues of our times. Yet these two highly related concerns are difficult to clearly define, let alone measure.

The standard metric of long-term fiscal imbalance is official government debt (Reinhart and Rogoff 2009). But, as shown in Green and Kotlikoff (2009), official debt, like time and distance in physics, is not a well-defined economic concept.

Did the 2009 Stimulus Package Work?

This article appeared in the Deseret News yesterday.

Congress passed the American Recovery and Reinvestment Act in February of 2009. If you will recall, at the time it was touted by its proponents as an economic treatment for the recession caused by the housing financial crisis that preceded it.

What Lies Ahead for North Korea?

This article appeared in the Deseret News on December 27th.

Kim Jung-il, the ruler of North Korea, died last week, reportedly of a massive stroke.  Other than a few deluded souls who might have been sincerely crying their eyes out on North Korean television, he will be missed by no one.

His death does, however, open up the possibility of changes in that reclusive country's policies, both domestically and internationally.  In terms of politics and policy, North Korea is probably the hardest country in the world to reliably understand.  We can observe the final results of whatever process determines policy, but very few people outside North Korea have any clue how that process actually proceeds.  So it is entirely possible that nothing will change in practical terms as a result of Kim Jung-il's death.  Still, if you are a bit of a gambler, the odds are higher now than they have been in a long time.

This article is from the Deseret News on Nov. 14th

In the last article in this series, I talked about how economic stimulus is supposed to work.  The basic premise is that when the government spends more money on goods & services, they more than replace the spending that households would've done without the stimulus.  That is the marginal propensity to consume (MPC) of the government is higher than that of households.

Economist Robert Barro has argued for the past thirty years or so, that this simple story ignores important aspects of household reasoning.  Imagine for example, that the government decides to run a budget deficit by lowering taxes.  This should be stimulative, since it leaves more money in the hands of consumers, who will presumably spend at least some portion of it (based on their MPC).  Barro argues, however, that rational households will realize that cutting taxes today and leaving spending unchanged does not mean taxes can stay permanently lower.  Such a policy is unsustainable over a long period of time.  Forward looking households will realize that lowering taxes today means raising them in the future (holding government spending constant over time in our example).  As a result they have a lower tax burden today and higher taxes in the future.  Since most consumers prefer consumption that is smoothed out over time, rather than high consumption now and low consumption later, the best behavior is to save.  Barro showed that under certain circumstances households increase their savings by exactly the same amount as the government reduced their taxes.  This leaves consumption unchanged and hence gives not stimulus at all.

 Barro has termed this effect "Ricardian equivalence" based on work by David Ricardo in the 1800's. As mentioned, Ricardian equivalence holds only in certain circumstances.  First, all consumers need to be rational and forward looking.  If some consumers do not care about the future, they will view a drop in taxes today as an increase in spendable income and increase their consumption.  If some consumers do not expect to be alive when the tax increase occurs they will also be likely to increase their consumption.  In these cases, there will be a stimulative effect of cutting taxes, even when it must necessarily be a temporary cut. 

Similarly, if the government increases spending and does so by borrowing money, rational households will realize that even though taxes don' t rise today, they must eventually rise at some future date.  The further off into the future that date is expected to be, the greater the number of households that will expect to be dead when the increase hits.  And, hence, the greater the stimulus will be.

A perfect example of this effect occurred in 1992 when Presidents Bush used an executive order to reduce federal withholding of taxes from people's paychecks.  The order did not change their overall tax burden; the same amount of taxes was due on April 15th.  However because withholding was lower the expected payment (refund) in April was larger (smaller) than before the change.  Since almost everyone in the economy expected to be around when the tax bill came due, this is an almost perfect implementation of a policy subject to Ricardian equivalence.  The response was exactly what Barro predicted, consumers saved most of their withholding and the policy had virtually no effect on the macroeconomy.

Very few economists believe that Barro's strict version of Ricardian equivalence where stimulus spending has zero effect is correct.  Nonetheless, his point is well taken.  That is, the effects of a stimulus are likely to be much smaller than those predicted by standard Keynesian models.  The effects are also likely to be larger when the future burden of paying for the stimulus is paid by future generations.  Stimulus spending that is paid back in the near future is likely to have very small effects.

As citizens and voters we need to ask ourselves if the short-run gain from a meaningful economic stimulus is worth the cost it imposes on future citizens and voters.
This article appeared on Tuesday, November 1st in the Deseret News.

In February of 2009 congress passed and President Obama signed the American Recovery and Reinvestment Act.  At the time it carried an estimated price tag of $787 billion.  Commonly referred to as "the stimulus bill," it was intended to reinvigorate an economy battered by the subprime mortgage financial crisis.  In September of this year, President proposed the American Jobs Act, which is also intended to invigorate the economy and spur jobs creation.  Under this act an additional $447 billion will be spent, leading some people to refer to it as "Stimulus Jr."

How exactly is increased government spending supposed to stimulate the economy.  The basis for this prescription lies in a particular school of macroeconomic thought known as Keynesianism.  The name comes from the famous British economist, John Maynard Keynes.  When he came up with his theories Keynes had in mind an economy mired in recession or depression, as was the case around the world during the 1930s.  In this environment Keynes claimed that workers and firms stood ready and willing to produce goods at the prevailing prices, if only someone would buy them.  This is the description of a market surplus, which occurs in individual markets occasionally for a variety of reasons.  Keynes argued there was an economy-wide surplus of goods, not just a surplus in a few scattered markets.

Normally with surpluses markets respond by lowering prices to clear the market, so that all goods offered for sale are purchased.  Think of sales on day-old bread or DVDs in the discount rack and you get the right idea.  However, Keynesian theory postulates that prices are slow to adjust, particularly downward.  This is referred to as price "stickiness" and it implies that markets will remain in surplus for long periods of time.  In the long run prices will eventually fall and markets will clear, but as Keynes famously quipped once, "In the long run we are all dead."  Hence, we may be quite concerned about what happens in the short run while prices are not adjusting.

In this scenario the problem with the economy is coming from consumers on the demand side.  They are not spending enough to purchase all the goods offered for sale.  A Keynesian prescription is to let the government purchase goods and services instead.  In theory this increases the demand for goods.  Firms sell goods that would otherwise remain unsold or not even produced in the first place.  And workers go back to work producing those goods.

There are complications, however.  The government needs to get the money to pay for these purchases somehow.  If it raises taxes, and uses the increased revenue to buy goods, it is also lowering the income of the households and businesses it taxes.  As a result, they spend less even as the government spends more.  Whether this leads to a net increase in the demand for goods depends on whether those taxes reduce their consumption of goods by more or less than the government increases its consumption.  Economists call this the marginal propensity to consume or MPC and argue that the MPC of the government is close to 100% (at least for stimulus spending) while the MPC of consumers in less than that.   Hence, a stimulus increases government spending more than it depresses private spending and yields a net increase in demand.

If, however, the government pays for spending by running a deficit, private spending need not fall, because households are not taxed and need not reduce spending.  This reasoning is why the traditional Keynesian policy prescription is to stimulate via deficit spending in a recession.

Since Keynes, macroeconomic theorists have run across flaws in this reasoning, however.  For example, when the government runs a deficit, it borrows more money from the general public.  When domestic households lend to the government, they voluntarily reduce spending and buy government bonds instead.  Hence, deficit-financed stimulus looks very similar to tax-financed stimulus in its overall effects.

Another reason why stimulus spending may be less effective than Keynesian theory suggests is that the effects depend crucially on how the money is spent.  For example, older and younger people may have different MPCs.  The old have less of a savings motive than the young.  Indeed most retired workers are dissavers, withdrawing funds on net from savings accounts and pensions.  If a stimulus package reroutes money from the old to the young it can actually reduce demand.

Recent studies suggest that much of the money from the 2009 stimulus was transferred to state and local governments for local spending projects.  However, many of these governments had quite low MPCs and used these stimulus funds directly or indirectly to pay off or avoid debt.  In other words they saved the money rather than spent it.  This may be one reason the stimulus was so much less effective that its proponents believed it would be.

Additional problems with stimulus spending include the effect it has in the long-run on burdens of taxation and expectations of future taxes.  More on those issues will be forthcoming in a later column.

This article was published on August 8, 2011 in the Deseret News under the title, "Debt deal didn't solve fiscal woes."

After months of wrangling and weeks of brinksmanship, the U.S. congress passed a bill raising the debt ceiling and President Obama signed it into law. The compromise calls for an immediate increase in the legal limit on federal borrowing by 2.4 trillion dollars and imposes reductions in federal spending by the same amount over the next 10 years.

It will be interesting to see how congress interprets the word "reduction." For most of us a reduction is an absolute drop. Congress, however, reduces spending by comparing the new forecast level of spending with the amount that was forecast before the agreement was reached, the so-called "baseline". There is no legal reason for using this baseline as opposed to some other measure. Some proponents of spending reform prefer a "zero baseline", where any change in policy is compared to a case where all future spending is assumed to remain at this year's levels. This latter baseline is a more accurate measure of how spending will actually change over time, but the former is a better reflection of the impact of a particular act of legislation.

If this was the only difference, baselines would not matter all that much. But when congress actually begins to implement the mandated spending cuts, the definition used will become very important. For example, if spending were forecast to rise by 10% per year over the next ten years, and we slowed that growth to only 5%, then (ignoring inflation) by the first definition we would have achieved a savings of just over 21%, but we would still have increased spending almost 26% from a zero baseline.

Credit agencies and financial markets are unimpressed by the debt-limit agreement. It is a good start; probably preferable to having the U.S. Treasury default on its debt payments. It may even be the best possible agreement one could hope for with a divided government. But it is only a start.
One of the more pithy, but accurate, descriptions of the deal came from Senator Rand Paul, who said, "The current deal to raise the debt ceiling doesn't stop us from going over the fiscal cliff. At best, it slows us from going over it at 80 m.p.h. to going over it at 60 m.p.h."
To the extent that the debt ceiling debate had focused the attention of the political class on the issue of spending it has done some good. But in a broader sense, the debt ceiling is a red herring. As I learned years ago from my college professor, Jim Kearl, the government has three fundamental ways of raising revenue: it can tax, borrow, or create money. And the effects of each of these, while not exactly identical, is roughly the same. In all cases the government extracts real resources from people in the economy which it then uses to buy goods and services and/or spend as transfer payments.

When it taxes the government uses the threat of force to extract resources. Failure to pay required taxes can result in imprisonment. When it borrows the government cajoles people into voluntarily surrendering resources by offering a sufficiently high repayment in the future. Of course, far enough in the future the government will be forced to raise taxes to pay for these interest payments, so the repayment is not as high as it may seem. Finally, when the government (via the Federal Reserve, in the case of the U.S.) creates money it taxes unilaterally without an explicit threat by reducing the real value of existing money holdings.
It is possible, by clever redefinition of terms to avoid a debt limit in the short run by turning debt into taxes. For example, suppose the government were to impose a surtax on households this year based upon estimated income from 2012. Tax revenue would rise, and the government debt would fall (or rise more slowly). But over time, everyone will end up paying the same amount as if the surtax had never been imposed.

The pressing problem with federal government finances is not the amount of money that is borrowed, but rather the size of the real resources the government extracts; in other words, the size of government. Right now there is no national consensus on how big the government should be. Until a consensus is reached and ultimately communicated to our political leaders, problems will continue to loom regardless what has happened or will happen to the debt limit.
A slightly edited version of this article was published July 25th, 2011,  in the Deseret News, under the title, "Term 'national debt' misleads country's finances."

On May 16th the US Treasury Department announced that the debt limit had been reached. Through accounting manipulations the federal government says it can manage to remain under that limit until early August. But what exactly is the national debt that is subject to this limit?

The statutory debt limit is a legal upper bound on the amount of debt the US government can issue through the Department of the Treasury. The actual amount of debt issued is often referred to as the "public debt" or the "national debt." The former term is more accurate, since this debt does not include amounts owed by private individuals or firms. Nonetheless, both terms are misleading.

So how much debt does the US government owe? The Treasury Bulletin reports that the outstanding US debt as of the end of September 2010 was $13,562 billion.

The national debt is held by a variety of individuals and institutions, and some of them really shouldn't count a part of the debt. For example, $5,656 billion was owed by one branch of the federal government to another. The US Federal Reserve System is included in this category because, while it is legally independent of the US government, it must refund its earnings on the US securities it holds to the Treasury. Subtracting this sum leaves a remaining balance that was privately held of $8,369 billion; still a substantial number, but more than a third smaller than the original.

This remainder was held as follows:
  $189 billion held by individuals in the form of savings bonds.
  $337 billion held by banks.
  $608 billion held by mutual funds.
  $1,030 billion held by pension funds and insurance companies
  $509 billion held by US state & local governments.
  $1,282 billion held by miscellaneous other investors.
  $4,257 billion held by foreign entities (firms, banks, governments, individuals, etc.)

It is not appropriate to think of the full amount as the debt of the nation. For one thing much of it is money owed by US citizens to US citizens. Just as I would not count $100 that I owe to my wife as part of our overall family debt, we should not count money owed by the government to its citizens as part of the overall national debt. It is in this sense that the term "national debt" is misleading.

Still that leaves over four billion dollars that the US government owes to foreigners. And if we include the net amount that private individuals and firms owe to foreigners the total is likely even greater. The national debt is only weakly related to the net amount of money we as residents of the US collectively owe to foreigners.

Another reason why the debt figures are misleading, however, is that they only show one side of the balance sheet. In addition to the debt it has issued the government also holds assets. These include some obvious things like the gold in Fort Knox, and money seized from criminals. But they also include physical goods (like the strategic petroleum reserve or stocks of grain bought to support farm prices), property (like the thousands of U.S. government buildings), machinery (like its fleet of automobiles, or its military hardware), and real estate (BLM lands, National Forests, and National Parks, for example).

We might argue that some or most of these assets should not be sold (perhaps never) even if they could be. But when we think of our personal net worth we often include such just goods as assets in our calculations. If a family owns a million dollar home, but owes debts of $250,000 we would not think of them as being broke and in the hole by a quarter of a million dollars; even if they really loved the house and had no intention of ever selling it and moving out. Still, we would also not think it wise of them to continue running up debt. In the long run, if they want to keep their nice house they can't continue to spend more than they earn.

Similarly, the government should not continue to run up its debt or it too may be forced to sell off some of the valuable assets it holds. (The government has done this before; for example, when it sold land to citizens prior to the Homestead Act. However, the primary purpose of these sales was not to raise revenue.)

The national debt is misleading as a measure of our nation's total net worth or even as a measure of the government's net worth. But that doesn't mean it's not important to monitor it and hold our government responsible for how it is managed.
This article was published July 8th, 2011, at and published in the Deseret News on July 12th.

Republicans in the House and Senate are preparing constitutional amendments that would require the government to run a balanced budget every year. Politically, the lines are already drawn, with Republicans generally in favor and Democrats generally opposed. But does balancing the federal budget each year make economic sense? Like many issues in economics, the answer is, "it depends." Specifically, it depends on the time horizon over which we balance.

One way to gain some insight into how the government should act is to imagine the parallel with your own household budget. The parallel is not perfect, because the government is big enough to affect the whole economy while your household (even if you are Bill Gates) is not. Nonetheless, the analogy is useful.

So, should you run a balanced budget as a household? The obvious answer is, of course you should. In fact, you really aren't given much of a choice in the matter, at least in the long run. If you spend more than you earn over a long period of time you will go into debt. And if you fail to pay that debt, your creditors will start seizing your assets. You might get out of paying back the full amount by declaring bankruptcy, but that's not a good choice when making a personal financial plan.

A more subtle question is, over what time horizon should you balance your budget? Should it be a year? Clearly you don't balance it over short periods of time, like a day. Most of us get paid relatively infrequently. If we adopted a strict balanced budget rule, we would spend our paycheck in full each payday. On days when we didn't get paid we would not be able to spend anything. Clearly a day-to-day balanced budget is silly for most of us. In practice, we set aside most of our paycheck on payday and gradually spend this balance down until the next one arrives.

Financial planners tell us to set some of our income aside each payday and save. One reason for saving is to be prepared for an unexpected expense. In many cases we can't really avoid running a household deficit. If the transmission goes out on the car, it is usually necessary to repair it or replace the car, even if this exceeds the planned budget for the month. We can dip into savings do to this or borrow money, but either way we are running a budget deficit.

Running this kind of deficit is not such a bad idea if we have the self-discipline to run surpluses later. That is, we either repay our loan or rebuild our savings account to its original level by spending less than our income.

When most of us manage our household expenses, we pay attention to the budget. We are aware of whether we have spent more or less than we intended and whether this is more or less than our income. However, we do not insist on a hard constraint that spending always be less than income. Instead, we keep an eye on our savings and borrowing. When savings falls or borrowing rises, we readjust our budget plans, realizing we need to spend less or do something to earn more.

Almost everyone in the U.S. realizes the government budget is seriously out of whack. We need major adjustments to spending if we are going to avoid bankruptcy. A balanced budget amendment is one way to force fiscal balance. Just as a financial planner might recommend a strict budget for a household that is heavily in debt, a balanced budget may be one part of a responsible plan to reform government spending and taxes. In this case, a strictly-enforced budget is a temporary tool that should be used to bring overall debt down. In fact, a good financial planner would recommend a budget surplus so that spending is significantly less than income and the large outstanding debt is reduced as quickly as is reasonably feasible. However, once the debt is reduced there is much to be gained from allowing borrowing in the face of unexpected events.

A balanced budget amendment is permanent and will bind all future congresses. Therefore, the short run gains in fiscal balance need to be weighed against the long-run losses in ability to respond to economic shocks. A better policy would be to impose spending restrictions until the level of debt reaches a much lower level. The best policy would be to elect a congress that is willing to spend within its means in the long run.

UPDATE July 25, 2011

Alex Tabarrok at Marginal Revolution has a proposal that brings together the good points of the balanced budget amendment, without the drawbacks I discuss above.  He calls it an "Unbalanced Budget Amendment," and it requires the government to run a surplus in good times, so that it has some savings to draw upon in bad times.

Social Security isn't bankrupt ... yet

This article appeared in the Deseret News on May 31st, 2011.

In mid-May the trustees of the U.S. Social Security system issued their annual report. The conclusion of the report is stated clearly and succinctly: "Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided."

One bit of information from the report that got some attention was that the total payouts in benefits have finally surpassed the collection of revenue from payroll taxes. This was not unexpected; we have known for a long time that the retirement of the baby boomers would eventually cause this to happen. What was surprising is that it happened this year and that it is projected to remain this way for the foreseeable future. Last year's report projected this flipping point would occur in 2015.

The Social Security system is a pay-as-you-go system. Revenue collected from workers is used primarily to pay for the benefits of retirees. Only a small fraction of revenue (about 8.5 percent this year) goes into the trust fund. This is in contrast to most other retirement plans, where most or all of the revenue collected goes into holdings of financial assets earmarked specifically for future benefits.

Social Security is still generating net surpluses today because it earns interest on the $2.7 trillion held in the trust fund. The system is expected to start generating net deficits starting in 2022. From that point on, the balance in the trust fund will begin to fall until it drops to zero in the year 2035.

Once this milestone is reached, the system faces a conundrum. Since the Social Security trustees do not have the legal authority on their own to raise taxes or lower promised benefits and cannot issue debt obligations, they will have no choice but to pay only some portion of promised benefits. That will initially be about 80 percent.

The scenario laid out above is true as far as it goes, but it also misrepresents how our fiscal system actually works.

The Social Security trust fund holds all its assets in the form of U.S. Treasury securities. Since these are normally very safe assets, this might actually be prudent, but it also means that the trust fund is effectively a fiction. The trust fund is a set of government assets that is backed by the same government's debt. This means the public debt is not as big as reported, and it also means there is no nest egg tucked away in a secure vault somewhere. In truth, the trust fund is backed by the government's ability to tax its citizens in the future. Workers today who are interested in receiving their promised benefits when they retire should therefore be very concerned about the size of the public debt and the U.S. budget deficit.

The trustees' report assumes that in 2035 they will need to reduce benefits so that total benefits outflows equal the total inflow of tax revenues. Politically, this seems highly unlikely. Rather, Congress would likely borrow more money to pay the full promised amounts to retirees. This accumulation of debt could conceivably go on for a very long time, but eventually the government would be unable to issue any more debt. No one knows for certain what the limit is, but we do know there is one. In fact, the limit may appear unexpectedly -- just ask the Greek government.

To avoid long-run bankruptcy, we need to realign the mismatch between promised benefits and expected tax revenues. The Social Security Administration is well aware of this problem. There are many viable options that would move us in the right direction. For example, there is talk of changing the way Social Security benefits are calculated so that future benefits are not so large a proportion of lifetime earnings. But change cannot occur unless Congress enacts it.

Since Social Security is pay-as-you-go, and workers pay the benefits of retirees, one way to make the system more sound is to increase the ratio of workers to retirees. In the past a high ratio was maintained by a high birthrate. But birthrates have fallen dramatically in the U.S. in the past few decades, and life expectancy has risen at the same time. We are transitioning from a retirement age of 65 to 67 in an attempt to adjust this ratio, but it is unlikely to be sufficient. Increases in legal immigration are one way to correct the imbalance. For fiscal purposes it doesn't matter if the birthrate rises and we have more young workers, or if they immigrate from other countries. More workers supporting the existing retirees reduces the tendency to draw down the trust fund balance.

Still, the fundamental problem with the system is that the benefits levels are too high relative to the taxes. Lawrence Kotlikoff of Boston University recently calculated the gap between the net present value of promised benefits from all government programs (which are dominated by Social Security and Medicare in the long run) and the net present value of all taxes likely to be collected. He calls this figure the "fiscal gap" and comes up with a number of $202 trillion! This means that in order to meet the promised obligations from our current fiscal system, we need to find the equivalent of more than a decade's production of all the goods and services in the entire U.S. economy.

Clearly, unless we can reduce promised benefits relative to taxes imposed, the system will go bankrupt. It is not too late to fix the Social Security system, but the longer we wait, the more difficult the fix will be.

Why newborns cry

| 1 Comment
(Thanks to Mary Hokanson for sending me this.)

National Debt Roadtrip

Because we don't do well with big numbers, this analogy puts some perspective on things:

Leamer and the state of macro

(Pardon the long post, but this is a topic that I love.) Adding another post to a topic that Jason and I have discussed often both on and off this blog (post 1, post 2), I wanted to post a link to a podcast interview with Ed Leamer on EconTalk. Leamer is a renowned economist in international trade and econometrics. Russ Roberts' interview with Leamer is interesting and insightful, and I recommend it as a good listen. But I finished the podcast feeling very confused. Leamer argues both that current macroeconomics does a terrible job at explaining the data and at having a story to explain the data. This is not an inditement, but rather a good indirect description of the two current ways of approaching macroeconomics.
The May edition of the International Economic Update from the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas was released on Monday. Two points stand out to me: (1) The global growth forecasts are less optimistic than most U.S. forecasters (e.g., Ben Bernanke), and (2) the ranking of countries by relative size of fiscal stimulus in 2009 puts the U.S. a little further from the top than I expected.


More on fiscal multipliers

A while back, I wrote about the relative size of the government spending and tax multipliers.  After spending way too long on IS-LM models in my macro class and thinking some more about fiscal multipliers, I'm now convinced that government spending multipliers can not be as large as the multiplier on tax cuts and think I can more clearly explain why. 
Greg Mankiw posted this link yesterday (3/17/09, St. Patrick's Day) to another funny Flash video from the folks at JibJab--Leprechaun Bailout.

Charity multiplier dwarfs all

| 1 Comment
Arthur Brooks, President of the American Enterprise Institute, gave a fascinating talk today at Brigham Young University about the effects of charitable giving. He started out with a quote from John D. Rockefeller who seemed to think that charitable giving was the source of his financial success, rather than a function of it. In trying to disprove Rockefeller's hypothesis with data, Brooks explained that he found more and more evidence in support of it.
Here are some of my favorite cartoons about President Obama's nominees and their tax problems. (Thanks to Mary Hokanson for sending these to me.)

The only significant policy difference between the current period of global recession and the Great Depression is monetary policy and financial market intervention. The government spending part is looking like it will be the same. The annual deficit is projected to rise from its current 2008 level of just under 3% of GDP to potentially 10% of GDP in 2009. However, this rise in the deficit is also similar to the early 1980s and 2000. (The big blip is World War II.)

Back in October 2008, I was a member of a panel discussion hosted by the BYU Economics Department that was tasked with explaining different aspects of the financial crisis up to that point and answering questions from the audience. Each member of the panel, myself included, supported the government's role in bailing out U.S. banks and financial companies citing the systemic role they play in the world economy (see my post 1 and post 2). However, since the crisis began in October 2008, two of my colleagues have consistently made what I see as the only good argument against the TARP financial bailout program--the slippery slope costs will outweigh the systemic risk reduction benefits.
Following up on Jason's post today, I am a bit bewildered with the Obama administration's choice of, not one, but two tax evaders as cabinet members. Bad enough is that the Treasury Secretary, Timothy Geithner, allegedly didn't pay taxes. The I.R.S. is a department within the Department of the Treasury. How can you appoint someone to oversee the Treasury and the I.R.S. who didn't pay taxes? In Geithner's defense, the amount of unpaid taxes was only about $17,000, so maybe this was an oversight.

However, adding an exclamation point to the Geithner appointment is now the Daschle appointment to head the Department of Health and Human Services.
John Cochrane had the following great quote in his insightful article, "Fiscal Stimulus, Fiscal Inflation or Fiscal Fallacies?"

"Others say that we should have a fiscal stimulus to 'give people confidence,' even if we have neither theory nor evidence that it will work. This astonishingly paternalistic argument was tried once with the TARP. Nobody could say how it would work in any way that made sense, but it was supposed to be important do to something grand to give people 'confidence.' You see how that worked out. Public prayer would work better and cost a lot less."

We have commented before on John Cochrane's uncanny ability to deliver biting rebuttals when challenged.

(Thanks to Mark Showalter for sending me this.)

The Bailout Game

Greg Mankiw posted a link to The Bailout Game this morning, and I couldn't resist putting it up here and on our economic jokes page. Here are a couple of tips for the game. When you get to AIG, don't bail them out and watch what happens. Also, you might enjoy the comments on the little ticker at the bottom of the page.
Jason had a great post a week-and-a-half ago about the stimulus debate. The debate as it stands right now in the newspapers, media, and blogs centers on the questions about the effect of government intervention (spending increases and tax cuts) on the economy in the short-run and in the long-run. Jason's comments were similar to those of Robert Barro (Harvard) in today's Wall Street Journal in making the case for multipliers on government spending and taxation being much lower than is being estimated by members of the Obama economic team. Barro focused on the government spending multiplier being close to zero, and Jason argued that the tax multiplier is bigger than the government spending multiplier. However, I think that the correct answer to the optimal amount of government intervention must incorporate more dynamic effects that balance any short-run benefits of intervention with long-run costs. It is, therefore, a question about how society discounts the future.
The second post ever posted on this blog in October 2008 is entitled, "International bailout arms race." I characterized the flush of bailout commitments that we saw across almost every major developed country as a strategic optimal response in the face of the bailout plans of the United States. With this model in mind, I predicted that the bailouts would develop into a situation similar to the nuclear arms race of the 1980s in which the U.S. defeated Russia by outspending them on weapons. The same thing is happening now as predicted among developed countries with respect to bailouts. The list of countries hitting their spending capacity and "folding their hand" started with Iceland and Hungary, and now looks to include Spain, Greece, Ireland, Germany, the U.K., Belgium, and the E.U. as a whole (see Iceland/Ireland joke).
Before I switched from MSNBC to CNN for coverage of yesterday's historic inauguration of Barack Obama as President of the United States, one of the MSNBC commentators said something that piqued my interest. He said that the only good examples of a President entering office in a recession before Barack Obama are Ronald Reagan (1981) and Franklin Delano Roosevelt (1933). Further the commentator contrasted Reagan's promise to decrease the size of government with FDR's commitment to increase the size of government. However, the following picture shows that Reagan is not the correct counterfactual.



With the inauguration just over a week away, the talk of Obama's "stimulus" plan is reaching a fever pitch.  Some of the coverage is funny, some mean, some thoughtful, some just plain stupid (ever heard of the broken window fallacy?).

What ever it is, I can't get enough of the debate.