Evidence Cast Aside

Tuesday 27 July 2010 - Filed under Dumbassery + Economy + Legislation + SCOTUS + Stimulus

Bad MathN. Gregory Mankiw, a Harvard economist, in a piece titled “Crisis Economics” at National Affairs concerning the reliance on Keneysian economic theories by the Obama administration while administering economic stimulus (and its current insistence on yet more stimulus cash being thrown in to the economy):

The administration’s second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers. Textbook Keynesian economics tells us that government-purchases multipliers are larger than tax-cut multipliers. And, as we have seen, the Obama administration’s economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts.

But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama’s Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper (“The Macroeconomic Effects of Tax Changes”) that sought to measure the influence of tax policy on GDP. Crucial to the Romers’ method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such “exogenous” tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions.

The Romers’ conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 — in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama’s advisors assumed it was during their policy simulations.

Of course, it could be that all multipliers are larger than previously assumed. Perhaps fiscal policy has such a great influence over our economy that, if the tax multiplier is 3, the government-spending multiplier is 4 or 5. We don’t know from the Romers’ study; they did not analyze government-spending multipliers, only tax multipliers. But several studies on government-spending multipliers have been conducted using techniques similar to those used by the Romers. And none has found government-spending multipliers to be so large as to justify assumptions about the inherent superiority of government spending over tax cuts.

Some excellent work on this topic has come from Valerie Ramey of the University of California, San Diego. Ramey finds a government-spending multiplier of about 1.4 — a figure close to what the Obama administration assumed, but much smaller than the tax multiplier identified by the Romers. Similarly, in recent research, Andrew Mountford (of the University of London) and Harald Uhlig (of the University of Chicago) have used sophisticated statistical techniques that try to capture the complicated relationships among economic variables over time; they conclude that a “deficit-financed tax cut is the best fiscal policy to stimulate the economy.” In particular, they report that tax cuts are about four times as potent as increases in government spending.

Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments.

So much for the “Obama is a thinking man’s president who relies on evidence when making decisions” argument made by the terminally libertarded.  He is an ideologue who makes policy based on the progressive ideology presented in textbooks.  Real-world evidence which refutes his ideology has no place in his administration.  “Several studies” all based on real government actions refute the models used by (Keneysian) administration economists, showing the multiplier effect of cutting taxes is MUCH HIGHER than his textbook numbers, yet he junks those studies in favor of classic progressive tax-n-spend economics.

How is this any different than the previous ‘tard in the oval office?1

1. Other than the previous ‘tard didn’t claim to be an elite academic thinking man who carefully weighs all of the evidence before making decisions.

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2010-07-27  »  madlibertarianguy