More Empirical Evidence Required

Robert Barro’s conclusions about fiscal stimulus are sure to bring howls of scorn and outrage from those who favor another big stimulus package:

We can now put the elements together to form a “five-year plan” from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous “balanced-budget multiplier”—the response of GDP when government spending and taxes rise together—is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

BTW, Italy’s experience with its own “Cash for Clunkers” program might be instructive in this light:

Italy’s Foreign Car Producers Association said 10,000 jobs are at risk at dealerships in the country because the government doesn’t intend to renew incentives to buy new autos.

The group, which represents 70% of deliveries in Italy, said it expects car sales to drop by about 350,000 vehicles, or lost revenue of about $6.3 billion.

The shortfall has caused auto companies to furlough autoworkers in Italy at reduced pay for two weeks. The program’s primary effect has been to “time shift” auto sales into last year from this year. If all your plans to do is kick the can down the road, you’ve got to take care that they kick them far enough.

I honestly don’t know what to think about stimulus plans. As I’ve said before when I took economics Keynes was king and the effectiveness of the multiplier was holy writ. However, I’m skeptical of perpetual motion schemes whether mechanical or fiscal and the notion that you always can get stimulus from deficit spending is at the very least counter-intuitive to me. I continue to think that more empirical evidence in support of multipliers greater than one is required.

1 comment… add one

  • The shortfall has caused auto companies to furlough autoworkers in Italy at reduced pay for two weeks. The program’s primary effect has been to “time shift” auto sales into last year from this year. If all your plans to do is kick the can down the road, you’ve got to take care that they kick them far enough.

    I would suggest some time working with inter-temporal budget constraints would show the problem with that last line. Granted we could complicate things with a production function, but then again most tend to exhibit decreasing returns to scale so….you’re likely to have a problem.

    I have to say this is just amusing. Everyone pretty much knows we can’t cut taxes and have them pay for reduced revenues. But when it comes to stimulus spending, the opposite side of the fiscal coin, what its totally different.

    Whiskey Tango Foxtrot?

Leave a Comment