Tuesday, February 10, 2009

Fiscal stimulus

Econbrowser: Why Can't We All Just Get Along? The Great Multiplier Debate by Menzie Chinn was a great article on the origins of multipliers: DSGE, Structural equation, VAR models. He notes that there aren't too many studies that provide sources of multipliers. My question is: VAR models are fairly easy to run. Why not focus on these as a source and do some sensitivity analyses with them?

I believe however that neither a fiscal stimulus nor a tax cut will be sufficient to get us out of our current mess so the current debate both in congress and the blogosphere (economists and non-economists alike) is just theater.

I'd echo Jim Hamilton here:
What, then, do I propose? The first principle that's quite clear to me is that drops in state and local government spending, or increases in state and local taxes, are a likely response to the current situation and are clearly counterproductive. Hence I've advocated ([1], [2]) additional federal borrowing in order to provide unrestricted block grants to states. That's a simple, effective plan that could and should be immediately implemented, while still preserving complete flexibility in responding to our serious longer run challenges.

I also am very comfortable endorsing additional government investment in infrastructure for which the argument can be made that the facilities could make a significant contribution to future productivity. At the top of my personal list would be investments in the electricity transmission grid, mass transit, and basic scientific research.

And unquestionably the number 1 priority for the federal government should be to restore a functioning financial sector. That in my mind should be done in a way that maximizes the return on any taxpayer funds invested.

But rushing through new government spending plans, just for the sake of spending? Count me off of that bandwagon.

Back in October last year I thought that the panic had spread from the financial sector to the real sector and feared that we may have been too late then. Today this is all the more true. Last night President Obama was on television discussion the fiscal stimulus package before Congress. If he can inspire some confidence that will turn around our animal spirits it would be welcom.

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